There’s a reason oil well sales are collapsing in California: Cleanup costs

For years, large drillers in California sold unprofitable wells to smaller companies willing to wring the last drops of oil out of them. The process essentially kicked the cost of cleaning up oil fields — pumping concrete down well bores, removing tanks and pipelines — to operators with less ability to pay for the eventual cleanup.

Policymakers and advocates predicted that taxpayers — not the oil companies themselves — would ultimately have to pay billions for remediation once those oil and gas operations ran dry. Unplugged wells emit climate-warming methane and pose long-term hazards to soil and groundwater.

But a new law may finally be slowing the so-called well shuffling, state data shows.

Since the start of this year, companies have proposed selling 766 wells in the state. But before the wells can change hands, purchasers are now required to request an estimate for a bond to plug the wells from the California Geologic Energy Management Division (CalGEM), the agency that regulates drilling. 

The requirement is part of a new law passed last year to ensure that someone — not taxpayers — is forced to put up the money to clean up the wells before they can be sold.

The state quoted bond amounts totaling $80.5 million for those hundreds of wells. Most of that money was for a bond to eventually plug 729 wells in Kern County that Vaquero Energy Inc. wanted to buy from Aera Energy. 

The remaining 37 wells are scattered across Santa Barbara, Orange, Kern, Fresno, and Los Angeles counties and are owned by two dozen companies. The majority of those wells were idle, and nearly all were marginal — producing less than 15 barrels of oil a day, enough to produce just 472 gallons of gas.

But after the state determined how much it would cost to bond those wells, all 37 of the proposed sales fell through. The California Geologic Energy Management Division directed questions about the failed transactions to the involved companies.

To Rob Schuwerk, the executive director of Carbon Tracker’s North American office, it means that the law is working as intended: Companies are no longer passing off marginal wells to operators who lack the financial means to plug them.

“The law has stopped some of the bleeding,” Schuwerk wrote in an email to Capital & Main.

Capital & Main reached out to all of the operators involved in the proposed sale of wells. Most did not respond to emails and phone calls. 

Chad Hathaway, the owner of Hathaway LLC, wanted to buy 14 wells from Kern River Holding LLC. The state required that he file a $2.6 million bond to complete the transaction. His company in the Mount Poso oil field in Kern County specializes in refurbishing and reactivating marginal wells.

In an email to Capital & Main, Hathaway wrote that California “places such high costs on abandonment and remediation that it makes the transfers impossible, unaffordable, and economically unfeasible to bond.” He noted that the state’s bonding estimates run much higher than his company’s internal estimates.

That sentiment is shared by other operators. Signal Hill Disposal LLC, a wastewater disposal company based in Southern California, responded with “shock and awe” after the California Geologic Energy Management Division said it needed to obtain a $651,820 bond to acquire a single well in Los Angeles County, according to division emails obtained by Capital & Main.

The quoted amounts to plug wells are, however, in line with and even a little below figures included in a Sierra Club idle wells report released in December 2023 that is frequently cited by some lawmakers in Sacramento. That report put total cleanup liabilities for all unplugged wells in California at $22.9 billion.

A Carbon Tracker report from 2023 estimated that the costs of decommissioning all those wells would be more than double the projected cash flows for all oil-producing companies in California given how much oil is left in the ground. 

Going forward, Carbon Tracker’s Schuwerk said, California needs “to increase financial assurance on all entities,” which he said could be accomplished through bonds or sinking funds, which can be dedicated to cleanup costs and which oil operators pay into over time.

But any plan to clean up oil fields through bonds alone faces a major hurdle: Bond sellers have become reluctant to work with California oil operators, said Mark Karr, a senior account manager with SuretyBonds.com.

“Out of all the bonds we sell, this is one of the highest risk industries,” Karr said. “A lot of surety companies think it’s not even worth it because we’ve had to pay out so many times” to the state after oil operators reneged on promises to use their own money for plugging wells.

The state’s largest operators, including Chevron, may be best positioned to set aside cleanup money, considering their still very profitable global operations. But actions by driller Aera Energy, which recently merged with California Resources Corporation to become the state’s largest well operator, show how challenging it can be to make companies put up a sufficient bond.

In one proposed transaction this year, Aera asked the California Geologic Energy Management Division for a bond estimate to sell 11 wells to an unidentified company. In another, where Aera wanted to sell 729 wells to Vaquero Energy, it’s not clear which company initiated the transaction. 

The bond amounts for the two transactions would have totaled $75.3 million, but neither moved forward. Neither Aera or Vaquero responded to requests for comment. 

And months before its shareholders voted in June to acquire Aera, California Resources Corporation told state regulators that its stock transfer acquisition of Aera meant no wells were actually changing hands. The California Geologic Energy Management Division agreed with the company’s interpretation of the law, and did not force California Resources Corporation to file a bond for acquiring Aera’s wells.

California Resources Corporation estimated in financial statements filed with the Securities and Exchange Commission that its long-term costs for cleaning up all of its unplugged wells after the merger — about 38,000 — amounted to $1 billion. By contrast, the Sierra Club estimated that the two companies’ liabilities to plug their idle wells amounted to $3.5 billion combined.

California Resources Corporation filed a $30 million bond for cleanup costs with the state in December 2023, the maximum amount under the law at the time. 

Meanwhile, the state is taking more steps to hold companies financially liable for their wells. In September, Governor Gavin Newsom signed a bill into law to charge companies thousands of dollars per idle well annually unless they start plugging them. 

Despite President-elect Trump’s desire to promote domestic oil production, the federal government may find it difficult to intervene in matters related to drilling on state lands. 

“It does not in any immediate way intersect with federal law or implicate federal interests,” said Ann Alexander, an environmental attorney and policy consultant who advocated for 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, Alexander said. Other industries could serve as a model, such as the nuclear power sector, in which plant operators are required by federal regulations to put money into a sinking fund for decommissioning.

“No matter how much people want to keep [California’s oil drilling] industry alive, it is fundamentally on the wane,” she said. 

Copyright 2024 Capital & Main

This story was originally published by Grist with the headline There’s a reason oil well sales are collapsing in California: Cleanup costs on Nov 30, 2024.