Statement from Rob Schuwerk, Executive Director, Carbon Tracker North America on California’s Orphan Wells Law:

“Having returned from well-received speeches at New York Climate Week, Governor Newsom should now sign California’s new orphan wells law.

“Something has to be done to address the orphan well problem in the state.  We calculate that 58% of future available cash flows for plugging and reclamation will be earned in the next two years alone.  Corporate law typically requires that creditors are paid before equity holders, but in California today, it is backward:  owners of oil and gas wells are taking profits long after cash flows can no longer satisfy plugging and remediation obligations.

“Bonding is one component of the larger question of who is going to pay to retire California’s oil and gas production infrastructure. A veto of AB 1167 would only allow current producers to privatize the remaining profits while socializing decommissioning liabilities, forcing the legislature to consider whether the oil and gas industry or California taxpayers should pay for these liabilities.

“California is in a deep hole.  In Carbon Tracker’s report There Will be Blood, we demonstrated that decommissioning California’s oil and gas infrastructure might exceed all future net cash flows from production by up to $21 billion.  That means that many currently producing oil and gas wells are all but orphaned already.  Plugging an orphaned well requires money from taxpayers.

“The legislature recently passed AB 1167, which requires bonding increases for companies that seek to transfer low-producing wells.

“The California Department of Finance (DOF) has opposed AB 1167 on the grounds that requiring more bonds will have the unintended consequence of increasing defaults and therefore orphan well counts.   Also, DOF notes that the state can pursue prior operators if the current operator defaults.

“The ‘unintended consequence’ argument assumes that these wells would otherwise be plugged.  There is no reason to assume that operators with liabilities that far exceed the value of their assets will plug them.  It’s similar to the subprime mortgage crisis when homeowners walked away from mortgages on properties that were underwater, but worse since oil and gas operators cannot live in an oil rig nor is there a reasonable prospect that these depleting resources will grow in value, as real estate might.  Many of these wells are already destined for orphanage; at most, AB1167 will simply reveal what is already likely to occur.”