Operator Financial Responsibility and Security Requirements
On January 23, 2020, the California Council on Science and Technology released a report1 on California’s potential liabilities associated with the plugging and abandonment of wells in the state. In the report, orphan wells are defined as wells that have no known responsible operator or no financially viable operator capable of plugging the well and decommissioning the well’s production facilities and the authors provide that responsibility for plugging and decommissioning these wells may ultimately fall to the State.
In their summary of the report, the authors provide the following analysis:
Recent cases in California highlight the potentially expensive and complicated nature of plugging and decommissioning wells and the difficulty of determining liabilities following an operator’s bankruptcy.
The bond amounts available to pay for the plugging of wells and decommissioning of production facilities vary according to operator, but in almost all cases these amounts are substantially lower than the predicted costs.
5,540 wells in California are, as defined by the authors, likely orphan wells or are at high risk of becoming orphan wells in the near future. The potential net liability for these wells is estimated to be about $500 million.
1California Council on Science and Technology, “Orphan wells in California: An Initial Assessment of the State’s Potential Liabilities to Plug and Decommission Oil and Gas Wells” published January 23, 2020 and available at: https://ccst.us/reports/orphan-wells-in-california/.
Related CalGEM Programs
Operator Financial Responsibility Program
Public Resources Code section 3205.7 requires each operator of a well to submit a report to CalGEM estimating the cost to plug and abandon all of its wells, decommission all attendant production facilities, and complete site remediation. The cost estimate reports must be prepared in accordance with criteria established by CalGEM.
Operator Financial Security Program (Bonding)
In response to concerns related to orphan wells and liabilities for plugging, decommissioning, and remediation of oil and gas sites, Public Resources Code section 3205.3 codified in 2018 by AB 1057, provides CalGEM the authority to require an operator subject to CalGEM’s indemnity bond requirements, to provide an additional security, acceptable to CalGEM, based on CalGEM’s evaluation of the risk that the operator will desert its wells and the potential threats the operator’s wells pose to life, health, property, and natural resources.