The 2022-23 Budget: Oil Well Abandonment and Remediation

The 2022-23 Budget: Oil Well Abandonment and Remediation JANUARY 2022 Summary. The Governor’s budget proposes For example, deserted wells can leak oil and other $200 million General Fund over two years for the injected fluids used for oil and gas extraction, California Geologic Energy Management Division which can contaminate nearby sources of water. (CalGEM) within the Department of Conservation In addition, deserted wells can release benzene and (DOC) to plug deserted wells and decommission methane, among other air pollutants, degrading associated facilities. Although addressing deserted local air quality. These environmental impacts can wells could have environmental, health, and safety pose health hazards, such as harm to respiratory benefits, this proposal represents a significant health, to residents in nearby communities. expansion of current well remediation activities. Deserted wells can also present physical safety In addition, federal funding for well remediation concerns, potentially endangering unsuspecting activities will soon be available. Furthermore, it may people and wildlife. be appropriate for the current oil and gas operators State Remediates About 11 Wells Annually. to bear at least some of the cost of remediating CalGEM is responsible for the oversight of the the environmental damages from these wells— oil, natural gas, and geothermal industries. rather than the general taxpayer through the state In the last five years, CalGEM has expended, on General Fund. We recommend the Legislature average, $2 million annually from the Oil, Gas, consider reducing the amount of state funding and Geothermal Administrative Fund and the proposed, consider using alternative sources of Hazardous and Idle-Deserted Well Abatement Fund funding to support well remediation, and require to remediate roughly 11 deserted wells per year. reporting on key program outcomes to inform The division identifies deserted wells to remediate future funding decisions. by prioritizing wells that pose the highest relative risk to public health, safety, and the environment. Background State staff issue permits and oversee the plugging California Has Over 5,000 Deserted Oil and and decommissioning activities, but the division Gas Wells. Oil and gas production in California uses external contractors to implement the has decreased over the past several decades. remediation projects. As a result, an increasing number of wells are no longer used for extraction of oil and gas. When a Governor’s Proposal well reaches the end of its productive life, operators Provides $200 Million Over Two Years for are required to plug the well and decommission Well Remediation. The Governor’s budget associated production facilities (also known proposes $100 million from the General Fund in as remediation). However, there are over 2022-23 and $100 million in 2023-24—total of 5,000 deserted wells with no responsible solvent $200 million over two years—for CalGEM to plug operator to appropriately remediate the well and the wells and decommission facilities. The cost to plug associated production facilities. a deserted well varies widely, but CalGEM’s most Deserted Wells Have Environmental, recent analysis found the average cost to be about Health, and Safety Impacts. Deserted wells $111,000 per well. Based on this average cost, without proper remediation can result in negative the division would be able to remediate roughly environmental, health, and safety impacts. 1,800 deserted wells with the proposed funding. Uses Contractors to Manage Projects, government had not yet issued detailed guidance Investigate, and Implement Projects. about how this funding can be used. However, CalGEM would use the total proposed funding based on our initial understanding, the funding to hire three types of external contractors: would go to three types of grants: (1) $10 million for a construction management • Initial Grants. Initial grants provide states up contractor to manage the remediation projects, to $25 million to accelerate well remediation (2) $20 million for a contractor to conduct financial work. This funding has not yet been allocated, obligations and land ownership research, and but the federal government will accept (3) $160 million for contractors to plug wells and applications later this spring. decommission facilities. In addition, the division will • Formula Grants. Formula grants provide a use $10 million for department administrative costs. larger amount of funding, to be allocated on Existing CalGEM staff would provide oversight by a formula basis, based on the number of job issuing permits, witnessing different stages of the losses in the state’s oil and gas industry, the project, and managing contracts. number of documented deserted wells, and Assessment the projected cost to remediate these wells. This funding is intended for well remediation Addressing Deserted Wells Has Merit. projects. It is unclear how much funding will As discussed above, deserted wells have significant be available nationwide through the formula negative environmental, health, and safety grants. Although CalGEM submitted a notice impacts. Well remediation projects could provide of intent for the formula grant in December important water and air quality improvements, as 2021, the federal government has not yet well as health and safety benefits. In particular, provided an estimate of how much the state is communities near these deserted wells would expected to be eligible for. Depending on the benefit from these projects. Because deserted number of states that apply for this funding, wells are concentrated in specific parts of the state, California could receive up to hundreds of such as Los Angeles, Santa Barbara, and Ventura millions of dollars over the next several years. Counties, benefits would likely be concentrated in • Performance Grants. Performance grants these geographic regions. include two types of funding categories. Request Represents a Significant Expansion First, it includes regulatory improvement of Current Well Remediation Activities Without grants of up to $20 million, which are intended Additional State Staff. The proposed funding is to help support states in taking steps to 20 times greater than the existing annual funding strengthen their regulation and oversight of dedicated to well remediation and does not include deserted wells. Second, it includes grants of additional positions for CalGEM. Furthermore, up to $30 million for states that can provide as discussed in more detail below, the state is matching funds for remediation activities. Both expecting to receive a significant amount of funding performance grant types have not yet been from the federal government for well remediation allocated and it is unclear when the federal activities. The proposal includes $10 million for government will accept applications. department administrative costs, but no additional positions. It is unclear how these funds will be spent Other Ways to Pay Remediation Costs May and whether the funds will adequately support Be More Appropriate. Under the polluter pays administration of the additional funding. principle, private parties who produce pollution Federal Funds Available for Well (such as environmental damage associated with oil Remediation, but Details Are Unclear. and gas wells) should bear the costs of managing The federal Infrastructure Investment and Jobs it to prevent damage to human health or the Act (IIJA) includes $4.7 billion nationwide over a environment. Deserted wells have no responsible five-year period for well plugging, remediation, and solvent operator that can pay for mitigating the restoration. At the time of this analysis, the federal environmental damages. However, it may be 2022-23 Budget Series 2 appropriate for the current oil and gas operators to • Matching Funds for Federal Funding. bear at least some of the cost of remediating the Some of the federal funds are expected to environmental damages from these wells—rather require a state match. Specifically, under the than the general taxpayer through the state General current federal guidelines, states must provide Fund. In fact, as mentioned earlier, current well matching funds to secure up to $30 million in remediation work done by CalGEM is funded by the performance grants. The Legislature could Oil, Gas, and Geothermal Administrative Fund and reduce the proposed funding to only the the Hazardous Idle Well Abatement Fund. The main amount necessary to secure these available source of revenue for both funds is fees on oil and federal funds. This approach could reduce gas operators. near-term state fiscal costs, allow the state to maximize available federal funding, Recommendations and give the Legislature an opportunity to Consider Proposal in Context of better evaluate the benefits and costs of Additional Guidance on Federal Funds. the remediation activities before allocating Additional information regarding available additional state funding. federal funds is expected to be available shortly. Consider Alternative Sources of Funding. Specifically, further federal guidance regarding the Instead of funding these activities through the amount of formula grants that the state is eligible General Fund as proposed, the Legislature might for is expected to be available in the coming weeks. want to consider raising fees on operators and use A better understanding of the total available federal special funds, such as the Oil, Gas, and Geothermal funding for well remediation activities would help Administrative Fund and the Hazardous Idle Well the Legislature determine the degree to which Abatement Fund, that are currently funding similar additional state funding for these activities (such as work. If state matching funds for federal funding is proposed by the Governor) is a priority. needed faster than can be generated through fee Consider Reducing Amount of Proposed revenues, the Legislature can consider providing Funding. The Governor’s proposal would a General Fund loan, to be repaid by these special significantly increase the current well remediation funds over a period of time. This would allow the activities overseen by CalGEM. It is unclear whether state to maximize available federal funding for the division has the capacity to administer such a well remediation activities, but also ensure the large increase in state and federal funding within polluting industry bears the cost of remediating existing resources, given their numerous other deserted wells. responsibilities for the oversight of the oil and Require Reporting on Key Program gas industries. In addition, a significant amount Outcomes. If funding is approved, we recommend of federal funding for many of these activities is the Legislature adopt budget bill language expected to be available over the next few years. requiring DOC to report annually (until the funds As a result, the Legislature might want to consider have been fully expended) on expenditures, reducing the amount of funding proposed by the contracts awarded, number of wells identified Governor and targeting funds instead to: and remediated, and quantifiable benefits of • Well and Facility Research. Many deserted remediation activities (such as greenhouse gas wells still need to be researched to verify reductions, water quality improvements, and health well location, assess facilities, and seek outcomes), as well as federal funds awarded. ownership documentation. The Legislature Additional information on costs and benefits of well could consider focusing funding exclusively remediation work done by CalGEM would be helpful on these research activities to have a better to the Legislature in determining whether any idea of the identification, scope, and cost of additional funding for these activities is warranted in well remediation projects. Under this proposal, the future. the administration requests about $10 million annually for such research. 2022-23 Budget Series 3 LAO PUBLICATIONS This post was prepared by Eunice Roh, and reviewed by Ross Brown and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. 2022-23 Budget Series 4