This article was originally published on ProPublica. ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to get stories like this delivered to your inbox. Co-published with LAist and KVPR.
For more than a century, the oil and gas industry has drilled holes all over California in search of black gold and a lucrative payday. But with production steadily falling, the time has come to clean up many of the nearly a quarter million wells scattered from downtown Los Angeles to western Kern County and across the state.
The bill for that work, however, will far outweigh any future benefits the industry will bring to the state, according to a first-of-its-kind study released Thursday and shared with ProPublica.
“This big problem has taken us by surprise,” said Dwayne Purvis, a Texas-based petroleum reservoir engineer who analyzed cleanup benefits and costs for the report. “Political leaders have not recognized it. The industry hasn’t recognized it or, if it has, they haven’t talked about it or acted on it.”
The analysis, which was commissioned by the Carbon Tracker Initiative, a financial think tank that studies how the transition from fossil fuels affects markets and the economy, used California regulators’ draft methodology to calculate the costs associated with the plugging of oil and gas wells and their closure. along with related infrastructure. The methodology was developed with industry feedback.
The report broke down the costs into several categories. Plugging wells, dismantling surface infrastructure and decontaminating contaminated drilling sites would cost at least $13.2 billion, according to publicly available data. Adding in factors with a bit more uncertainty, such as inflation rates and the price of dismantling 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 earn about $6.3 billion in future profits during the remaining course of operations, Purvis estimated.
Compounding the problem, the industry has only set aside about $106 million that state regulators can use for cleanup when a company liquidates or abandons its liabilities, according to state data. This amount is less than 1% of the estimated cost.
Taxpayers will likely have to cover much of the difference to ensure the wells are capped and not leaking brine, toxic chemicals and climate-warming methane.
“These findings detail why the state must ensure that this cost is not passed on to the California taxpayer,” state Sen. Monique Limón, D-Santa Barbara, who has authored legislation regulating the oil, said in a statement. “It is important for the state to collect funds to plug and abandon the wells in a timely and expeditious manner.”
Representatives of the state’s petroleum regulatory agency, the California Division of Geological Energy Management, did not respond to ProPublica’s request for comment on the report’s findings.
Rock Zierman, chief executive 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 dedication to meeting their obligations and mitigating the environmental impact of their operations,” he said.
Tariffs on current oil and gas production will offset some of the liabilities, but are nowhere near enough to address the shortfall quantified by the new report.
“It really scares me,” Kyle Ferrar, western program coordinator for the environmental transparency and data group FracTracker Alliance, said of the report’s findings. “It’s a lot for the state, even a state as big as California.”
Declining industry
High oil prices have translated into big profits for the industry in recent years, but the Carbon Tracker report found that this is likely to be short-lived. Only two drilling rigs were operating in the state this year, meaning few new wells will come online and more than a third of all disconnected wells are idle.
Judson Boomhower, an environmental economist and assistant 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 the country moves from internal combustion engine vehicles to electric vehicles. But, he said, Carbon Tracker’s estimates for environmental liabilities follow his research.
“It’s a state in the twilight of its production period, and that means big liabilities,” Boomhower said. He added that now is the time for regulators to prevent companies from offloading their wells to “small-cap companies” that can’t take on the cleanup.
As ProPublica reported last year, major 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 companies smaller and less well funded.
About half of the wells drilled in California have changed hands through sales and bankruptcy since 2010, according to data analyzed by Ferrar.
Smaller companies are often on the verge of bankruptcy because their wells are orphaned, meaning they are left to taxpayers as the companies dissolve. The Biden administration recently committed $4.7 billion in taxpayer funds to plug orphan wells.
And the environmental responsibilities of industry in California are far greater than the Carbon Tracker report quantifies.
Purvis only included the environmental liabilities associated with onshore oil and gas production. Billions more will be needed to plug offshore wells, remove platforms and reclaim man-made islands used for drilling off the coast of Long Beach, Ventura and Santa Barbara.
Also, the report did not quantify the emerging risk of “zombie wells,” which were connected years ago to weaker standards and are likely to leak if not reconnected. This is an expensive endeavor, as the average cost to plug a well in California, to say nothing of cleaning up surface contamination, is $69,000, according to Purvis’ research. But some wells in California have already begun to fail, even in neighborhoods in Los Angeles.
“They won’t have the money to do it later”
Time is running out to correct the funding shortfall, for example by increasing the money companies must set aside for plugging wells.
The Carbon Tracker report, which uses state production data and financial futures contracts on the New York Mercantile Exchange, estimates that as production declines, 58% of all future profits from oil drilling are likely to oil and gas in the state come within the next two years.
“Right now our backs are against the wall in California,” Ferrar said. “If companies don’t put money into it now, they won’t have the money to do it later.”
Environmental policies could accelerate the industry’s decline. California voters will decide on a ballot initiative in 2024 that would restore large buffer zones between communities and oil wells, limiting drilling.
Acting quickly to plug the wells would also “stimulate economic activity” and help smooth the transition for oil and gas workers who will lose high-paying jobs in the switch from climate-warming fossil fuels, Purvis said. Spending large sums to plug old wells would create short-term employment for oilfield workers.
As California grapples with the consequences of its failure to quickly clean up aging oil and gas infrastructure, there are likely several million more wells across the country that are low-producing or already orphaned and soon to be ‘they will have to deregister.
“California will be a test case or the vanguard of this,” Boomhower said. “This same problem will eventually manifest itself everywhere.”
