BILL ANALYSIS
SB 550
Page 1
Date of Hearing: June 28, 2010
ASSEMBLY COMMITTEE ON NATURAL RESOURCES
Wesley Chesbro, Chair
SB 550 (Florez) - As Amended: June 21, 2010
SENATE VOTE : Not relevant
SUBJECT : Oil and gas drilling: indemnity bonds
SUMMARY : Requires an oil and gas drilling operator to file with
the Supervisor of the Division of Oil, Gas and Geothermal
Resources (DOGGR) evidence of insurance or an indemnity bond in
an amount reasonably expected to secure the total costs of
clean-up of any adverse environmental impact expected from
drilling, but no less than $10 million.
EXISTING LAW :
1)Requires the Supervisor of the Division of Oil, Gas and
Geothermal Resources (DOGGR) in the Department of Conservation
(Department) to supervise the drilling, operation, maintenance
and abandonment of oil and gas wells, production facilities,
and pipelines to prevent damage to life, health, property,
underground and surface waters, and natural resources, among
other things.
2)Requires an operator who engages in drilling to file with the
Supervisor an individual indemnity bond of $15,000, $20,000 or
$30,000 per well depending on its depth. The bond-holder must
faithfully comply with all applicable oil and gas laws and
must secure the state against all losses, charges, and
expenses incurred by it to obtain such compliance.
3)Authorizes a drilling operator to file with the Supervisor a
blanket indemnity bond to cover all operations in any of its
wells in the state in lieu of individual bonds. An operator
can file a $100,000, $250,000 or $1,000,000 blanket bond
depending on the number of wells.
4)Requires DOGGR to, by regulation, prescribe minimum facility
maintenance standards for all production facilities in the
state, which may include leak detection, corrosion prevention,
tank inspection, valve maintenance, secondary containment, and
other standards the Supervisor deems important for proper
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operation of facilities and to prevent damage to life, health,
property, natural resources, groundwater and surface waters.
5)Requires a facility operator to file a spill contingency plan
at the time of initial production or within three months of
acquiring a production facility.
6)Authorizes the Supervisor to require an operator with a
history of violating relevant oil and gas laws or that has
outstanding liabilities to the state to require a life-of-well
or life-of-production facility bond to ensure the proper
plugging and abandonment, safe decommission, financing of
spill response and clean-up.
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THIS BILL :
1)Requires an operator to file with the Supervisor evidence of
insurance or an indemnity bond in an amount and kind
reasonably expected to secure the total costs of cleanup of
any adverse environmental impact that could be expected to
result from drilling, including the potential for drilling
accidents, negligent drilling activity, or both. The
indemnity bond or insurance policy must be in an amount of not
less than $10,000,000. In the case of subsurface drilling
within 1,000 feet of groundwater, the indemnity bond or
insurance policy must be in an amount of not less than
$25,000,000, and shall specifically cover damage to
groundwater.
2)Requires an operator to provide to the owner of surface rights
written disclosure of any agreement between the operator and a
drilling company within 10 days of the execution of the
agreement.
3)In the case of drilling on farmland, requires an operator to
compensate landowners for surface damage to crops and all
other improvements caused during the drilling.
FISCAL EFFECT : Unknown
COMMENTS : According to the author's office:
There is currently no requirement that an oil and gas
exploration company have liability insurance in order to get a
permit from DOGGR to drill. A small bond is required by DOGGR
to cover shut-in costs, but the bonds are not "lifetime of
facility" bonds and, in any case, the amounts are insufficient
to cover the clean-up of a large accident.
This is very important to the surface rights owner in a
situation where the surface and subsurface/mineral rights are
owned by different parties and the mineral rights owner
engages in hydro-carbon exploration (directly or through a
lease). If an accident occurs (spill, explosion, or
groundwater contamination) and the exploration company is
insolvent or under-capitalized, the surface owner could not
only suffer impairment of their investment in the surface, but
also be liable for the clean-up costs.
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1)Background : According to DOGGR, in 2008, over 52,000 onshore
wells in the state produced nearly 240 million barrels of oil
while approximately 1,600 wells produced 205 billion cubic
feet of natural gas. Oil production in 2008 declined slightly
from 2007 and was consistent with a persistent statewide
production decline to levels not seen since 1942. At the same
time, the number of new wells drilled in 2008 (3,410) was the
second highest since 1985, which can likely be explained by
oil trading well above $100/barrel. During this time, many
idle or abandoned wells were re-drilled or put into
production, some in suburban areas (to the consternation of
residents) using new but arguably riskier techniques such as
slant-drilling or the injection of carbon dioxide.
According to the Office of Spill Prevention and Response
(OSPR), there are over twice as many inland oil spills as
there are marine spills, but the state responds to less than
one third of all inland spills reported (It is unclear how
many spills were from oil and gas operations supervised by
DOGGR.). Recently, spills have occurred on the central coast
and in Suisun Marsh, impacting water supplies and sensitive
marsh ecosystems. In Santa Barbara County, Greka Oil and Gas
reportedly has spilled more than 500,000 gallons of oil and
contaminated material since 2002 due to a failure to
adequately maintain its facilities. In 2008 and 2009, OSPR
reported 159 and 105 onshore spills (of 42 gallons or more),
respectively, from oil exploration and production activities
most likely in DOGGR's jurisdiction. Collectively, nearly
590,000 and 270,000 gallons of oil, drill waste, or oily/water
mixtures were spilled, respectively. OSPR data do not
indicate whether there was a clean-up response, if any, or the
damage a spill may have caused.
2)Existing bond requirements appear to be limited in coverage:
The author of this bill is primarily concerned about a
scenario in which surface and subsurface development rights
are owned by different parties (a common occurrence in the San
Joaquin Valley) and the latter party's capacity to shoulder
the costs of cleaning up a spill or compensating a landowner
for surface damage should it go bankrupt or otherwise be
unable to pay. In this instance, the author is concerned that
the costs and liability would then fall to the surface right
holder. Additionally, the author is concerned about multiple
cases of drinking water contamination across the country due
to new drilling techniques like hydraulic fracturing, though
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it is unclear if the technique is used much in California.
Since 1939, the Legislature has required well operators to
provide indemnity bonds whenever they drill, redrill, deepen,
or otherwise permanently alter a well. Existing law requires
these bonds to secure the state against any losses or expenses
it incurs to bring an operator into compliance with all
applicable drilling laws and regulations, which include the
prevention of damage to life, health, property, underground
and surface waters, and natural resources. Otherwise, unlike
offshore drilling or oil transport activities, there is no
liability insurance or financial assurance requirement (e.g.,
a demonstration of the ability to pay any damages caused by a
worst-case spill) for onshore operators.
As interpreted by DOGGR, a bond only covers the estimated costs
to safely plug and abandon a well. DOGGR relies on other
agencies, such as the Regional Water Quality Control Boards,
to regulate potential impacts to water quality or OSPR to
respond to oil spills. However, this narrow interpretation
may prevent the state from recouping any losses or expenses to
remediate a surface spill or illegal discharge, for example,
caused by an insolvent operator. Accordingly, the committee
and author may wish to consider whether to amend the bill to
clarify that existing bond requirements should cover losses to
the state should an insolvent operator damage life, health,
property, underground and surface waters, or natural
resources.
There are currently no overarching bonding requirements to cover
the state against any losses during the life of a production
facility or life of a well. AB 1960 (Nava), Chapter 562,
Statutes of 2008 authorizes the Supervisor to require an
operator with a history of violating relevant oil and gas laws
or that has outstanding liabilities to the state to require a
life-of-well or life-of-production facility bond to ensure the
proper plugging and abandonment, safe decommissioning, and
financing of spill response and clean-up. DOGGR has not yet
exercised this authority since proposed regulations are
pending. However, even an operator without a history of
violations can cause damage to natural resources or surface
waters, for example, if associated risks are not adequately
assessed or mitigated. Thus, the committee and author may wish
to consider whether to authorize the Supervisor to require a
life-of-production or life-of-well in this instance.
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3)Are existing bonding requirements sufficient? Existing bond
requirements-$15,000, $20,000, or $30,000 per well based on
depth-are fixed in statute and were last increased (by $5,000)
by the Legislature in 1999. In lieu of an individual well
bond, an operator can file a blanket bond that covers multiple
wells; these bonds range from $100,000 to $1 million based on
the number of wells. DOGGR is authorized to terminate a bond
when a well is properly completed (and thus operational) or
abandoned; this usually occurs after six months of continuous
production. However, significant environmental or public
health risks could still remain during production. The
committee and author may also wish to consider an amendment
prohibiting the Supervisor from terminating or canceling an
individual or blanket indemnity bond (or requiring the
substitution of a life-of-well bond) if the Supervisor
determines that a significant risk of damage from any drilling
or production activity remains, considering any other local,
state, or federal regulatory requirements, to natural
resources, fish or wildlife, underground or surface water, or
agricultural resources, including cultivated crops.
This bill requires an operator to provide evidence of
insurance or an indemnity bond in an amount reasonably
expected to secure the total costs of clean-up or other
environmental impact that could be expected to result from
drilling. At the same, the bill sets a $10 million floor for
such bonding; $25 million if drilling occurs within 1,000 feet
of groundwater. This bill also requires an operator to
compensate a landowner for damage to agricultural crops and
"all other improvements" caused during drilling. According to
the author, these amounts are supposed to represent the value
of a farm (even though the author acknowledges that large
farms can far exceed $25 million) assuming an insolvent
drilling operator causes a spill or accident the costs of
which are equal to this value.
However, while such a large spill swamping the value of an
entire farm could potentially occur, it is not likely. Such a
large bonding requirement could also be cost-prohibitive,
especially for smaller, independent operators. Instead, the
committee and author may wish to consider whether to adjust
existing individual and blanket bond requirements for
inflation since 1999 and require the Supervisor to raise these
requirements if: 1) they are not commensurate with the costs
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to secure the state against any statutory loss; or 2) drilling
activities covered by a bond present a significant risk of
damage to surface resources and the risk is not adequately
mitigated by any other local, state, or federal law,
regulation or ordinance. Given the fact that bonding
requirements haven't been adjusted for inflation since 1999,
it is reasonable to assume that they are insufficient to cover
the state losses for bringing an operator into compliance.
4)Notice provisions need clarification : Subdivision (b) of the
bill requires an operator to notify an owner of surface rights
within 10 days of executing any agreement with a drilling
company. Given the bifurcation of surface and sub-surface
rights in certain areas of the state, the author contends that
a surface right owner should at least be notified of such an
agreement considering the potential for damage of drilling
operations to surface resources or groundwater. In certain
agreements or leases obtained by the author, there is no
mention of the obligation to remediate contamination to soil
or groundwater. While a surface right owner may not have any
leverage to influence such an agreement, notification, at a
minimum is reasonable. However, a technical amendment to this
provision is necessary to account for the situation in which
an operator is also the drilling company (see attached).
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REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Independent Petroleum Association
Western States Petroleum Association
Analysis Prepared by : Dan Chia / NAT. RES. / (916) 319-2092