Gov. Newsom recently signed Assembly Bill 1167, requiring well owners to pre-fund well closures. While passed by the state legislature, the bill had drawn opposition from some lawmakers, the state Department of Finance, and industry representatives concerned the bill will discourage the sale of wells and deter well bonding companies from operating in the state, placing more wells at risk of being abandoned.
The bill requires an “indemnity bond” from well owners as payment for future well plugging, mandating a full cost-of-plugging bond be obtained be new owners when idle or low-production wells are sold or transferred.
Funds will be held by a surety company, who would ultimately be responsible for full plugging cost in the event of a well owner’s insolvency. There are concerns that these bonding firms will also face bankruptcy, given the cyclical nature of the petroleum industry and California’s push to eliminate combustion-fueled vehicles in favor of electric vehicles.
For wells that changed ownership after January 1996, current laws compel previous owners to take financial responsibility should the present owner file bankruptcy, abandoning the wells. However, this leaves many older wells as the taxpayer’s responsibility.
For example, 19 wells were drilled on the grounds of Beverly Hills High School then orphaned when the lease ended and the oil company filed for bankruptcy. The school district was then responsible for the cost of closing the wells. Ultimately the company provided $760,000 as part of a settlement – but the final cost of plugging and remediating the 19 wells was $40 million, an average cost of over $2 million per well, paid by the city.
Most communities cannot provide that level of financial outlay to get wells closed, especially typical working-class locations – the majority of well sites. There are around 5,500 orphaned wells in California, with perhaps 70,000 at risk of abandonment.
The average orphan well closing/mitigation cost in California is about $180,000, of which ~$68K is for plugging, and the remainder of costs for infrastructure removal and site remediation. Bonding funding per well is around $1,000 to $2,400. State regulators are considering raising the bonding amounts required under existing laws.
The California Geologic Energy Management Division (CalGEM) will evaluate plugging costs and determine bond amounts.
One study, written by petroleum reservoir engineer Dwayne Purvis, estimated that cleaning up California’s oil industry could cost $21.5 billion.
Purvis said if this Bill 1167 dissuades companies from purchasing California wells, there actually is a larger problem. “This admits — implicitly but almost inescapably — that the cost of plugging exceeds the value of remaining production,” he said.
Analyzing the cost/benefit of wells is a never-ending balancing act, and should include the well closing costs. Maintaining U.S. production should be a priority, with responsibility for managing the potential downsides of energy as a consideration. The industry can minimize long-term impact to future generations while continuing to provide energy security and vital resources to power the nation and the world.
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