Why No One Wants California’s Orphaned Oil Wells
Tsvetana Paraskova

None of the three dozen sales of oil wells proposed in California this year has materialized due to the considerable clean-up costs for the wells estimated by the state’s oil and gas regulator.

Last year, California sought to prevent a rise in the already high number of so-called orphan oil wells. The state also looked to keep from passing off to taxpayers the liability for plugging and abandoning oil wells should operators not have sufficient funds to plug and decommission non-producing or marginal wells and clean up the sites.

That’s why California Governor Gavin Newsom signed in the autumn of 2023 the Orphan Well Prevention Act, AB 1167. This act creates a process requiring the State Oil and Gas Supervisor to approve transfers of marginal oil and gas wells only once the full cost of well plugging and abandonment and site restoration is covered by a bond or other financial assurance mechanisms.

“As marginally productive wells are increasingly sold to companies without the resources to retire them, we now have an insurance policy if they go bankrupt and disappear,” Katelyn Roedner Sutter, California State Director at Environmental Defense Fund, said at the time.

Under the new law, entities obtaining the rights to operate an oil well or a production facility need to file with the drilling regulator, California Geologic Energy Management Division (CalGEM), an individual indemnity bond for the well or production facility, or a blanket indemnity bond for multiple wells or production facilities.

But the amount of the bond should be determined by the supervisor and needs to be “sufficient to cover, in full, all costs of plugging and abandonment, decommissioning of the facility, and site restoration, as provided,” according to the bill.

However, the regulator’s bonding estimates are so much higher than internal company assessments that none of the 37 proposed sales of wells this year has proceeded, industry executives and analysts have told Capital & Main.

The California law is now working in part to prevent companies without the necessary funds to clean up the wells from obtaining the rights to them, thus diminishing the risk that these costs would end up being paid by taxpayers in some form in the future.

But the law has also essentially stalled any oil well transactions, and none of proposed sales of 766 wells in California has been completed this year, according to Capital & Main.

The Californian regulator “places such high costs on abandonment and remediation that it makes the transfers impossible, unaffordable, and economically unfeasible to bond,” Chad Hathaway, who owns Hathaway LLC, a company refurbishing oil wells operating in Kern County, told Capital & Main via email.

Meanwhile, the problem with orphan wells in California is getting worse.

At the time of the 2023 law on bonding requirements established by the state, 41% of California’s oil and gas wells were either idle or orphaned, Environment California said.

The costs for plugging and cleaning up these wells is an estimated $2.8 billion, according to the organization.

“More than 5,500 wells in California are already likely orphaned, and nearly 70,000 more are at risk of becoming orphaned in the near future,” Environment California said.

Last year, Carbon Tracker said that onshore oil production in California has plunged by 42% since 2014 with the depletion of the mature resources.

As of 2023, California’s oil sector was sitting on at least $13.2 billion in onshore decommissioning costs for the dried-up wells, Carbon Tracker said in a report.

That’s more than double the expected profits of the oil companies from California, which are projected to total $6.3 billion.

Even if all future profits from onshore operations in the state were redirected to decommissioning, the remaining clean-up costs would be at least $6.9 billion, according to Carbon Tracker’s estimates.

By Tsvetana Paraskova for Oilprice.com

 

 

 

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

 

 

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