For years, California’s big drillers sold unprofitable oil wells to small businesses looking to squeeze every last drop of oil out of them. This process essentially pushed up the cost of cleaning up the well (the cost of pumping concrete into the well hole and removing tanks and pipelines) to operators who were less able to pay for the final cleanup.
Policymakers and advocates predicted that if oil and gas operations dried up, taxpayers, not oil companies, would ultimately have to pay billions of dollars for repairs. Unplugged wells emit climate warming emissions methane and pose long-term risks to soil and groundwater.
But new laws may finally be slowing the so-called well shuffling, according to state data.
Since the beginning of this year, companies have proposed selling 766 wells in the state. But before a well can change hands, buyers must now request a bond quote to plug the well from the California Geological Energy Management (CalGEM), the agency that regulates drilling.
This requirement is new law The law, passed last year, ensures that someone, rather than taxpayers, must pay for the cleanup of wells before they can be sold.
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The state estimated a total bond of $80.5 million for these hundreds of wells. Most of that money ultimately went toward bonds to plug 729 wells in Kern County that Vaquero Energy wanted to buy from Aera Energy.
The remaining 37 wells are located in Santa Barbara, Orange, Kern, Fresno and Los Angeles counties and are owned by 20 companies. Most of these wells were idle and nearly all were at capacity, producing less than 15 barrels of oil per day. produce Only 472 gallons of gas.
But all 37 proposed sales fell through after the state determined how much it would cost to bond those wells. The California Department of Geological Energy Management directed questions about the failed deal to the companies involved.
For Rob Schwak, executive director of Carbon Tracker North America, this means the law is working as intended. In other words, companies will no longer transfer marginal wells to operators who don’t have the financial resources to fill them.
“Thanks to the law, some of the bleeding has stopped,” Schwak wrote in an email to Capital & Main.
Capital & Main contacted all operators involved in the proposed well sale. Most people didn’t respond to emails or phone calls.
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Chad Hathaway, owner of Hathaway LLC, wanted to purchase 14 wells from Kern River Holdings LLC. The state required him to post a $2.6 million bond to complete the deal. His company, located in the Mount Poso oil field in Kern County, specializes in marginal well rehabilitation and revitalization.
In an email to Capital & Maine, Hathaway wrote that California “imposes such high abandonment and remediation costs that transfer is impossible, unaffordable, and economically unavoidable.” It is no longer possible to guarantee the same.” He noted that the state’s bond estimate is much higher than the company’s internal estimates.
That sentiment is shared by other operators. Signal Hill Disposal LLC, a Southern California-based wastewater treatment company, will receive a $651,820 bond for the California Department of Geological Energy Management to acquire one well in Los Angeles County, according to an email from the department. He said there was a reaction of “shock and awe” after he said it was necessary. Acquired by Capital & Main.
However, the amount quoted for unplugging the wells is consistent with, and even slightly below, the numbers included in the Sierra Club’s idle wells. report It was released in December 2023 and is frequently cited by some members of Congress in Sacramento. The total cleanup debt for all unplugged wells in California is $22.9 billion, according to the report.
carbon tracker report Considering how much oil remains underground after 2023, the cost of decommissioning all these wells is estimated to be more than double the projected cash flows of all California oil producing companies.
Going forward, Carbon Tracker’s Schwak said California will need to “strengthen financial guarantees for all entities,” which he said can be accomplished through bonds and bonds. sinking fundwhich can be used to cover cleanup costs and oil operators can pay over time.
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But plans to clean up oil fields using bonds alone face major hurdles. Bond sellers are becoming more reluctant to work with California oil operators, said Mark Kerr, senior account manager at SuretyBonds.com.
“This is one of the riskiest industries we sell in fixed income,” Kerr said. After oil operators reneged on promises to use their own money to plug wells, “many surety companies thought it wasn’t even worth it because they had to pay so many times. “I’m there.”
The state’s largest operators, including Chevron, may be in the best position to secure cleanup funding given their still highly profitable global operations. But the actions of drilling company Aera Energy, which recently merged with California Resources Corp. to become the state’s largest oil well operator, illustrate how difficult it can be to impose sufficient bonds on companies.
In one of the proposed deals this year, Aera asked the California Department of Geological Energy Management for a bond quote to sell 11 wells to an unidentified company. In another case, Aera wanted to sell 729 wells to Vaquero Energy, but it’s not clear which company initiated the deal.
The total deposits for the two deals were supposed to total $75.3 million, but neither moved forward. Neither Aera nor Baquero responded to requests for comment.
And months before shareholders voted to acquire Aera in June, California Resources Corporation informed state regulators Aera’s stock acquisition does not actually mean a change in ownership of the wells, he said. California Geological Energy Management Division agreed The company agreed with its interpretation of the law and did not force California Resources Corporation to post a bond to acquire the Aera well.
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California Resources Corporation said in financial statements filed with the Securities and Exchange Commission that long-term costs to clean up all the wells (approximately 38,000) that were unplugged after the merger amounted to $1 billion. Then I made an estimate. By contrast, the Sierra Club estimated that the companies’ combined debt to fill idle wells was $3.5 billion.
In December 2023, California Resources Corporation filed a bond with the state for $30 million in cleanup costs, the maximum amount under the law at the time.
Meanwhile, states are taking further steps to hold companies financially responsible for their wells. Gov. Gavin Newsom signed the bill in September. law Unless companies start plugging them, each idle well could cost companies thousands of dollars a year.
Despite President-elect Trump’s desire to boost domestic oil production, the federal government may find it difficult to intervene in issues related to drilling on federal lands.
“It does not immediately violate federal law or implicate federal interests,” said Ann Alexander, an environmental lawyer and policy consultant who supports the oil well bonding law.
The bonding law is a step in the right direction, but California needs to continue finding ways to make oil operators pay for cleanup costs, Alexander said. Other industries, such as the nuclear power sector, could also serve as models. In the nuclear power sector, plant operators are required by federal regulations to commit capital. Sinking fund for decommissioning.
“No matter how much people want to protect, [California’s oil drilling] The industry is alive but in fundamental decline,” she said.
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