Running on Empty: The decline of California’s oil and gas industry and the true cost and scale of decommissioning
We have conducted research into the decommissioning liabilities of the Californian oil and gas industry, and the reasons for the decline of the state’s upstream and downstream sectors. The report was conducted by Dwayne Purvis, of Purvis Energy Advisors, and Rob Schuwerk, Redwater Insights Director of Research.
Key Findings: Decommissioning
Despite industry efforts to address the problem in recent years, our study confirms prior findings California’s oil and gas industry still cannot fund its own decommissioning.
This consistent conclusion sits within a complex political context that is centered on the causes of oil and gas production and refining to decline in the State.
This report examines the root causes of that production decline to inform deliberations as the state navigates this middle stage of its energy transition. Following a similar approach taken in a 2023 analysis by Carbon Tracker, we compare the remaining cash to outstanding liabilities flows for California’s oil wells.
We found that:
The pace of well plugging in California has accelerated significantly and is now much faster than the historical pace in the rest of the country. Specifically, more than 15,000 wells have been plugged since our last review, mostly with industry funds.
However, per-unit decommissioning costs have risen, and the number of defined assets (wells and associated infrastructure) has increased somewhat. Using the newest cost estimation model of the state regulator, we estimate the current cost of statewide decommissioning to be $18.5 billion.
The industry’s in-state balance sheet does include some funds saved or set aside by the state for decommissioning, but it also includes the $2.7 billion of financial debt owed by California Resources Corporation. This means AROs plus some financial liabilities total more than $21.2 billion.
Set against these costs are future production and future cash flows. The minor updates to our statewide production calculations show that much of the state is operating near or below its profitable limit. In aggregate, we estimate only $2.1 billion of remaining cash flow that could be applied to the liability.
Financial assurance has increased, but most additions come from corporate guarantees or self-insurance, providing no new mitigation of the risk beyond what was already implied. Concrete forms of financial assurance have more than doubled, but the total $240 million still constitutes only 1.3% of the estimated statewide liability.
As a result, California has a net shortfall (including some financial liabilities) of $18.4 billion, assuming all future profit is spent on decommissioning.
Key Findings: Industry Decline
It has been widely asserted that the decline of oil production in California is “self-inflicted” by public opposition and policy changes at local and state levels.
There have been many challenges to the industry, and production has declined. However, these assertions offer little or no evidence of causation.
Rather than inference or anecdote, we undertake a wide-ranging, information-based retrospective investigation into the causes, adaptations, and net effects of the disagreements onshore California. Like our analysis of costs and cash flow above, we look only at the onshore industry,2 and we try to isolate political effects which might be reversed from the effects of geologic depletion and economics which are well-known, first-order drivers of production and cannot be reversed by lawmakers.
We find that the long and complicated history of proposals, votes, lawsuits, court-orders, rule-makings, and new laws obscures the pattern of actual implementation and on-the-ground adaptation by oil companies. We find that the constraints had minimal impact.
Actual constraints implemented
Most of the formal measures to impede development were defeated, significantly delayed, and/or enforced only intermittently.
The earliest and one of the more impactful changes on the industry was enforcement of federal law which had been violated up to that point, not a new restriction and not a state policy.
When statewide pressures did effectively increase during the Newsom administration, industry stockpiled drilling permits then adapted with other kinds of operations to delay and diminish the effects on production.
The most impactful of the state policies (lack of drilling permits) were already reversed in 2025 with a change in behavior of the regulator followed by the passage of SB 237 guaranteeing the right to drill up to 2000 wells per year for 10 years.
To test the effect of these broad but mitigated pressures on the oil industry and to separate the effects from geologic and economic drivers, we compare the recent outcomes in California against its previous outcomes and against outcomes in other jurisdictions.
The natural depletion and diminution of opportunities inherent to any non-renewable resource has always been – and remains – the primary driver of production declines. Economic forces are also an extraneous and primary driver of production.
A research study of the effect of a ban on hydraulic fracturing predicted only about 1% change per year, and a separate research study of the effect of an 3200-foot setback predicted no more than 4% aggregate impact over three years.
The decline of oil production in California established in 2015 by geologic and economic forces before the effective increase in policy restrictions continued unchanged during the period of increased restrictions.
The decline of reserves reported by California oil companies also declined in the about same trend before and after the increased California Resources Company calculated the effects of policy changes to be only 10% reduction of its total Proved reserves base, and it increased its reserves by 7% when policy reversed at the end of 2025.
Other states and regions which, like California, lack an economically viable shale resource, have experienced the same large-scale declines in employment, number of companies, drilling activity, production and reserves regardless of their political climate.
California’s falling rank among oil-producing states is a consequence of other states’ increasing production from shale formations. The lack of an economically viable shale play in California is not the fault of policy or policymakers. Excluding the major shale plays in the U.S., California has maintained its rank as the third largest producing state in the country.
Multiple lines of evidence show that the sound and fury of the politics in California have had a marginal effect on crude production in the state. Most or all of the decline is driven by geologic depletion and economics which cannot be overcome by a reversal of recent policy changes.
Despite this, recent policy has sought to turn back the tide. SB 237, passed last year, guarantees the ability to drill up to 2000 wells per year in Kern County, and hopes to increase production.
Three separate analyses have found that the policy change will not reverse the decline. It will at best partially slow the decline.
California Resource Corporation added back the majority of the reserves it had previously written off, but the change constitutes just more than one month of California’s current oil consumption.
If the policy objective is primarily the protection of consumers against price increases, then upstream production is two steps removed from the problem. The decline of refineries in California is closer to the risk, and we find that the declining demand for gasoline, not overregulation, has determined the fate of California’s refineries.
Decline of refineries
Refinery shutdowns are nothing new to California which opened its last major refinery in 1968 whilst closing and/or consolidating more than 30 refineries between 1985-2025. The Benicia and Valero closures of the past two years reduced in-state refinery capacity by 20%.
Declines are attributable to the twenty-year trend of declining gasoline demand in California.
From a refiner’s standpoint, closures keep the supply and demand balance tight. This allows refiners to benefit from price spikes induced by supply shocks. From the refiner’s perspective, if the Benicia and Valero refineries had remained open through 2027, there would have been roughly 20-30% ‘excess’ capacity in California.
We anticipate that from a refiner’s perspective, further closures will be required. By the end of 2028, California may need roughly 84,000 bbl/d of capacity less to maintain tight supply.
Declining future demand for gasoline means that there are no incentives for new participants to enter the market or for existing refineries to invest capital in upgrades since costs must be amortized over foreshortened timeframes. This gives current market participants significant market power.
The result is a well-established “mystery gasoline surcharge” which is an economic rent that California consumers pay to the refining value chain that is not a function of regulations, taxes, or other state-imposed costs.
This gasoline economic rent is significant, costing Californians about $59 billion over the past decade and now costing approximately $6 billion per year.
This matters because the different drivers have different policy implications. If geology and declining gasoline demand are driving out California’s oil and gas activities, then removing health and environmental protections, reducing taxes and levies and relaxing restrictions will not change the dynamic. Nor will permitting reforms or even payments to refineries. They may increase short term profits but are unlikely to drive more investments since future declines in demand make it less likely that capital investments in refineries will have long enough economic lives to be fully depreciated. Moreover, investments in California refineries compete with investments options elsewhere, where gasoline demand is not in decline. Investments in California are likely not as attractive as the companies’ other investment options.
We agree with the consensus that California is in mid-transition. In our view, that means that the direction of travel – decarbonization – is clear to everyone, but the State remains dependent on two incompatible energy systems. This gives the declining legacy system the ability to leverage concessions and the motivation to use that leverage. Without a plan to address that leverage, it is likely that the State will see recurring crises and more fear-driven policymaking. Indeed, the California Energy Commission (CEC) has made clear that managing from crisis to crisis will yield subpar results.
In response, California needs to plan for the retirement of oil and gas infrastructure including upstream, midstream, and downstream to minimize the costs imposed on Californians.
Those costs include:
decommissioning obligations, which the state has not required operators to save for,
jobs that will be lost, and
excessive energy costs caused by the market power of the remaining refiners.
The solution is not piecemeal policy changes, but a comprehensive plan that mitigates the leverage that an increasingly concentrated industry has over policymaking.
This is where understanding the problem is critical. Today, Californians are paying roughly $6 billion more per year for gasoline than the rest of the U.S. None of that amount is attributable to taxes and regulation. It’s a more tangible and immediate cost than any refinery closures to date.
Good policy should focus on reasonable solutions to real problems, and California’s legislature, by focusing energy transition policy on relatively minor benefits to a declining industry’s wish list, risks facing a triple-whammy of discontent.
How will this happen? By: suggesting to their constituents that regulations and taxes are driving industry declines, deregulating on this premise, but failing to prevent further industry decline, and removing important environmental and/ or health protections or taxes that fund infrastructure and other services.
A better course would be to acknowledge the reality-one that coincides with stated policy goals, nonetheless – and focus policy on addressing the secondary impacts of these receding industries.
A lot is at stake. 2025 was a lost year on policymaking to move California through the mid-transition, though the CEC has made some promising observations in its recent report. 2026 will test whether California gets back on track.
“Oil remains in place, but 120 years of extraction including during the very high prices of the last decade have recovered the vast majority of what can be captured economically. Unfortunately, the industry has not saved for the impending liability of cleaning up these formerly world-class fields, and today taxpayers are likely to inherit the majority of the end-of-life costs.”
– Purvis Energy Advisors Founder Dwayne Purvis
“Upstream and downstream, California is running on empty. Projections show the industry’s available cash flows have halved in just three years, leaving behind a $18.4 billion decommissioning black hole. We followed multiple lines of evidence and found that the sound and fury of state politics have had little effect on Californian crude production to date. The decline is driven by geology and economics, neither of which can be overcome with reversing state policy.”
– Redwater Insights Director of Research Rob Schuwerk
