Both the Jerry Brown and Gavin Newsom administrations expanded oil and gas drilling in California, with the Brown administration approving 21,000 new or reworked well permits and Newsom’s regulators approving over 4,049 new or reworked permits as of November 4, 2019.
With the mushrooming of permits for new or reworked wells comes another problem: what happens when the oil and gas in the wells runs out and they are abandoned by the oil and gas companies, becoming “orphan” wells?
A report by the California Council on Science & Technology addresses this problem, revealing that California taxpayers could be on the hook for more than $500 million to plug thousands of those “orphan” wells drilled and abandoned by oil and gas companies.
The study, “Orphan Wells in California: An Initial Assessment of the State’s Potential Liabilities to Plug and Decommission Orphan Oil and Gas Wells,” was conducted at the request of the Division of Oil, Gas, and Geothermal Resources (DOGGR), now called the California Geologic Energy Management Division (CalGEM), under the California Department of Conservation.
“An initial analysis of readily available information suggests that 5,540 wells in California are, as defined, likely orphan wells or are at high risk of becoming orphan wells in the near future,” the report states. “The State’s potential net liability (subtracting available bonds held by CalGEM) for these wells is estimated to be about $500 million.”
The report also reveals that:
“Recent cases in California highlight the potentially expensive and complicated nature of plugging and decommissioning wells and the difficulty of determining liabilities following bankruptcy.
As most of California’ swells (98%) are located onshore, it will be important to assess the potential liabilities for onshore wells.
The bond amounts available to pay for plugging and decommissioning vary according to operator, but in almost all cases these amounts are substantially lower than the predicted costs.”
The study also provides recommendations for a more detailed analysis of orphan well liabilities using the findings from the initial report.
The report documents about 107,000 active and idle oil and gas wells in California, a state that is constantly touted by state officials and media outlets as the nation’s “green leader.”
“At some point, each well will end its productive life and the operator of the well will be required to carefully plug the well with cement (‘plug and abandon’) and decommission the production facilities,” the report states.
“There is a large population of nonproductive wells in the state, known as idle wells, which have not produced oil and gas for at least two years and have not been plugged and decommissioned. Idle wells can become orphan wells if they are deserted by insolvent operators. When this happens, there is the risk of shifting responsibility for decommissioning the wells to the State,” the authors note.
The report said there are current policies in place to protect the State from the potential liabilities of orphan and idle wells. For example, operators are required to file indemnity bonds—a form of financial assurance—when drilling, reworking, or acquiring a well, to support the cost of plugging a well should it be deserted.
“In an effort to prevent the orphaning of wells, the operators of idle wells are required to pay fees or develop management plans to eliminate long-term idle wells—wells that have been idle wells for 8 years or more. However, the available funds from these bonds and fees are often not enough to fully cover the costs of plugging and abandoning the well and decommissioning its facilities. In some cases, especially for older orphan wells, there may be no bond at all,” the report stated.
The analysis also reveals that 5,540 wells in California “may already have no viable operator or be at high risk of becoming orphaned in the near future,” a fact that strongly conflicts with the oil industry’s constant contention that California oil drilling operations are the most heavily regulated in the entire country.
“The State’s potential net liability (subtracting available bonds held by CalGEM) for these wells is estimated to be about $500 million. The share of this long-run cost that will be borne by the State (as opposed to operators) will depend on policy, market outcomes, and other factors,” the report states.
The study identifies additional 69,425 economically marginal and idle wells that could become orphan wells in the future as their production declines and/or as they are acquired by financially weaker operators. “Increasing the financial security for these wells while they are still profitable may avoid plugging and decommissioning challenges in the future,” according to the report.
These wells will eventually need to be plugged, bringing the possible cost to $5 billion. Plugging all 107,000 wells in California would cost more than $9 billion, the report finds.
The lead author of the report is Judson Boomhower, Assistant Professor of Economics at UC San Diego and an expert on energy, environmental economics, and applied microeconomics.
“As with all states where oil and gas drilling takes place, there are policies in place to protect the State from the potential liabilities of orphan wells,” said Boomhower. “California, like many other states, has recently taken steps to enhance these policies, primarily by requiring more financial assurance from well operators. However, our initial analysis implies that the potential cost to the state still substantially exceeds the value of these assurances.”
In a press release, the Center for Biological Diversity noted that oil companies are required to pay for plugging and abandonment costs of their well, but the bonds collected to cover the cost of plugging wells currently total a little over $100 million, approximately one percent of the cost to plug and abandon all of California’s wells.
The report’s key findings, as summarized by the Center, are:
- CCST identified 5,540 oil and gas wells that are orphan (i.e., idle for five years with no owner) and highly likely to become orphaned (idle for 5 years with smaller, partially active owner)
- It would cost $550 million to plug and abandon just these wells.
- Another 69,425 wells are “active” but produce less than 5 barrels a day. Add those in and the cost would be $5 billion to plug.
- This does not include wells that are currently plugged but may need to be replugged due to improper plugging or outdated standards (another 40,000 – 120,000 wells). (California has been identified as being in the “bottom tier” of states in terms of the strength of decommissioning regulations.)
- The bonds that are supposed to cover the cost of plugging and abandoning currently total $107 million, plus a couple extra million each year from idle well fees.
“California’s oil companies have drilled and drilled without any thought of how to clean up their mess,” said Hollin Kretzmann, an attorney at the Center for Biological Diversity. “This study shows it’ll ultimately cost billions to plug these dangerous wells, yet the companies profiting from the oil have set aside a tiny fraction of that money for cleanup. If state officials don’t impose stronger rules, California taxpayers will end up paying big bucks to fix this toxic problem.”
This independent assessment is available for download at CCST’s website: https://ccst.us/reports/orphan-wells-in- california/.
For more information about the expansion of oil and gas drilling in California under the Newsom Administration, read: www.dailykos.com/...
Remember: these wells will eventually run out of gas and oil — and will have to be plugged, potentially costing the taxpayers millions or even billions of dollars.
Background: Western States Petroleum Association and Big Oil dominate lobby spending in California
The increase in oil and gas drilling permits — and the potential taxpayer expense needed to plug the wells — is a result of the millions of dollars every year that the Western States Petroleum Association (WSPA), the most powerful corporate lobbying group in California and the West, and oil companies spend every year on lobbying state officials, including the Governor’s Office and state regulatory agencies.
WSPA is led by Catherine Reheis-Boyd-Boyd, the WSPA President and former chair of the Marine Life Protection Act (MLPA) Blue Ribbon Task Force to create “marine protected areas” off the Southern California Coast.
WSPA spent $6,608,836 lobbying in the first three quarters of 2019; the total spending for the year won’t be known until the fourth quarter lobbying expenses are published on the California Secretary of State’s website by January 31. The group spent $2,482,133 lobbying in 2019's third quarter after spending $4,126,703 in the first 2 quarters of the year, according to forms WSPA filed with the California Secretary of State on October 30.
For the entire 2017-2018 Session, WSPA spent a total of $15,768,069. The group spent $7,874, 807 to influence California government officials in 2018. Of the four quarters, WSPA spent its most money lobbying, $2,649,018, in the eighth quarter, from October 1 to December 31, 2018.
Over the past decade, WSPA and Big Oil have topped the list of spenders on lobbying the Legislature in California. During the 2015-2016 Legislative Session, the oil industry spent a historic $36.1 million to lobby lawmakers and officials in California.
WSPA and Big Oil wield their power in 6 major ways: through (1) lobbying; (2) campaign spending; (3) serving on and putting shills on regulatory panels; (4) creating Astroturf groups: (5) working in collaboration with media; and (6) contributing to non profit organizations.
For more information about WSPA and Big Oil, go to: California's Biggest Secret? How Big Oil Dominates Public Discourse to Manipulate and Deceive: https://www.counterpunch.org/2019/06/07/californias-biggest-secret-how-big-oil-dominates-public-discourse-to-manipulate-and-deceive/