BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 665
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          SENATE THIRD READING
          SB 665 (Wolk)
          As Amended  September 4, 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)Requires an oil and gas well operator to file with DOGGR an  
            individual indemnity bond for each oil and gas well drilled,  
            redrilled, deepend, or permanently altered, in the following  
            amounts: $25,000 for a well that is less than 10,000 feet deep  
            and $40,000 for a well that is 10,000 or more feet.  

          2)Increases the amount of wells an operator must have to be  
            eligible for a blanket indemnity bond to 20 or more wells.  

          3)Increases the blanket indemnity bond amount for oil and gas  
            wells to $400,000. 

          4)Increases the blanket indemnity bond amount for oil and gas  
            wells to $200,000 for any operator having 50 or fewer wells in  
            the state, exclusive of properly abandoned wells.

          5)Increases the blanket indemnity bond amount for oil and gas  
            wells to $2 million if it includes the bond or fee required  
            for idle wells. 








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          6)Increases the blanket indemnity bond for oil and gas wells  
            located on state submerged lands to $1,000,000.

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

           EXISTING LAW  :

          1)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. 

          2)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.

          3)Requires a person who engages in the drilling, redrilling,  
            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.   








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          4)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." 

           Background.   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)  
          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  








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          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 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  








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          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 


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