AB 1167: Putting the Brakes on the Orphan Well Catastrophe

Update:  After passing the legislature, AB 1167 was signed into law by Governor Newsom on October 7, 2023, accompanied by a signing message.

For too long, oil companies in California have been operating on the dine-and-dash model: dining on enormous profits from their polluting oil drilling, and then splitting before the bill comes for cleaning up the mess. As the state’s wells dwindle in productivity and profitability, they are frequently sold to companies that are less likely to pay for cleanup when the wells stop producing, until eventually the state’s taxpayers get stuck with the bill. 

That is why Assemblymember Wendy Carrillo has introduced AB 1167, the Orphan Well Prevention Act, which NRDC and Environment California are sponsoring. The act is designed to intervene before wells become “orphaned” without a solvent operator, by prohibiting transfer of a well unless the transferee puts up financial security to pay for the full cost of cleaning it up, a process called plug and abandonment.

Current law is set up, in theory, to ensure that there is money available to pay for plugging and abandoning wells even when operators go bankrupt, but what’s on the books right now has not been sufficient in practice. While operators are required to post a bond to pay for cleanup before they can drill, the bonding amounts required are woefully inadequate to cover the actual cost of plug and abandonment. Operators of multiple wells are given the option of filing a single blanket bond covering all of the wells—but not covering them nearly enough. For instance, an operator with 10,000 wells in the state can file a blanket bond of $2,000,000, which is a whopping $200 per well.

To put that in perspective, the California Council on Science & Technology (CCST) estimates that the average cost of cleaning up a well in California is $68,000. For an even scarier perspective, CCST estimates that the average available bond funding per well in the state is just north of $1,000. Back in 2019, then assemblymember Monique Limón’s AB 1057 gave the state’s oil extraction regulator, the Geologic Energy Management Division (CalGEM), discretionary authority to increase bonding requirements up to a higher cap, which we hope they’ll use, though they haven’t yet. 

The results of this statutory setup are, unfortunately, predictable. As California’s 20th-century oil boom continues to fade and production rates fall, well operators offload their increasingly unproductive assets to others that are often in less of a position to pay the full cleanup bill and more in a position to simply declare bankruptcy. The poster child for this problem was the 2016 bankruptcy of a subsidiary of Greka Energy Corporation, the last owner of Rincon Island, a 2.3-acre man-made island off the coast of Ventura, California, that was built for offshore drilling by the oil giant Atlantic Richfield in the late 1950s. Rincon ended up in the hands of the Greka subsidiary following multiple sales and bankruptcy proceedings. After years of citations for extensive environmental violations, the subsidiary filed for bankruptcy with less than $28,000 in its bank account—leaving California’s taxpayers holding the bag for a large fraction of the $45 million cost of the cleanup’s first phase.

Lawmakers rushed to deal with the Greka fiasco after the fact, including passing Senator Robert Hertzberg’s SB 1147 in 2018, which required offshore drilling operations to provide financial security for the full cost of plug and abandonment. But the legislation left bonding requirements for onshore drilling untouched. 

And now, we’re poised for history to repeat itself as big oil companies continue to offload their fading onshore oil wells. Just last fall, supermajors Shell and ExxonMobil—operating as the Aera Energy partnership—agreed to sell more than 23,000 wells in California to a German asset management group. Thirty-eight percent of those wells are idle, producing no oil or gas. ProPublica, which reported on the sale, notes that Aera’s $3 million blanket bond would cover less than half a percent of the $1.1 billion that CCST’s estimate indicates would be needed to plug and abandon the company’s wells. 

Assemblymember Carrillo’s AB 1167 would put the brakes on this slow-moving catastrophe in a straightforward manner: by requiring that upon any transfer of an oil well, the transferee provide bonding for the full cost of cleanup, overriding the current statutory provisions allowing inadequate blanket bonding. That means no California well could be sold until and unless the buyer—large or small, fully solvent or not—ensures that cleanup costs are covered. 

The measure won’t pay for the more than 5,000 California wells that CCST estimates are likely already orphaned. But it will help prevent the additional roughly 70,000 wells identified by CCST as idle or marginal from joining their ranks; and go a long way toward preventing future Greka-type fiascos. It’s a step that California, facing potentially billions of dollars of orphan well cleanup liability, can’t afford not to take.