BILL ANALYSIS                                                                                                                                                                                                    



                                                                SB 665
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        SENATE THIRD READING
        SB 665 (Wolk)
        As Amended  August 5, 2013
        Majority vote 

         SENATE VOTE  :26-12  
         
         NATURAL RESOURCES   6-3         APPROPRIATIONS      12-5        
         
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        |Ayes:|Chesbro, Garcia,          |Ayes:|Gatto, Bocanegra,         |
        |     |Muratsuchi, Skinner,      |     |Bradford,                 |
        |     |Stone, Williams           |     |Ian Calderon, Campos,     |
        |     |                          |     |Eggman, Gomez, Hall,      |
        |     |                          |     |Holden, Pan, Quirk, Weber |
        |     |                          |     |                          |
        |-----+--------------------------+-----+--------------------------|
        |Nays:|Grove, Bigelow, Patterson |Nays:|Harkey, Bigelow,          |
        |     |                          |     |Donnelly, Linder, Wagner  |
        |     |                          |     |                          |
         ----------------------------------------------------------------- 
         SUMMARY  :  Increases the statutory amount for indemnity bonds that an  
        oil and gas well operator is required to file with the Division of  
        Oil, Gas and Geothermal Resources (DOGGR) for its well operations.   
        Specifically,  this bill  :  
         
        1)Increases the individual indemnity bond amount to $100,000 for  
          each well, regardless of well depth.

        2)Increases the amount of wells an operator must have to be eligible  
          for a blanket indemnity bond to 20 or more wells.  Increases the  
          blanket indemnity bond amount to $2 million, regardless of number  
          of wells.  Increases the blanket indemnity bond amount for a bond  
          that includes the bond or fee required for idle wells to $5  
          million. 

        3)Increases the class II commercial wastewater disposal well  
          indemnity bond amount to $100,000.

         EXISTING LAW  :

        1)Requires the DOGGR to supervise the drilling, operation,  
          maintenance, and abandonment of wells and the operation,  
          maintenance, and removal or abandonment of tanks and facilities  








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          attendant to oil and gas production, including certain pipelines  
          that are within an oil and gas field, so as to prevent, as far as  
          possible, damage to life, health, property, and natural resources;  
          damage to underground oil and gas deposits from infiltrating water  
          and other causes; loss of oil, gas, or reservoir energy; and  
          damage to underground and surface waters suitable for irrigation  
          or domestic purposes by the infiltration of, or the addition of,  
          detrimental substances.

        2)Requires the operator of any oil and gas well, before commencing  
          the work of drilling the well, to file with DOGGR a written notice  
          of intention to commence drilling.  Prohibits the commencement of  
          drilling until approval is given by DOGGR.  If DOGGR fails to give  
          the operator written response to the notice within 10 working days  
          from the date of receipt, requires that failure to be considered  
          an approval of the notice.

        3)Requires an oil and gas well operator who engages in the drilling,  
          redrilling, deepening, or in any operation permanently altering  
          the casing, of a well to file with DOGGR an individual indemnity  
          bond for the well.  Requires the indemnity bond to be $15,000 for  
          each well less than 5,000 feet deep, $20,000 for each well at  
          least 5,000 feet but less than 10,000 feet deep, and $30,000 for  
          each well 10,000 or more feet deep.  Requires the bond to be filed  
          with DOGGR at the time of the filing of the notice of intention to  
          perform work on the well. 

        4)Authorizes an oil and gas well operator who engages in the  
          drilling, redrilling, deepening, or in any operation permanently  
          altering the casing, of one or more wells at any time, to file  
          with DOGGR one blanket indemnity bond to cover all of the  
          operations in any of its wells in the state in lieu of an  
          individual indemnity bond for each operation.  Requires the bond  
          to be provided in one of the following amounts, as applicable:

           a)   The sum of $250,000;

           b)   The sum of $100,000 for any operator having 50 or fewer  
             wells in the state; or

           c)   The sum of $1 million, which also includes the bond or fee  
             required for idle mines.

        5)Requires a person who engages in the drilling, redrilling,  








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          deepening, or in any operation permanently altering the casing, of  
          one or more wells located on submerged lands under ocean waters  
          within the jurisdiction of this state, to file with DOGGR a  
          blanket indemnity bond for $250,000 to cover all his or her  
          operations in drilling, redrilling, deepening, or permanently  
          altering the casing in any of his or her wells located on those  
          submerged lands.  In addition to the $250,000 blanket indemnity  
          bond, requires any person who operates one or more wells that are  
          located on tide or submerged lands within the jurisdiction of this  
          state to provide an additional amount of security acceptable to  
          DOGGR that covers the full costs of plugging and abandoning all of  
          the operator's wells.  

        6)Requires a person who engages in the operation of a class II  
          commercial wastewater disposal well to file an indemnity bond with  
          DOGGR for $50,000 for each well so used.  Authorizes the bond to  
          be terminated and canceled and the surety be relieved of all  
          obligations thereunder when the well is properly abandoned or  
          another valid bond has been substituted.

         FISCAL EFFECT  :  According to the Assembly Appropriations Committee,  
        negligible state costs.

         COMMENTS  :  According to the author, the purpose of this bill is to  
        update outdated indemnity bonds requirements "to ensure that  
        adequate funds are available to address any environmental clean-up  
        needs that may arise when a well is drilled or redrilled." 

        DOGGR is responsible for supervising the drilling, operation,  
        maintenance, and abandonment of oil and gas wells in the state so as  
        to prevent, as far as possible, damage to life, health, property,  
        and natural resources, including underground and surface waters  
        suitable for irrigation or domestic purposes.  As part of this duty,  
        DOGGR is also required to permit the owners or operators of a well  
        to utilize all suitable methods and practices known to the oil  
        industry for the purpose of increasing the ultimate recovery of  
        underground hydrocarbons.

        For wells that inject fluids associated with oil and natural gas  
        production operations (class II wells), DOGGR's authority stems  
        specifically from the Public Resources Code and the federal Safe  
        Drinking Water Act (SDWA).  The SDWA requires the United States  
        Environmental Protection Agency (U.S. EPA) to develop minimum  
        federal requirements for the underground injection control (UIC)  








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        program, which is designed to control the injection of wastes into  
        "underground sources of drinking water."  Under the SDWA, a state  
        may have primary enforcement responsibility if the state adopts and  
        implements a UIC program that meets federal requirements.  DOGGR  
        received primary enforcement responsibility for Class II wells  
        through an agreement with the U.S. EPA in the early 1980s.  DOGGR  
        maintains this responsibility until it transfers it back to the U.S.  
        EPA or the U.S. EPA determines that the state program is not in  
        compliance with the SDWA.

        Under DOGGR's class II UIC primacy program, an oil and gas well  
        operator may demonstrate financial responsibility by filing an  
        individual indemnity or cash bond for each well drilled or a blanket  
        bond covering all well operations.  Individual bonds are normally  
        released after an injection well has injected fluids for a six-month  
        continuous period if DOGGR is satisfied that a well is mechanically  
        sound.  Blanket bonds are normally not released until all of the  
        operator's wells are abandoned or until the operator specifically  
        requests the release of a well from bond coverage.  After the  
        release of a bond, DOGGR still has the authority to order an  
        operator to perform remedial or corrective work on a well.  

        The current bond amounts for class II wells were established in 1998  
        by SB 1763 (Costa), Chapter 845.

         U.S. EPA Audit  .  In the spring of 2010, U.S. EPA undertook a  
        comprehensive review of DOGGR's implementation of the Class II UIC  
        primacy program.  The goals of this program evaluation were to  
        review how DOGGR oversees and manages the program and to identify  
        program implementation recommendations.

        The final report for this review was released in 2011, which  
        indicated that there are several program deficiencies and areas for  
        improvement.  One issue raised is whether the required indemnity  
        bond amounts for class II wells are sufficient.  The report  
        concluded that the current bond requirements, which, as mentioned  
        above, were established in 1998, "are probably not adequate to cover  
        the full cost to plug and abandon a well when that becomes  
        necessary."

        On November 16, 2012, DOGGR submitted an "Underground Injection  
        Control Action Plan" to the U.S. EPA in response to the 2011 report.  
         In this action plan, DOGGR stated that "[the bonding] amounts are  
        outdated and therefore insufficient."  The action plan also state's  








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        DOGGR's desire to increase the bond to a reasonable level.  The  
        author of this bill has consulted DOGGR, the surety bond industry,  
        and has reviewed information from other oil and gas producing states  
        to arrive at the amounts proposed in this bill.

         Orphan Well Program  .  Members of the oil and gas industry assert  
        that the state's orphan well program is a sufficient backup plan  
        when there are well problems and a bond or the operator cannot cover  
        the costs of addressing the problems.  DOGGR, however, is limited in  
        how much it can spend each year on orphan wells and has an orphan  
        well wait list.  Moreover, excessively low bonding amounts do not  
        allow DOGGR quick access to abandonment and remediation funds.  And  
        insufficient bonding, or lack of bonding, removes an incentive for  
        operators to properly plug and abandon wells.  Therefore, some  
        marginal operators may decide it is easier to walk away from a well  
        rather than incur the plugging and abandonment cost.   
         

        Analysis Prepared by  :    Mario DeBernardo / NAT. RES. / (916)  
        319-2092 

                                                                  FN: 0001858