BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2729


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          Date of Hearing:   April 12, 2016


           ASSEMBLY COMMITTEE ON ENVIRONMENTAL SAFETY AND TOXIC MATERIALS


                                  Luis Alejo, Chair


          AB 2729  
          (Williams) - As Amended April 7, 2016


          SUBJECT:  Oil and gas:  operations


          SUMMARY:  Increases idle oil and gas well fees and indemnity  
          bonds to provide a disincentive for operators to maintain large  
          numbers of idle wells. Specifically, this bill:  


          1)Defines "idle well" as any well that has had six consecutive  
            months of not producing oil or natural gas or being used for  
            injection.  


          2)Defines "long-term idle well" as any well that has been an  
            idle well for five or more years.


          3)Requires that abandoned underground personal property of an  
            operator becomes the property of the mineral interest owner.


          4)Increases the bond amounts for operators of wells that are  
            required to file an individual indemnity bond with the State  
            Oil and Gas Supervisor (Supervisor) to secure the state  
            against all losses, charges, and expenses for each well  
            drilled, re-drilled, deepened, or permanently altered, on or  








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            after January 1, 2018, as follows:


             a)   From $25,000 to $50,000 for each well that is less than  
               10,000 feet deep; and,


             b)   From $40,000 to $80,000 for each well that is 10,000 or  
               more feet deep. 


          5)Authorizes an operator to file one blanket indemnity bond with  
            the Supervisor to cover 20 or more wells instead of individual  
            indemnity bonds.  Requires, on January 1, 2018, the blanket  
            bond to be the following amounts:


             a)   $400,000 for 20 to 50 wells; and,


             b)   $2,000,000 for over 50 wells.


          6)Eliminates, on or after January 1, 2018, the option for an  
            operator to file a super blanket bond.


          7)Requires an operator, on January 1, 2018 and after, to do one  
            of the following:


             a)    File with the Supervisor annual fees for the following  
               amounts:


               i)     $500 for each idle well that has been idle for less  
                 than 3 years;










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               ii)    $2,000 for each idle well that has been idle for 3  
                 years or longer, but less than 5 years;


               iii)   $5,000 for each idle well that has been idle for 5  
                 years or longer, but less than 10 years; and,


               iv)    $10,000 for each idle well that has been idle for 10  
                 years or longer.


             b)   File a plan with the Supervisor for approval to provide  
               for the management of all long-term idle wells that  
               eliminates all long-term idle wells in no more than five  
               years.


          8)Eliminates, on or after January 1, 2018, the option for an  
            operator to provide an escrow account and indemnity bond to  
            the Supervisor instead of paying annual fees.


          9)Requires, on or after January 1, 2018, a well to be properly  
            abandoned before an individual or blanket indemnity bond can  
            be terminated or canceled.


          10)Authorizes a party to plug and abandon a hazardous well or a  
            deserted idle well if, the Supervisor determines that the well  
            is a potential danger to life, health, or natural resources  
            and there is no operator determined by the Supervisor to be  
            responsible for plugging and abandoning the well, by obtaining  
            all necessary rights to the well.  


          11)Requires the Division of Oil, Gas and Geothermal Resources  
            (DOGGR) within the Department of Conservation (Department), by  
            June 1, 2018, to review and evaluate and update as  








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            appropriate, regulations pertaining to idle wells.  The update  
            shall include idle well testing requirements and provide an  
            option for temporary or partial well abandonment in lieu of  
            testing at the discretion of the supervisor.  


          EXISTING LAW:  


          1)Requires the Supervisor to supervise the drilling, operation,  
            maintenance, and abandonment of wells and the operation,  
            maintenance, and removal or abandonment of tanks and  
            facilities attendant to oil and gas production.
          2)Defines "idle well" as any well that has not produced oil or  
            natural gas or had not been used for injection for six  
            consecutive months of continuous operation during the last  
            five or more years. 


          3)Defines "long-term idle well" as any well that has not  
            produced oil or natural gas or has not been used for injection  
            for six consecutive months of continuous operation during the  
            last 10 or more years. 


          4)Requires a person who acquires the right to operate a well to  
            provide the following material to the Supervisor or District  
            Deputy in order for the acquisition to be recognized as  
            complete:


             a)   The name and address of the person from whom the well  
               was acquired;


             b)   The name and location of the well;


             c)   The date when the acquisition becomes final;








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             d)   The date when possession was or will be acquired; and,


             e)   An indemnity bond for each idle well.


          5)Requires an operator to file an individual indemnity bond with  
            the Supervisor to secure the state against all losses,  
            charges, and expenses for each well drilled, re-drilled,  
            deepened, or permanently altered for specified amounts. 


          6)Requires the bond to be filed at the time of the filing of the  
            notice of intention to perform work on the well.


          7)Allows an operator to file with the Supervisor one blanket  
            indemnity bond to cover 20 or more wells instead of individual  
            indemnity bonds.  Specifies various bond amounts. 


          8)Requires an operator of an idle well that is not covered by an  
            indemnity bond to do one of the following:


             a)   File with the Supervisor annual fees for specified  
               amounts; or,  


             b)   Provide an escrow account with $5,000 for each idle well  
               and fund that account with $500 each year for each idle  
               well to the Supervisor for plugging and abandoning the  
               operator's idle wells.  


             c)   File with the Supervisor an indemnity bond for $5,000  
               for each idle well.








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             d)   On or before July 1, 1999, file a plan with the  
               supervisor to provide for the management and elimination of  
               all long-term idle wells not covered by the fees, escrow  
               account or indemnity bond.


          9)Exempts an operator of a well who complies with the  
            requirement to file a plan to provide for the management and  
            elimination of all long-term idle wells from increased idle  
            well or fee requirements.


          10)Specifies that the funds in the escrow account may be  
            released by the Supervisor for wells that have been properly  
            plugged and abandoned, returned to production or injection, or  
            converted to an active observation well.


          11)Allows any individual or blanket indemnity bond to be  
            terminated or canceled when the well or wells covered by the  
            bond have been properly completed (made ready for production)  
            or abandoned.


          12)Prohibits an operator from undertaking any work on a  
            hazardous well or an idle-deserted well unless the mineral  
            rights owner consents, in writing, to the work plan.


          FISCAL EFFECT:  Unknown. 


          COMMENTS:  


          Need for the bill: According to the author, 









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          "California has approximately 21,000 idle oil and gas wells.  
          More than half have been idle for ten years or more actually  
          4,700 have been idle for 25 years or more. The number of idle  
          wells statewide continues to increase annually, regardless of  
          the price of oil.



            Idle wells can pose a risk to the environment and public  
            health.  Improperly maintained well casings can rust or crack,  
            allowing contaminants such as uranium, lead, iron, selenium,  
            sulfates, and radon to enter into freshwater formations.   
            Improperly maintained wells can also leak methane, a potent  
            greenhouse gas.



            Idle wells may become "orphan wells" in cases were the  
            responsible party either cannot be identified or is no longer  
            financially capable of covering the costs of plugging and  
            abandonment.  Orphan wells can deteriorate underground over  
            time.  Given the infrequent and insufficient testing  
            requirements for idle wells, leaks and damage can go  
            undetected for years.



            Current legal mechanisms and fees are insufficient to provide  
            incentives for operators to properly plug and abandon idle  
            wells. Low fees, and the option to avoid paying fees by using  
            blanket bonds, make it economically rational to leave wells  
            idle rather than plugging and abandoning the wells. 



            Inconsistent legal interpretations of when a well becomes idle  
            (i.e., after six months of not producing, or after five or ten  
            years, respectively, regardless of when oil and gas production  
            ceased) have prevented the Division from assessing idle well  








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            fees or commencing enforcement activities.  



            Property rights ambiguity frequently prevents new landowners  
            from developing or remediating land where an abandoned well  
            exists.  No process currently exists for the Division to  
            transfer responsibility for re-plugging a well to a new  
            landowner.  New landowners may need to re-plug and abandon a  
            well if it was not done properly by the original owner, or may  
            need to re-plug the well due to new development."

          State responsibilities: DOGGR is required to supervise the  
          drilling, operation, maintenance, and plugging and abandonment  
          of onshore and offshore oil, gas, and geothermal wells.   
          California is in the top five oil producing states in the  
          country and produced more than 200 million barrels of oil in  
          2014.  There has been concern that DOGGR has had too much focus  
          regulating production practices based on what will increase  
          hydrocarbon recovery.  This focus has been at the cost of  
          protection of groundwater, occupational safety, and public  
          health.  


          Idle wells: California has approximately 20,000 idle oil and gas  
          wells that have been idle for over five years and would be  
          classified as long-term idle wells by this bill.  The number of  
          idle wells statewide continues to increase annually despite  
          fluctuations in oil prices.  While operators have legitimate  
          economic reasons for idling wells in the short term, current  
          fees and bond requirements provide little incentive to reduce  
          inventory of idle wells.  Of the 20,000 idle wells in  
          California, 50% have been idle for more than 10 years; nearly  
          25% have been idle for 25 years or more.  


          Idle wells can pose a risk to the environment and public health.  
           Improperly maintained well casings can rust or crack, allowing  
          contaminants such as uranium, lead, iron, selenium, sulfates,  








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          and radon to enter into freshwater formations.  Improperly  
          maintained wells can also leak methane, a potent greenhouse gas.  
           Due to groundwater overdraft and other factors, California is  
          experiencing increased instances of subsidence, which is the  
          gradual caving in or sinking of an area of land.  The resulting  
          shifts in the earth can cause well casings to crack or collapse,  
          resulting in contamination to surrounding areas.  Unlike wells  
          in production, where operators will likely see changes in  
          production levels if a leak or damage occurs, leaks or damage to  
          idle wells may go unnoticed.  Testing of wells that are not  
          producing or injecting is not required until the well officially  
          becomes idle after five years.  


          A concern regarding idle wells is that if they are idle for a  
          significant period of time, they could be deserted by the  
          operator.  If an idle well is deserted, it could become an  
          "orphan well" and present a significant cost for the state to  
          plug and abandon the well and remediate any environmental  
          damage.  Orphan wells can deteriorate underground over time.   
          The state is responsible for plugging and abandoning orphan  
          wells; DOGGR has already plugged and abandoned over a 1,000  
          orphan wells.  Orphaned wells in Ohio and Texas account for one  
          fifth of the incidences of oil and gas groundwater  
          contamination. 


          A 2011 United States Environmental Protection Agency (US EPA)  
          audit of DOGGR's Underground Injection Control (UIC) program  
          implementation stated that idle well rules needed to be  
          strengthened and bonding requirements may not be adequate.  In  
          October 2015, DOGGR released its "Renewal Plan for Oil and Gas  
          Regulation," which outlines reforms DOGGR will undertake with  
          the goal of having "an effective regulatory program that ensures  
          the protection of public health and the environment in the oil  
          fields of California."  One issue DOGGR has identified as  
          needing improvement is reducing the large inventory of idle  
          wells.  









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          Arguments in Support:


          According to the sponsor, the Department of Conservation, "AB  
          2729 is needed to created disincentives for operators to  
          maintain large idle well inventories and ensure that funds are  
          available to plug and abandon idle wells in the event that they  
          are deserted.  Low idle well fees and insufficient bonding  
          requirements create a significant financial incentive for  
          operators to idle low performing wells, rather than to properly  
          plug wells. As a result, an increasing number of wells remain  
          idle for decades, and are at risk of becoming orphan wells with  
          no accountable operator.  Even through periods of high oil  
          prices (theoretically creating a financial incentive to begin or  
          resume production), the number of idle wells continued to grow."


          Arguments in Opposition:


          According to the Western State Petroleum Association, "The bill  
          presents a perverse incentive that will result in increased  
          costs, significant job losses and lost productivity for existing  
          and future operators.  By imposing significant fees on operators  
          and requiring mandatory abandonment, the bill would have the  
          unintended consequence of creating more orphan sites and costly  
          cleanups for the State.  Requiring operators to prematurely  
          shutdown wells and pay increased idle well fees without any  
          level of risk assessment or integrity analysis to determine  
          their potential threat to public health, safety or the  
          environment, will only result in job losses and reduced revenues  
          for the State, county and mineral owners with little no  
          environmental benefit."


          Technical suggestion:










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          The bill requires DOGGR to review and evaluate, and update as  
          appropriate, its regulations pertaining to idle wells by June 1,  
          2018.  However, this requirement does not take effect until  
          January 1, 2018.  The author and committee may wish to consider  
          a technical amendment for DOGGR to adopt regulations beginning  
          on January 1, 2017.


          Questions for the Committee to consider:


                 Are increasing fees and bond amounts the best approach  
               to manage idle wells in the state?  The bill proposes to  
               increase fees as a disincentive for well operators to leave  
               their wells idle in the hope that well operators will pay  
               for the abandonment/plugging of the well instead.  However,  
               given the costs of abandonment, would well operators be  
               inclined to desert their wells if these fees and bond  
               amounts were to increase as proposed?  The Committee may  
               wish to consider whether or not there are other options to  
               reduce the amount of idle wells.  Should the emphasis be  
               more of a risk base approach, meaning, should the focus be  
               on plugging the idle wells that may pose a threat to human  
               health or safety and the environment versus those wells  
               that have been idle for a certain period of time?


                 Is the length of time for an idle well the correct  
               metric to determine whether or not the idle well poses a  
               threat to human health or safety and the environment?   
               There may be many different market reasons why an operator  
               could leave a well idle for a long period of time.  The  
               Committee may wish to consider putting the emphasis on  
               directing DOGGR to focus on any idle well that poses a  
               threat to human health and safety or the environment and  
               close/plug those wells that pose a risk instead of closing  
               wells simply because they have been "idle" for a period of  
               time.









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                 Who pays for the ultimate closure/abandonment of a well?  
                Many wells have indemnity bonds that cover costs relating  
               to the drilling of the well.  However, there is no explicit  
               requirement in statute that the well operator ensure that  
               there is some type of financial mechanism (a bond for  
               instance) that is in place for the eventual  
               closure/abandonment of the well.  The Committee may wish to  
               consider whether statute should be amended to require well  
               operators to have such a financial mechanism in place so  
               that the operator is responsible for the eventual  
               closure/abandonment of the well and it does not become an  
               orphan well and therefore a responsibility of the state.


          Related legislation: 


             1.   AB 1882 (Williams, 2016) would require the State Water  
               Board or the appropriate regional water quality control  
               board (RWQCB) to review and concur with any UIC project  
               subject to review or approval.  This bill is in the  
               Assembly Appropriations Committee.  


             2.   AB 2756 (Thurmond, 2016) would enhance DOGGR's penalty  
               and investigative authority and allow penalties to be spent  
               on environmentally beneficial projects.  This bill was  
               referred to the Assembly Judiciary Committee.


             3.   SB 248 (Pavley, 2015) would require DOGGR to review and  
               update its regulations, data management practices, and  
               enhance required reporting.  This bill prohibits the use of  
               oil sumps after July 1, 2017.  This bill also prohibits  
               injection chemicals, unless DOGGR has complete information  
               about specified properties and potential groundwater  
               impacts.  This bill is in the Assembly Appropriations  
               Committee.








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             4.   SB 665 (Wolk, Chapter 315, Statutes of 2013) increased  
               bond amounts that oil and gas operators are required to  
               file with the Supervisor when submitting a notice of  
               intention to drill a well.  


             5.   AB 1960 (Nava, Chapter 562, Statutes of 2008)  
               substantially strengthened and clarified DOGGR's authority  
               to regulate oil and gas production facilities.  This bill  
               imposed additional requirements on operators to minimize  
               frequency and severity of oil spills, and authorized DOGGR  
               to impose life-of-well and life-of-facility bonding on  
               operators under specified circumstances.  This bill also  
               increased maximum penalties that DOGGR may impose from  
               $5,000 to $25,000 per violation.   


          Double referral:  This bill has been double-referred to the  
          Assembly Committees on Natural Resources and Environmental  
          Safety and Toxic Materials.  This bill passed out of the  
          Assembly Natural Resources Committee on a 6-2 vote on April 4,  
          2016.


          


          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Department of Conservation (sponsor)









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          Azul
          California Coastal Protection Network


          California League of Conservation Voters
          Center for Environmental Health
          Citizens Coalition for a Safe Community
          Clean Water Action
          Earthworks
          Environmental Defense Center
          Environmental Defense Fund
          Environmental Working Group


          Fresnans Against Fracking


          Grassroots Coalition
          Natural Resources Defense Council
          Santa Barbara County Board of Supervisors


          Save the Sespe
          Surfrider Foundation
          The Wildlands Conservancy


          Opposition


          California Chamber of Commerce


          California Independent Petroleum Association


          California Manufacturers & Technology Association
          National Federation of Independent Business








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          Western States Petroleum Association




          Analysis Prepared by:Josh Tooker / E.S. & T.M. / (916) 319-3965