You have permission to edit this article.
Edit

Deadlines loom as oil producers address idle wells

The new slogan used by Maricopa oilman Chris Hall speaks to the direction small, independent producers like him may be headed with recent political currents. If it sounds fatalistic, it's also conscientious.

"I am in the business," he says, "of going out of business."

Hall means he's working to wind down his operations, plugging his oil wells as fast as he can afford to and removing pipelines and associated facilities so as not to leave behind an environmental, health and safety risk.

Hall, 71, says every dime goes to oil field remediation. But he worries time is running short as state government accelerates its phaseout of in-state oil and gas production.

Among the deadlines keeping him up at night is a Jan. 1, 2027, ban on the diesel motors his well-workover equipment runs on.

"I just hope the state gets it right," he said.

His challenge illustrates a tricky balance for California's campaign to address the threat of orphan wells while also regulating the state's oil industry out of existence.

Ongoing production funds oil companies' well abandonment work. Similarly, Sacramento's efforts to prevent idle wells from becoming so-called orphan wells rely to a large degree on oil producers being financially healthy.

Some in the industry warn cutting off oil too soon could have unintended consequences.

"To ensure this (well plugging and remediation work) by operators continues in the future, we need to ensure we have viable operators who continue to meet their obligations," CEO Rock Zierman of the trade group California Independent Petroleum Association said by email.

WORK AHEAD

The state Legislature, recognizing earlier rules had allowed orphan wells to balloon into unfunded liabilities, passed laws in recent years to address them. Its solutions range from increased bonding requirements on oil producers to new fees on industry activity.

An immediate goal is assessing how much individual producers would have to pay to shut down and fully remediate the sites where they operate.

"The process of risk evaluation has begun in earnest," state Oil and Gas Supervisor Uduak-Joe Ntuk said in an emailed statement.

Meeting upcoming regulatory deadlines isn't as much a worry for large producers who say they're dutifully adhering to state timetables. But small independents may have a harder time cleaning up in time to meet state deadlines.

Hall said abandonment costs producers between $25,000 and $250,000 per well, depending on the location, depth and condition of the well. He contracts most of the work, but some is done by his eight employees attending 65 wells that now produce about 100 barrels a day.

With prices strong lately, he figures it'll take him five to 10 years to meet his obligations and return his leases to the property owners in case they want to use the land for something else.

DEADLINE PRESSURE

Oil producers he speaks with are worried about California's proposed Jan. 1, 2024, date for ending the well-completion technique known as fracking, he said, not to mention the 2035 date for requiring all new vehicles sold in the state to be emissions-free, and the 2045 deadline ending oil and gas production altogether.

"As an industry," he said, "we are actively talking about those dates."

Especially for small independent producers, he added, "you really have to focus on what you're doing for abandonment and cleanup."

Zierman at CIPA noted 2016's Assembly Bill 2729 requires oil field operators to plug and remediate at least 4 percent to 6 percent of their idle wells each year, with bigger companies having to abandon proportionately more wells.

In practice, that has meant the permit most frequently issued this year by CalGEM, the California Geologic Energy Management Division, has been well abandonments: about 1,300, or close to two-thirds of permits issued by the agency through June 30.

INDUSTRY VIEW

Bakersfield-based oil producer Aera Energy LLC said by email it is abiding by state requirements that it reduce its inventory of idle wells every year to ensure they're managed safely and don't become a risk to public health, safety and the environment.

The company said Gov. Gavin Newsom's recent announcements about accelerating the phaseout of in-state oil production haven't altered its idle-well management plans, and that it will have met its obligations by March 31, 2025. By that date, it said all its idle wells as of April 1, 2019, will have been properly abandoned.

San Ramon-based oil major Chevron Corp. said by email it conducts business in a socially and environmentally responsible manner across the life of its assets. It is committed to retiring its idle assets according to applicable laws, and that its highest priority is the protection of people and the environment in communities where it works.

"We plan to stay on track with our planned abandonment activities regardless of the regulatory environment," it said, adding that historically it has abandoned more wells than required by state regulations.

CalGEM's Ntuk noted oil field operators must file indemnity bonds when drilling, reworking or acquiring a well. The bond money is intended to support the cost of plugging wells that may later be deserted.

NEW AUTHORITIES

But because those bond amounts generally have fallen short, CalGEM is working to carry out new authorities under various state laws in recent years to expand California's bonding program. The guiding principle is making sure enough bond money is available to cover the costs of plugging and decommissioning oil facilities.

Ntuk noted the agency's authority to evaluate risks associated with orphan and potential future orphan wells stems from 2019's Assembly Bill 1057, which empowered CalGEM to require individual operators to come up with additional money, if necessary, to cover their orphan well liabilities.

Additionally, 2019's Senate Bill 551 authorized CalGEM to require operators to file reports showing their total liability related to costs associated with plugging, abandonment and site decommissioning work. Those reports, the first of which are due in 2022 and 2024, will inform subsequent state measures forcing operators to set aside more money to cover those expenses.

As things stand, Ntuk stated, the industry pays all plugging and abandonment costs. If an oil producer is financially solvent and responsibly managing its wells, the work is done as necessary. But it's when no responsible party can be found, and wells are found idle and deserted, that the state steps in with money contributed by other oil companies.

Money for that work will come from two funds. One pools operators assessments capped at $3 million per year through fiscal 2022-23. After that time, the per-company cap falls to $1 million per year.

The other fund comes from fees on operators with idle wells. Either one can be spent on plugging and abandonment work the state deems necessary.

"CalGEM may use these funds to plug and abandon wells to mitigate a hazardous or potentially hazardous condition," Ntuk wrote.