If the industry moves away from fossil fuels, its profits will exceed the costs of rehabilitation.
Kern County oil fields along California State Highway 33.
This story was originally published ProPublica and republished here with permission. Subscribe to The Big Story newsletter to get similar stories delivered to your inbox.
For more than a century, the oil and gas industry has drilled wells all over California in search of black gold and lucrative paychecks. But with production steadily falling, it’s time to clean up many of the nearly quarter-million wells scattered from downtown Los Angeles to western Kern County and across the state.
The bill for that work, however, will far exceed any future earnings for the industry in the state, according to a first-of-its-kind study released Thursday and handed over ProPublica.
“This is a major problem that has crept up on us,” said Dwayne Purvis, a Texas-based petroleum engineer who analyzed cleanup profits and costs for the report. “Politicians did not recognize this. The industry didn’t recognize it, or if it did, it 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 affects markets and economies, used a draft methodology from California regulators to calculate the costs of plugging and decommissioning oil and gas wells . along with related infrastructure. The methodology was developed with industry feedback in mind.
The report breaks down costs into several categories. Plugging wells, dismantling ground infrastructure and decontaminating contaminated drilling sites will cost at least $13.2 billion, based on publicly available data. Adding in factors with slightly more uncertainty, such as the rate of inflation and the cost of decommissioning miles of pipeline, could bring the total cleanup bill for California’s onshore oil and gas industry to $21.5 billion.
Meanwhile, California oil and gas production will generate about $6.3 billion in future earnings over the remaining course of operations, Purvis estimated.
The problem is compounded by the fact that the industry has set aside only about $106 million, which state regulators can use to clean up if a company liquidates or otherwise walks away from its obligations, according to government records. This amount is less than 1% of the estimated cost.
Taxpayers will likely have to cover much of the difference to make sure the wells are plugged and don’t leak brine, toxic chemicals and climate-warming methane.
“These findings detail why the state must ensure that these costs are not passed on to California taxpayers,” state Sen. Monique Limon, D-Santa Barbara, who wrote the oil regulation legislation, said in a statement. “It is important that the state collects funds for the closure and elimination of wells in a timely and efficient manner.”
Representatives for the California Division of Geological Energy Management, the state petroleum regulatory agency, did not immediately respond to requests for comment. ProPublicaplease comment on the findings of the report.
Rock Thirman, CEO of the California Independent Petroleum Association, an industry trade group, said in a statement that companies spent more than $400 million last year to plug and clean up thousands of oil and gas wells in the state. “This demonstrates their commitment to fulfilling their obligations and mitigating the impact of their activities on the environment,” he said.
Taxes on current oil and gas production offset some of the liabilities, but they fall far short of closing the shortfall quantified in the new report.
“It really scares me,” Kyle Ferrar, western program coordinator for the environmental protection and data transparency group FracTracker Alliance, said of the report’s findings. “That’s a lot for a state, even one as big as California.”
The industry is in decline
High oil prices have led to huge profits for the industry in recent years, but a Carbon Tracker report shows that this is likely to be short-lived. Only two rigs were operating in the state at one point this year, meaning few new wells will come on stream and more than a third of all shut-in wells are idle.
Judson Boomhower, an environmental economist and associate professor at the University of California, San Diego, who has studied California’s oil industry, said there are inherent uncertainties in estimating future oil revenues. For example, one variable is how quickly a country transitions from combustion engine cars to electric cars. But he said Carbon Tracker’s estimates of environmental liability are consistent with his research.
“This is a state at the end of its production period, and that means a lot of commitment,” Boomhauer said. He added that the time has come for regulators to prevent companies from unloading their wells to “small-cap firms” that can’t take on the cleanup.
“This is a state at the end of its productive period, and that means big commitments.”
How ProPublica As reported last year, the big oil companies that have long dominated California and have the deep pockets needed to pay for environmental cleanups are selling their wells and leaving the state, handing over the task to smaller, less well-funded companies.
About half of the wells drilled in California have changed hands through sales and bankruptcies since 2010, according to data analyzed by Ferrar.
Smaller companies are often one bankruptcy away from having their wells orphaned, meaning they are left with the tax bill when the companies go out of business. The Biden administration recently committed $4.7 billion in taxpayer funds to plug errant wells.
And the environmental liability of the industry in California is much greater than the Carbon Tracker report identifies.
Purvis included only the environmental liabilities associated with onshore oil and gas production. Billions more will be needed to shut down offshore wells, remove drilling rigs and reclaim artificial islands used for drilling off the coast of Long Beach, Ventura and Santa Barbara.
Also, the report does not quantify the risk of “zombie wells” that were plugged years ago to lax standards and are likely to start leaking if not re-plugged. It’s an expensive endeavor, with the average cost of plugging one well in California — not to mention cleaning up surface contamination — $69,000, according to Purvis’ research. But some California wells have already begun failing, including in areas of Los Angeles.
Oil pumping station in Bakersfield, California.
“They won’t have the money to do it later”
Time is running out to fix the funding shortfall, for example by increasing the money companies have to shell out for plugging wells.
The Carbon Tracker report — using state production data and financial futures contracts on the New York Mercantile Exchange — estimated that as production declines, 58% of all future oil and gas drilling revenue in the state is likely to come within the next two years.
“We’re hitting a wall in California right now,” Ferrar said. “If companies don’t invest in it now, they won’t have the money to do it later.”
Environmental policies can accelerate the decline of industry. California voters will decide on a ballot initiative in 2024 that would restore large buffer zones between populated areas and oil wells, limiting drilling.
Purvis said swift action to plug the wells would also “stimulate economic activity” and help smooth the transition for oil and gas workers who may lose well-paying jobs as a result of the shift away from climate-warming fossil fuels. Spending large sums of money plugging old wells will create short-term jobs for oil field workers.
While California faces the consequences of its failure to quickly clean up its aging oil and gas infrastructure, there are likely several million more low-producing or orphaned wells around the country that will soon need to be decommissioned.
“California is going to be the test or the cutting edge of this,” Boomhauer said. “The same problem will eventually show up everywhere.”
Mark Olalde – a ProPublica reporter covers the environment in the Southwest. Before joining ProPublicahe wrote for Desert Sun, Arizona Republic and Center for Public Integrity. We welcome letters from readers. Email Top news of the country in (email protected) or present a letter to the editor. See ours letters to the editor of Polit.