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