BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON NATURAL RESOURCES AND WATER
                             Senator Fran Pavley, Chair
                                2015 - 2016  Regular 

          Bill No:            SB 545          Hearing Date:    April 14,  
          2015
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          |Author:    |Jackson                |           |                 |
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          |Version:   |April 6, 2015                                        |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Katharine Moore                                      |
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                          Subject:  Oil and gas operations.


          BACKGROUND AND EXISTING LAW
          1.According to the Division of Oil, Gas and Geothermal Resources  
            (division), the state's oil and gas regulator, there are  
            approximately 90,000 active oil and gas wells in the state.   
            These wells are primarily used for oil and gas production,  
            injection for enhanced oil recovery (EOR) by a variety of  
            methods, injection for oil and gas field wastewater disposal,  
            and gas storage, among others.  As of 2013, California was the  
            #3 oil producing state by volume and in the top 20 for natural  
            gas.

          2.Primary oil/gas production is when the oil/gas reservoir has  
            sufficient internal pressure that the oil/gas can be produced  
            using only pumping or other artificial lift method. Secondary  
            and tertiary oil/gas production methods, collectively known as  
            enhanced oil recovery (EOR) methods, typically involve the  
            addition of pressure and/or heat via injection well to the  
            oil/gas reservoir in order to promote oil/gas production.

          3.The division is located in the Department of Conservation.

          4.Existing law provides broad authority to the head of the  
            division - the State Oil and Gas Supervisor (supervisor).   
            Existing law requires the supervisor to supervise the  
            drilling, operation, maintenance, and abandonment of oil and  
            gas wells, as specified, and the operation, maintenance, and  







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            removal or abandonment of tanks and facilities related to oil  
            and gas production within an oil and gas field, so as to  
            prevent damage to life, health, property, and natural  
            resources; to permit owners and operators of oil wells to  
            utilize all known methods and practices to increase the  
            ultimate recovery of hydrocarbons; and to perform these duties  
            in a manner that encourages the wise development of oil and  
            gas resources to best meet oil and gas needs in the state.  
            (Public Resources Code (PRC) §3106).

          5.Existing law requires the operator of an oil and gas well to  
            file a written notice of intention to commence drilling or to  
            rework a well.  It prohibits drilling until the notice is  
            approved by the supervisor or division district deputy,  
            although if neither responds in writing within 10 working  
            days, the notice is deemed approved.  The operator has one  
            year to complete the work described in the notice (PRC §3203).

          6.Existing law, the Permit Streamlining Act (act) requires any  
            public agency that is a lead agency for a development project  
            to approve or disapprove of a project, as specified.  Under  
            the act, in certain circumstances, the project applicant may  
            file an action to compel the agency to provide the public  
            notice or hold the hearing, or both, among other provisions.   
            (Government Code (GOV) §§65920 et seq.)  According to the  
            Office of Planning and Research, the act requires public  
            agencies to "follow standardized time limits and procedures  
            for specified types of land use decisions."

          7.Existing law generally provides that well records filed by the  
            well owners and operators are public records.  However,  
            existing law (PRC §3234) allows the supervisor, upon written  
            request from a well owner or operator, to keep certain well  
            records of exploratory or certain other wells confidential for  
            specified periods of time after the well has been drilled. For  
            both onshore and offshore wells, the initial confidential  
            periods of 2 and 5 years, respectively, can be extended up to  
            another 2 years each, with further extension possible with the  
            supervisor's approval and subject to certain conditions.   
            While well record confidentiality practices vary from  
            state-to-state, the underlying idea is to provide some time  
            for the owner or operator of the exploratory well to take  
            competitive advantage of knowledge gained through the risk  
            taken.








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          8.Existing law recognizes the Conservation Committee of the  
            California Oil and Gas Producers and authorizes it or any  
            other committee of oil producers to make voluntary  
            recommendations to the supervisor regarding, among other  
            things, the maximum efficient rate of production, as defined  
            (PRC §§3450 - 3451).
          
          PROPOSED LAW
          This bill would revise several statutes governing the division's  
          authority and practices.  Specifically this bill would:
                 Define both EOR methods and confidential wells.
                 Revise the supervisor's broad authority to regulate oil  
               and gas field activities in the state and specify that the  
               supervisor shall administer the division in conformance  
               with the Permit Streamlining Act.
                 Revise the process for a well owner or operator to  
               obtain approval for well drilling, reworking, deepening,  
               redrilling or plugging, as specified.  A permit application  
               replaces the existing notice of intent, an application must  
               be approved in writing, and the applications and written  
               approvals must be posted online, among other provisions.
                 Delete the requirement that a notice of intent to drill  
               is deemed approved if the division does not respond in  
               writing within 10 days.
                 Require in the event of a loss of well and well casing  
               integrity that the operator report any resulting action to  
               the applicable regional water quality control board within  
               5 days.
                 Revise the requirements to obtain and retain  
               confidential well status, as specified, including  
               additional information, documentation and public posting  
               requirements.  The initial confidential time period for  
               offshore wells is reduced from 5 years to 3 years.  A  
               single extension of confidential wells status for no more  
               than 6 months is available. 
                 Delete an obsolete definition, and revamp and add  
               transparency to the supervisor's interaction with the  
               Conservation Committee of California Oil and Gas Producers  
               or any other committee of oil and gas producers, and  
               recommendations made to the supervisor by these committees,  
               if any, as specified.










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          ARGUMENTS IN SUPPORT
          According to the author, "[t]o realize the Governor's 2030  
          vision of deriving fifty percent of California's electricity  
          from renewable sources and to reduce the release of pollutants  
          into the atmosphere, the prime directive of the [division] - the  
          agency charged with overseeing oil and gas exploration and  
          production in California - cannot continue to be to increase the  
          recovery of underground oil and gas as currently stated in law.   
          This bill reforms the [division] by changing its prime directive  
          to allow for, and strictly regulate in a transparent fashion,  
          the judicious exploration and extraction of oil and gas in a  
          manner that protects public health and the environment."

          According to Environmental Working Group, and others writing in  
          support, "it has come to light over the last several years that  
          [the division] has been lax in [its] regulation of the oil  
          drilling industry.  In 2011, the Legislature became aware that  
          [the division] was not regulation fracking or any form of well  
          stimulation, and it has recently been revealed that the  
          [division] has been allowing oil companies to inject toxic  
          wastewater in aquifers that are capable of supporting  
          agricultural and domestic uses.  SB 545 addresses a number of  
          concerns at [the division] that will help ensure that this  
          [division] is serving the public and protecting the environment,  
          while [it] gives oil companies fair and efficient service."

          ARGUMENTS IN OPPOSITION
          In a late joint letter, Western States Petroleum Association, in  
          apparent reference to the bill's changes to the supervisor's  
          authority, states "[a]s amended, SB 545 would fundamentally  
          alter the primary mission [of the division] by requiring [the  
          division] to issue permits for virtually all oil field  
          activities including routine maintenance."

          COMMENTS
           This bill is a work-in-progress  .  While EOR is a  
          well-established set of techniques and is already referred to in  
          existing statute and regulation, it is not currently defined.  A  
          review of the definition of EOR from multiple sources, including  
          other oil- and gas-producing states, indicates that the  
          definition proposed here requires technical and clarifying  
          revision.  The committee may wish to direct staff to continue  
          working with the author's office, should the bill pass the  
          committee, to resolve this and other necessary technical and  








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          clarifying changes, as noted below, in order to achieve the  
          author's intent.

           The supervisor's broad regulatory authority has evolved over  
          time  .  In 1915, the supervisor's essential job - the supervision  
          of the drilling, operation, and maintenance and abandonment of  
          petroleum and gas wells - was established.  The justification  
          cited for regulating the oil/gas industry in 1915 included  
          preventing damage to the hydrocarbon reservoir, and protecting  
          neighboring property owners and the public.  In the ensuing  
          decades, oil/gas exploration and production, and the hazards  
          associated with it, changed.  The law describing the  
          supervisor's job and justifying the supervisor's authority  
          evolved to reflect these changes.  Protecting groundwater  
          quality, for example, is now used to justify oil/gas industry  
          regulation.  This bill would continue this evolution.  However,  
          the supervisor is supposed to supervise, not just permit,  
          oil/gas field activities.  The committee may wish to revise the  
          bill to avoid limiting the supervisor's existing broad authority  
          to regulate [Amendment 1].

           Is it necessary for the supervisor to encourage the "wise use"  
          of the oil and gas resource  ?  It does not appear so.  Committee  
          staff was unable to find similar language in the relevant laws  
          and regulations of other major oil- and gas-producing states,  
          although the other principal reasons cited to supervise the  
          development and operation of oil and gas resources were highly  
          similar.

           Implications of the Permit Streamlining Act to the division  .  As  
          existing state law, the division is already subject to the act.   
          In general, the act requires regulators to take certain  
          permit-related actions, as defined, within set time periods.   
          This includes actions taken on permits for "development  
          projects," as defined, by state and local agencies and by lead  
          and responsible agencies, as applicable, under the California  
          Environmental Quality Act (CEQA).  (As noted below, CEQA is  
          under the jurisdiction of the Senate Committee on Environmental  
          Quality and the discussion here is therefore limited.)  There  
          are provisions of the act that the division clearly satisfies -  
          such as the requirement that a state agency compile and make  
          available a detailed list of the information required to be  
          submitted with a permit application.  









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          It appears that the author's intent, at least in part, is to  
          substitute the longer period the act allows for the division to  
          respond to a drilling notice (now permit) than the 10 days in  
          existing law that the bill would delete.  Committee staff have  
          sought technical assistance in determining whether the current  
          bill language addresses the author's intent.  Clarifying  
          language may be required later as this is resolved.

          Current law appears to allow the division to meet the 10 day  
          response requirement without approving a notice by responding in  
          writing that the notice is still under review.

           Confidential wells  .  The supervisor's annual report on the  
          state's oil and gas operations used to include a public  
          tabulation of confidential wells.  The information provided  
          included the owner, location and drilling date of the well,  
          among other non-secret information.  Since the release of the  
          2009 annual report, however, the annual report's tables have  
          been limited to the specific information required in statute.   
          Public information regarding confidential wells is still  
          available from the division upon request.  Limited review of the  
          available historic data suggests that the total number of  
          confidential wells during the period investigated was generally  
          in the range of 100 - 150.  The existing ability to maintain  
          confidentiality for up to 4 and 7 years for onshore and offshore  
          wells, respectively, without public review in California is  
          relatively generous compared to many other states (6 months, as  
          specified, in Colorado and Wyoming; 2 years only in Alaska; up  
          to 3 or 6 years for onshore or offshore wells Texas).

           Data management and handling  .  The division has acknowledged  
          long-standing well data management and handling issues (see, for  
          example, testimony at the March 10, 2015 joint hearing of the  
          Senate Committees on Natural Resources and Water and  
          Environmental Quality).  The additional online posting of well  
          information required by this bill may help spur needed reform,  
          and provide more information to the public.

           The interaction between the division and the state and regional  
          water boards  .  There are at least two Memorandums of Agreement  
          (MOAs) between the state water board and the state and regional  
          water boards and the division.  While the current interaction  
          between the state and regional water boards and the division  
          appears to be good, communication between them, particularly  








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          under the 1988 MOA related to the Underground Injection Control  
          (UIC) program, has been inconsistent.  This bill's requirement  
          that the operator notify the appropriate regional board in the  
          event of a loss of well integrity seeks to ensure that the water  
          quality regulator is notified in a timely manner of potential  
          adverse impacts.

           Maximum Efficient Rate (MER), as defined, appears to be  
          obsolete  .  This bill deletes the definition of Maximum Efficient  
          Rate and recasts the division's statutory interaction with the  
          Conservation Committee of California Oil Producers to remove,  
          among other things, the reference to MER.  MER generally means  
          the maximum rate an oil reservoir can be produced without unduly  
          impacting total recovery from the reservoir.  The two relevant  
          sections (PRC §§3450 - 3451) were added in the mid-1950s, have  
          not been revised much since, and are not otherwise referenced in  
          regulation.  While some states may regulate some activities  
          based upon MER, it does not appear that California does,  
          although the state does consider the somewhat recast "ultimate  
          economic recovery" in the context of unitized pools (see 14 CCR  
          §1720).  Additionally, the provisions of PRC §3160b appear to  
          ensure the concept underlying MER is taken into consideration in  
          the regulation of oil/gas activities.

           This bill is double-referred  .  The Rules Committee referred this  
          bill to both the Committee on Natural Resources and Water and to  
          the Committee on Environmental Quality.  Therefore, should this  
          bill pass this Committee, it will be referred to the Committee  
          on Environmental Quality, which will consider the issues in this  
          bill in its jurisdiction (for example, CEQA).

           Related legislation
           SB 248 (Pavley, 2015) This bill would provide for reform of  
          DOGGR and its injection well program, including improving public  
          transparency and regulatory accountability (before the Senate  
          Natural Resources and Water Committee at this hearing)

          AB 356 (Williams, 2015) This bill would provide for reform of  
          the UIC program with an emphasis on the role of the Water Boards  
          and require groundwater monitoring in the vicinity of UIC wells  
          (before the Assembly Natural Resources Committee)

          SB 454 (Allen, 2015) This bill seeks to alter the aquifer  
          exemption process for the UIC program (in the Senate Rules  








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          Committee)

          SUGGESTED AMENDMENTS 
          
          AMENDMENT 1
               Revise proposed PRC §3106 to ensure that the supervisor's  
               existing broad authority to supervise oil/gas field  
               activities is retained.
          
          SUPPORT
          California League of Conservation Voters
          Citizens Coalition for a Safe Community
          Citizens for Responsible Oil and Gas
          Clean Water Action
          Earthworks
          Environmental Working Group
          Grassroots Coalition
          League of Women Voters of California
          Los Padres ForestWatch
          Natural Resources Defense Council
          Physicians for Social Responsibility
          Save the Sespe
          Sierra Club California
          The Wildlands Conservancy 

          OPPOSITION
          California Chamber of Commerce
          California Independent Petroleum Association
          Independent Oil Producers' Agency
          Western States Petroleum Association

          
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