For more than a century, the oil and gas industry has dug holes all over California in search of black gold and lucrative paydays. But with production steadily declining, it’s time to clean up many of the nearly a quarter of a million wells that are spread from downtown Los Angeles to western Kern County and across the state.
However, the bill for that business will vastly exceed all future industry earnings in the state, according to a first-of-its-kind study published Thursday and shared with ProPublica.
“This major issue has crept up on us,” said Dwayne Purvis, a Texas oil reservoir engineer who analyzed earnings and cleanup costs for the report. “Policy makers didn’t get to know it. The industry didn’t recognize it, or, if they did, they didn’t talk about it or act on it.”
The analysis, which was commissioned by the Carbon Tracker Initiative, a financial think tank that studies how the transition away from fossil fuels will affect markets and the economy, used California regulators’ draft methodology to calculate the costs associated with plugging oil and gas wells on and off. along with the relevant infrastructure. The methodology was developed with feedback from the industry.
The report breaks down costs into several categories. Plugging wells, dismantling surface infrastructure and clearing contaminated drilling sites would cost at least $13.2 billion, based on publicly available data. Adding factors with greater uncertainty, such as inflation rates and the price of decommissioning miles of pipeline, could bring the total cleanup bill for California’s onshore oil and gas industry to $21.5 billion.
Meanwhile, oil and gas production in California will generate about $6.3 billion in future profits over the remaining operations, Purvis estimates.
Compounding the problem, the industry has set aside about $106 million only that state regulators can use to clean up when a company goes into liquidation or steps away from its responsibilities, according to state data. This amount equals less than 1% of the estimated cost.
Taxpayers will probably have to cover a lot of the difference to ensure the wells are plugged and not allowed to leak brine, toxic chemicals and warming methane.
“These findings demonstrate why the state must ensure that this cost is not passed on to California taxpayers,” state Senator Monique Lemon, a Santa Barbara Democrat who wrote legislation regulating oil, said in a statement. “It is important for the state to raise funds to plug and abandon wells in a timely and rapid manner.”
Representatives for the state’s petroleum regulatory agency, the California Department of Geological Energy, did not respond to ProPublica’s request for comment on the report’s findings.
Rock Zerman, CEO of the California Independent Petroleum Association, an industry trade group, said in a statement that companies spent more than $400 million last year plugging and cleaning thousands of oil and gas wells in the state. “This demonstrates their dedication to fulfilling their obligations and mitigating the environmental impact of their operations,” he said.
Charges for existing oil and gas production will offset some of the liability, but they’re nowhere close enough to address the shortfalls identified in the new report.
“It really scares me,” said Kyle Ferrar, Western program coordinator with the environmental and data transparency group FracTracker Alliance, of the report’s findings. “That’s a lot for the state, even for a state the size of California.”
The industry is in decline
Higher oil prices have translated into huge profits for the industry in recent years, but the Carbon Tracker report found that they are likely to be short-lived. Only two drilling rigs were operating in the state simultaneously this year, which means few new wells will be commissioned, and more than a third of all non-connected wells are idle.
There is an inherent uncertainty in estimating future oil revenues, said Judson Boomhauer, an environmental economist and assistant professor at the University of California, San Diego, who has studied the oil industry in California. For example, one variable is how quickly a country can shift from cars with internal combustion engines to electric cars. But he said Carbon Tracker’s estimates of environmental responsibilities track his research.
“It’s a case in the twilight of its production period, and that means big commitments,” said Boomhauer. He added that it was time for regulators to prevent companies from offloading their wells to “capitalised companies” that could not afford the cleanup.
As ProPublica reported last year, the oil majors that have long dominated California and have the deep pockets needed to pay for environmental cleanup are selling their wells and leaving the state, handing the job to smaller, less well-funded companies.
Nearly half of the wells drilled in California have traded through sales and bankruptcy since 2010, according to data analyzed by Ferrar.
Small businesses are often one bankruptcy away from their orphan wells, which means they are left to taxpayers with the businesses dissolving. The Biden administration recently allocated $4.7 billion in taxpayer money to plug in orphaned wells.
And the environmental responsibilities of industry in California are much greater than what the Carbon Tracker report identifies.
Purvis only included the environmental liabilities associated with onshore oil and gas production. Billions of additional dollars will be needed to plug offshore wells, remove rigs, and reclaim artificial islands used for drilling off the coasts of Long Beach, Ventura, and Santa Barbara.
In addition, the report did not identify the emerging danger of “zombie wells,” which were plugged years ago to weaker standards and are more likely to leak if not reconnected. This is an expensive endeavor, as the average cost of plugging a well in California—let alone cleaning up surface contamination—is $69,000, according to Purvis’ research. But some California wells are already starting to fail, including in neighborhoods in Los Angeles.
They won’t have the money to do that later.
Time is running out to correct funding shortfalls, for example by increasing the money companies must allocate to plug wells.
The Carbon Tracker report—using government production data and financial futures on the New York Mercantile Exchange—estimated that with lower production, 58% of all future profits are likely to come from oil and gas drilling in the state over the next two years.
“We have our backs against the wall in California right now,” Ferrar said. “If companies don’t put money into this area now, they won’t have the money to do so later.”
Environmental policies can accelerate the decline of the industry. California voters will decide on a ballot initiative in 2024 that would reinstate large buffer zones between communities and oil wells, limiting drilling.
Acting quickly to plug the wells, Purvis said, would “spur economic activity” and help smooth the transition for oil and gas workers who would lose good-paying jobs in the shift away from climate-warming fossil fuels. Spending large sums to plug old wells would create short-term jobs for oilfield workers.
As California faces the consequences of failing to quickly clean up aging oil and gas infrastructure, there are likely several million more wells across the country that are either low-producing or already orphaned and will soon need to be shut down.
“California is going to be the test case or the vanguard on this,” said Boomhauer. “This same problem will eventually appear everywhere.”
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