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Rob Schuwerk, report author with Redwater Insights, said: “California has taken a critical first step. It should now ensure that all operators – not just sellers – are financially prepared to fulfil their clean up responsibilities.”
New legislation has substantially reduced the flow of low-producing wells to lower-producing companies, reducing taxpayer risk.
LONDON, 20 May – California’s Orphan Well Prevention Act (Assembly Bill No. AB 1167) which came into effect on January 1, 2024, required oil producers to provide full-cost financial assurance when transferring low-producing wells. AB1167 has shrunk a key loophole that previously allowed large operators to shift cleanup costs to smaller, less financially secure companies – a practice that often left taxpayers footing the bill.
The new report: ‘Closing the Oil Well Transfer Loophole’ from Carbon Tracker and Redwater Insights analyzes the impact of the law, finding that it has substantially reduced transfers of low-producing wells.
Our analysis of well transfers before AB 1167 identified troubling patterns:
- 60% of the wells were “idle” or “active”, but not producing, at the end of the transfer year;
- Transferred wells were 32% less productive than the average well for the selling company;
- On average, wells were transferred from larger operators to those less than half their size, dispelling the notion that large operators would acquire late-life mature wells;
- Publicly-held operators were net sellers of wells, and most of the transactions were between private companies. For example, Berry Petroleum (“Berry”) transferred 367 unplugged wells to several operators, most notably Shadow Wolf LLC;
- In more than half of the transfers of 20+ wells, the transferee more than doubled its inventory of wells and, in some cases, transferees became first-time operators of wells in California, highlighting the risks present before the passage of AB 1167.
The Act sought to close this loophole by requiring full-cost financial assurance when low-producing wells were transferred. Since the Act took effect, transfers have nearly come to a halt, with operators thinking twice about acquiring further wells where plugging liabilities might exceed asset values.
The nature of the wells transferred and the state of the purchasers of those wells suggests that AB 1167 has been effective at curtailing transfers that, in the end, likely posed greater counterparty credit risk to the state of California. In that sense, the legislation has been a success in terms of shielding taxpayers from greater harm, with the one exception being CalGEM’s interpretation of the law as not applying to “changes of control,” where control over a low-producing operator passes to another operator, as occurred with the sales of AERA to California Resources Corporation.
Whilst AB 1167 has curbed problematic transfers, many current operators still appear underfunded for their long-term obligations. Strengthened bonding requirements, including elimination of blanket bonds and use of sinking funds, could further protect taxpayers.
Rob Schuwerk, report author with Redwater Insights, said: “California has taken a critical first step. It should now ensure that all operators – not just sellers – are financially prepared to fulfil their clean up responsibilities.”
To further mitigate losses from orphan wells, the state should:
- Consider imposing full-cost financial assurance on low-producing wells held by current operators, including those with a range of productive wells;
- Impose a production levy on all existing wells, based either on production or well counts, earmarking the revenues for plugging and abandonment of orphan wells;
- Enforce existing requirements that predecessor operators plug wells orphaned by their successors.
Enacting these changes will help shield the risk that the oil industry’s obligation to plug over 125,000 wells in California, estimated to potentially cost $21.5 billion[1], does not come wholly at the taxpayer’s expense.
Methodology:
Pursuant to a request for information to the State of California, we obtained data on transfers of wells over a six-year period (2019-2024) (the “Base Dataset”). The Base Dataset contains summary information referencing the transfer of over 17,245 wells and precise transfer dates.
Additionally, we obtained bulk data from the CalGEM website which publishes a number of annual snapshots, and have been able to identify 12,041 well transfers,[2] including their unique APIs, in the 2021-2024 period, where the named operator changed (collectively, the “Annual Reports”).
The report relies on these two datasets from the State of California which, while roughly in agreement with each other, are not fully overlapping or reconcilable. However, despite these discrepancies and as detailed in the report, we believe the use of both datasets is helpful and illustrative of the impact the law has had on transfers.
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Once the embargo lifts the report can be downloaded here: https://carbontracker.org/reports/closing-the-oil-well-transfer-loophole/
For more information and to arrange interviews please contact:
Joel Benjamin jbenjamin@carbontracker.org +44 7429637423
[1] https://carbontracker.org/reports/there-will-be-blood/
[2] Included in this count are some wells that were transferred multiple times.
