BILL ANALYSIS Ó AB 2729 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 2729 (Williams, et al.) As Amended August 1, 2016 Majority vote -------------------------------------------------------------------- |ASSEMBLY: |62-14 |(June 2, 2016) |SENATE: |30-6 |(August 18, | | | | | | |2016) | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: NAT. RES. SUMMARY: Increases idle oil and gas well fees and blanket 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 24 consecutive months of not producing oil, natural gas, or water to be used in production stimulation, enhanced oil recovery, or reservoir pressure management. Defines "long-term idle well" as any well that has been an idle well for eight or more years. 2)Allows an operator to file one blanket indemnity bond with the state's Oil and Gas Supervisor (Supervisor) to cover 20 or more wells instead of individual indemnity bonds. Requires, on January 1, 2018, the bond to be the following amounts: AB 2729 Page 2 a) $200,000 for 20 to 50 wells; b) $400,000 for 51 to 500 wells, c) $2,000,000 for 501 to 10,000 wells; and, d) $3,000,000 for more than 10,000 wells. 3)Eliminates, on or after January 1, 2018, the option for an operator to file a super blanket bond. 4)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) $150 for each idle well that has been idle for three years but less than eight years; ii) $300 for each idle well that has been idle for eight years or longer, but less than 15 years; iii) $750 for each idle well that has been idle for five years or longer, but less than 20 years; and, iv) $1,500 for each idle well that has been idle for 20 years or longer. AB 2729 Page 3 b) File an idle well management plan with the Supervisor for approval that eliminates between 4 and 6% of their long-term idle wells each year. 5)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. 6)Requires, by June 1, 2018, Division of Oil, Gas, and Geothermal Resources (DOGGR) to review, evaluate, and update its testing regulations pertaining to idle wells. The Senate amendments: 1)Increases the number of wells an operator must have to be required to file a $3 million blanket indemnity bond from 1,500 wells to 10,000 wells. 2)Increases the number of idle wells an operator must have from 1,000 wells to 1,250 wells to be required in their idle well management plan to eliminate 6% of long-term idle wells each year. 3)Allows operators to file an idle well management plan prior to 2018. 4)Requires the Supervisor to submit to the Legislature a comprehensive report on the status of idle and long-term idle wells each year. EXISTING LAW: 1)Defines "idle well" as any well that has not produced oil or AB 2729 Page 4 natural gas or had not been used for injection for six consecutive months of continuous operation during the last five or more years. 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. 2)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, redrilled, deepened, or permanently altered for the following amounts: a) $25,000 for each well that is less than 10,000 feet deep; and, b) $40,000 for each well that is 10,000 or more feet deep. 3)Allows an operator to file with the Supervisor one blanket indemnity bond to cover 20 or more wells instead of individual indemnity bonds. Requires the bond to be the following amounts: a) $200,000 for 20 to 50 wells; b) $400,000 for over 50 wells; and, c) $2,000,000 for over 20 wells and can include idle wells (known as a super blanket bond). 4)Requires an operator who has not filed a super blanket bond to do one of the following: a) File with the Supervisor annual fees for the following AB 2729 Page 5 amounts: i) $100 for each idle well that has been idle for less than 10 years; ii) $250 for each idle well that has been idle for 10 years or longer, but less than 15 years; and iii) $500 for each idle well that has been idle for 15 years or longer. 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. File with the Supervisor an indemnity bond for $5,000 for each idle well. 5)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. FISCAL EFFECT: According the Senate Appropriations Committee: 1)Fee revenue. According to the Department of Conservation (Department), the fiscal impact of this bill would depend upon which option operators select (i.e., idle well fees or the Management Plan). Assuming the current number of 20,000 idle wells, if all operators elect to pay idle well fees, idle well fee revenue could increase (at most $15 million over the first five years). However, implementation of an idle well Management Plan would yield up to several million dollars in savings for the operator, depending upon the number of idle wells in the operation. As such, the Department anticipates that most operators will opt to implement a Management Plan, AB 2729 Page 6 which will result in significantly less revenue to the Department. However, because more long-term idle wells will be plugged in a timely manner, this would also dramatically minimize the State's liability to plug wells that could eventually be orphaned. 2)Staff costs. In the first year, DOGGR will likely need an additional $1.5 million to implement the requirements in the bill and hire additional staff. In subsequent years, the Division may need up to $2.5 million depending upon the requirements outlined in the regulations required pursuant to this bill. COMMENTS: 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, and radon to enter into freshwater formations. Improperly maintained wells can also leak methane, a potent greenhouse gas. Unlike wells being produced, 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. The longer a well remains idle, the more likely it is to be deserted by the operator. Leaving idle wells in this state can threaten the environment and public health, and, if deserted, AB 2729 Page 7 present a significant cost for the state to plug and abandon wells and remediate any environmental damage. Idle wells often become "orphan wells" in cases where 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. The state is responsible for plugging and abandoning orphan wells; DOGGR has already plugged and abandoned over a 1,000 orphan wells. Analysis Prepared by: Michael Jarred / NAT. RES. / (916) 319-2092 FN: 0004199