By Colby Bermel, POLITICO PRO

July 17, 2020

SACRAMENTO — The bankruptcy declaration of California's largest oil and natural gas producer will pose the first major test for the state's fossil fuel regulator since Gov. Gavin Newsom shook up the agency after indications it was too soft on industry.

Environmentalists are urging the state to take a strong stance on California Resources Corp. as it navigates the Chapter 11 process with nearly 8,000 idle wells that need to be plugged in the future. They want the California Geologic Energy Management Division to play the same role in ensuring safety and environmental protections that the state Public Utilities Commission did during Pacific Gas & Electric's recent bankruptcy.

Citing massive debt and a pandemic-driven plunge in fossil fuel demand, CRC on Wednesday night filed for Chapter 11 protection, announcing that it already resolved with lenders how the company would restructure its debt. Daily operations will continue, CRC said, as they did for PG&E when the utility was in bankruptcy over the past 17 months. 

The financial squeeze on the state could be significant if other operators follow CRC into bankruptcy. According to the California Council on Science and Technology, the state's potential net liability tied to 5,540 orphan or likely orphan wells is $528 million — in addition to $5.2 billion in potential net liability for over 69,000 idle and low-producing wells throughout the state.

The council didn't specify CRC's share of those wells, but a February report from the Institute for Energy Economics and Financial Analysis — a group promoting "the transition to a diverse, sustainable and profitable energy economy" — extrapolated from CCST's findings that it could cost the company $1.2 billion to plug and abandon all of its wells.

"Did Occidental Petroleum spin off CRC in order to offload troubled assets freighted with costly environmental liabilities?" IEEFA analyst Clark Williams-Derry postulated in his report, referring to the Houston petrochemical giant's 2014 decision to move its California operations to a separate company.

In response to the IEEFA statement, CRC spokesperson Margita Thompson said that the company "proudly operates world-class assets and critical energy infrastructure in the State of California. Our challenge has been the massive debt load we were saddled with at the Spin-Off."

The Center for Biological Diversity and Sierra Club California expressed concerns about CRC's Chapter 11 case to Newsom, writing in a Thursday letter that "Any action by oil and gas producers to use bankruptcy proceedings and other cost-cutting and restructuring efforts to evade their environmental obligations will increase the risk that pollution from improperly secured or monitored oil and gas wells will cause environmental damage."

Thompson said the company "will retain our regulatory obligations" during and after the Chapter 11 process, including the continued plugging and abandoning of wells. CRC received $1.1 billion in bankruptcy financing to help maintain operations, and the company said it "will continue to meet California's world-leading safety and environmental standards."

Environmentalists see this as an opportunity for CalGEM to show it has become a stronger regulator since Newsom overhauled the agency last year.

The governor acted after top officials at the agency's predecessor — known as the Division of Oil, Gas and Geothermal Resources — were found to have owned stocks in oil and gas companies, in addition to accelerating the rate of permit approvals without Newsom's knowledge.

He fired DOGGR's leader and signed a law renaming and revamping the agency. CalGEM also announced a suite of actions meant to tighten fossil fuel use: stopping new extraction that uses a drilling technique tied to a Chevron oil leak; contemplating a buffer zone between wells and vulnerable facilities; and conducting independent reviews of fracking and other well stimulation applications.

The agency's parent, the Department of Conservation, approved a new conflict-of-interest policy governing stock ownership and related issues in March, CalGEM spokesperson Teresa Schilling said.

The scrutiny of CalGEM continues, including an unreported probe of the agency by the Office of State Audits and Evaluations within Newsom's Department of Finance. DOF spokesperson H.D. Palmer told POLITICO that the audit is studying CalGEM's permit approval processes to "determine compliance" with the state's related laws and regulations.

The audit should be completed in the fall, Palmer said. Another source familiar with the probe said it was directed by Newsom's office last September, just two months after the DOGGR stocks-and-permits scandal and before the agency was renamed and revamped to become CalGEM.

Costs of the audit are being borne by CalGEM, according to the source, a practice used by the state to discourage agencies from actions that may trigger an audit.

Critics argue that CalGEM still isn't doing enough to oversee operators. It's cheaper for companies to run what environmentalists decry as "zombie" wells that barely or don't produce, rather than take on the more expensive task of permanently closing those facilities.

According to the California Council on Science and Technology, the average cost to plug a well is $68,000 — but that can range up to $391,000. The group Carbon Tracker earlier this year said that approximately 7,000 of CRC's onshore wells, or 44 percent of its overall onshore inventory, are now idle. And of those 7,000 wells, 4,100 of them have been idle for more than eight years, and 1,600 of them idle for over 20 years.

Thompson, the CRC spokesperson, said Carbon Tracker's report is "highly misleading," though the company did not provide alternatives to the specific figures published by the group. Instead, Thompson said, CRC's fields have "thousands of feet of hydrocarbon-bearing formations ... long-lived assets that enable us to progress along the value chain."

"Both active and idle wells have an essential role in our life of field planning, since they enable us to access formations through existing well bores and facilities," she added. "State law recognizes the importance of idle wells and accordingly provides alternatives for managing idle wells."

Consumer Watchdog advocate Liza Tucker said the state could hike idle well maintenance fees or just stop allowing those wells' continued existence, among other actions. She lamented how CalGEM earlier this year granted operators a filing extension for idle well management plans, which the agency said was a necessary action due to the pandemic slowing work and other operations.

"It's a matter of political will," Tucker said. "We are in a hole right now, and unfortunately it was the regulators that allowed it. ... They're treating the industry with kid gloves."