Lessons from California’s new financial assurance transfer rules
By Rob Schuwerk
Redwater Head of Research
Image credit: Pete Markham
Ownership transfer has been a critical challenge in ensuring timely, effective decommissioning and clean up of low and non-producing oil wells. A new paper by Redwater Insights and Carbon Tracker, Closing the Oil Well Transfer Loophole, examines the impact of new legislation in California requiring full-cost financial assurance on low-producing wells with high risk of default. The paper found the new regulations led to sharply reduced transfers of wells, likely to entities without the financial resources to fully fund plugging and cleanup.
California’s Assembly Bill No. AB (AB 1167) was introduced in February 2023. Before it came into effect, roughly 60% of wells transferred in California were “idle” or “active,” but not producing any oil or gas.
The paper found that operators who assumed control of these wells likely posed a greater risk of default, and therefore increased risk that the State of California, and therefore the taxpayer, would be left with the liability. Many wells were transferred from publicly held companies to private ones, and on average, the size of the companies acquiring the wells was half that of those selling them. For transfers of over 20 wells, in half of cases companies that acquired the new wells more than doubled their inventory. In some cases, they were first-time operators of wells in California.
AB 1167 effectively stopped transfers that posed high-risk to the state, reducing the number of well transfers from 1,300 in the first half of 2023 to just 6 in 2024. However, it did not end the risk to taxpayers, given the overall low rate of financial assurance by current operators.
The authors propose a set of additional actions to ensure the costs of plugging 125,000 remaining wells in California is borne by industry, including:
requiring savings through sinking fund mechanisms;
eliminating blanket bonding;
using other liability mechanisms to ensure that there are responsible actors with the financial capacity to plug wells.
