BILL ANALYSIS �
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| SENATE COMMITTEE ON NATURAL RESOURCES AND WATER |
| Senator Fran Pavley, Chair |
| 2011-2012 Regular Session |
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BILL NO: AB 1054 HEARING DATE: June 26, 2012
AUTHOR: Skinner URGENCY: No
VERSION: June 19, 2012 CONSULTANT: Katharine Moore
DUAL REFERRAL: No FISCAL: Yes
SUBJECT: Public lands: oil and gas leases.
BACKGROUND AND EXISTING LAW
The State Lands Commission (commission) was established in 1938
with specified authority (see Division 6 of the Public Resources
Code (PRC)). The commission has jurisdiction over the state's
sovereign lands - the land underlying the state's navigable and
tidal waterways - which must be used for public purposes
consistent with the public trust, as well as its school lands.
School lands were lands granted to the state by Congress to be
managed and enhanced to provide for an economic base in support
of the public school system. Among its responsibilities, the
commission is charged with managing all mineral, oil and gas and
geothermal leases - required for resource extraction - on these
public lands (PRC �6801 et seq.). All revenues generated from
sovereign lands and school lands must be deposited into the
General Fund and the California State Teachers' Retirement Fund,
respectively.
There are different minimum annual lease payments, royalty
payments and other lease terms and conditions for oil and gas,
mineral and geothermal resources on public lands. Certain basic
lease features, however, are common to all, including the
quitclaim procedure (PRC �6804.1). Existing law requires a
lessee at any time to file with the commission a written
quitclaim or relinquishment of all rights under any lease or
part of a lease of specified size. The quitclaim goes into
effect on the date of its filing, although the lessee must
continue to pay any royalties due, and prepare all wells to be
idled or abandoned. If these conditions are satisfied, the
lessee is released from future obligations related to the lease,
although the lessee remains liable for any defaults at the time
of the quitclaim filing. Additionally, lessees may remain
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liable for certain reclamation obligations pursuant to the
Surface Mining and Reclamation Act of 1975 (SMARA) and the terms
of their agreement with the commission.
In 2009, the author's AB 368 would have modified the existing
lease quitclaim process for public lands to require that
reclamation be completed before the quitclaim goes into effect
and lease payments cease. This bill was vetoed by then-Governor
Schwarzenegger whose veto message stated:
"It is unclear why this bill is needed,
since I have not seen, or have been
provided, any evidence that would indicate
widespread abuse of mineral extraction
leases held under existing law by the oil,
industry, the gas industry, or the hard rock
mining industry. Absent such evidence, this
bill appears to be a 'solution' in search of
a 'problem.'"
PROPOSED LAW
This bill would modify the existing quitclaim procedure for all
mineral, oil and gas, geothermal and other leases on public
lands authorized by the commission. The revised process, for
leases entered into on or after January 1, 2013, would be as
follows:
The lessee may file a written request with the
commission at any time to accept a quitclaim for
relinquishment of all or part of the lease premises.
The quitclaim will not go into effect until completion
of any required abandonment or reclamation of lease
premises specified in the lease and approved by the
commission, and the lessee must continue to comply with all
provisions of the lease - including paying rents and
royalties.
The commission shall hear the request at a scheduled
meeting in a timely manner. Acceptance of the quitclaim by
the commission releases the lessee from all obligations
accruing under the lease.
ARGUMENTS IN SUPPORT
According to the commission, current law "allows a mining lessee
to quitclaim at any time all or a portion of its mining lease
once production is over, but before reclamation is complete,
having the effect of releasing them of their lease obligations,
including their obligation to maintain insurance and bonds and
to pay rent to the state while occupying the land. Reclamation
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can take years to complete and the commission is precluded from
leasing these lands to other parties during this period.
Moreover, the state may be subject to liability after a
quitclaim because the lessee is no longer required to maintain
insurance and bonds."
"AB 1054 makes a mining lessee's quitclaim effective upon
completion of any required abandonment of facilities and
required reclamation of the lease premises, contingent upon
approval by the commission. Until that time, the mining lessees
would have to continue to pay rent and maintain insurance and
bonds. As such, the state would generate additional revenue and
protect itself from liability until such time as the lessee
reclaims and abandons the lease premises."
ARGUMENTS IN OPPOSITION
Although recent amendments addressed and removed some concerns,
the California Independent Petroleum Association (CIPA)
continues to have several on-going concerns with AB 1054. In
particular, any oil and gas wells have to be prepared for
plugging and abandonment under current law subject to the
approval of the Division of Oil, Gas and Geothermal Resources
(DOGGR) and that obligation is not released by the quitclaim
taking effect. Therefore, "there does not appear to be any
benefit to the state to require the lease operator to seek
additional regulatory approval from the �commission]." Further,
CIPA believes that appropriate requirements written into the
initial lease would be an effective remedy and that all the
examples provided concern mineral, not oil and gas, resources.
CIPA recommends retaining a dual track quitclaim process with
the distinction made between those with surface facilities and
those without.
COMMENTS
Is there a 'problem' ? The commission has provided several
examples where lease payments on public lands for mining have
ceased prior to reclamation being completed. Beyond the lease
income, the issue of state liability is potentially significant.
All examples cited are for mineral extraction.
Homestake Mining entered into a lease on school lands located in
Lake County with the commission in 1994. Lease terms for the
McLaughlin gold mine required Homestake Mining to pay the state
$4,577 in annual rent as well as a 4 percent royalty rate. The
lease included a provision that would have increased the annual
rent to $18,300 in the eleventh year of the lease. In 2002,
Homestake quitclaimed its lease despite that fact that
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reclamation was not completed and stopped paying its annual rent
and maintaining insurance and bonding in favor of the state.
The McLaughlin mine was still going through the reclamation
process as recently as 2011 which prevents the commission from
leasing the land to another party. Since 2002, at least
$150,000 in lease payments to the benefit of the California
Teachers' Retirement System Fund were avoided by Homestaking
Mining by exercising the quitclaim prior to reclamation being
completed.
US Borax operated the Gerstley mine, located in Inyo County. US
Borax maintains that a quitclaim is not needed as the mineral
rights lease expired in 2007. According to the commission,
reclamation work continued past the end of the lease. In May
2011, the Office of Mine Reclamation asked for the reclamation
work to be repaired. The annual rent was $480.
The Ludlow Pit in San Bernardino County is operated by Granite
Construction. The mine has been idle for more than two years.
The lease expired in February 2011 and the commission was not
able to negotiate a renewal. Reclamation is required under
Granite Construction's use permit. The annual rent was $80.
Related legislation
AB 368 (Skinner, 2009) would have modified mineral and oil and
gas lease quitclaim procedures to require reclamation to be
completed prior to lease payments ceasing. Vetoed by Governor
Schwarzenegger
SUPPORT
State Lands Commission (sponsor)
California State Teachers' Retirement System
OPPOSITION
California Independent Petroleum Association
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