BILL ANALYSIS Ó AB 2729 Page 1 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 AB 2729 Page 2 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; AB 2729 Page 3 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 AB 2729 Page 4 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; AB 2729 Page 5 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. AB 2729 Page 6 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, AB 2729 Page 7 "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 AB 2729 Page 8 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, AB 2729 Page 9 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. AB 2729 Page 10 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: AB 2729 Page 11 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. AB 2729 Page 12 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. AB 2729 Page 13 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) AB 2729 Page 14 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 AB 2729 Page 15 Western States Petroleum Association Analysis Prepared by:Josh Tooker / E.S. & T.M. / (916) 319-3965