California—Oil & Gas

TRACY K. HUNCKLER & MEGAN A. SAMMUT
— Reporters —

AB 1167 Requires Bond upon Transfer of Wells
                On October 7, 2023, Governor Newsom approved Assembly Bill 1167 (AB 1167) to add sections 3017 and 3205.8 and to amend sections 3202, 3204, and 3205.5 of the California Public Resources Code. Effective January 1, 2024, the new law requires “a person who acquires the right to operate a well or production facility, . . . except a well that has an average daily production level that exceeds 15 barrels of oil or 60,000 cubic feet of natural gas during the 12 months preceding the date of acquisition or a natural gas storage well,” to file an individual or blanket indemnity bond with the State Oil and Gas Supervisor “in an amount determined by the supervisor to be sufficient to cover, in full, all costs of plugging and abandonment, decommissioning of the facility, and site restoration . . . .” Cal. Pub. Res. Code § 3205.8(a)(1) (effective Jan. 1, 2024).

                As adopted, the supervisor may use “any reasonable method” to estimate the “full cost” of plugging and abandonment, facility decommissioning, and site restoration, including consideration of factors set forth in existing sections 3205.3 and 3205.7 or consultation with a contractor. Id. § 3205.8(c). Existing section 3205.3 authorizes the California Department of Conservation’s Geologic Energy Management Division (CalGEM) to require an operator to post an additional indemnity bond based on certain risk factors, the amount of which shall not exceed the lesser of the estimated reasonable costs of plugging and abandonment, decommissioning, and site restoration, or $30 million. Section 3205.7 requires operators to submit a report of the operator’s total liability to plug and abandon its wells, decommission facilities, and restore its sites. Section 3205.7 additionally directs CalGEM to develop criteria for operators to use in estimating those costs.

                The law expresses the legislature’s intent to require a bond upon the transfer of a lower-producing well because

those who own idle and marginally producing wells, frequently transfer those wells to less solvent entities. These transfers increase the likelihood that public funds will be needed to pay for plugging and abandonment of those wells, because funds available through existing bonds are inadequate to pay the cost of plugging and abandonment of those wells.

Id. § 3017(c). Despite this expressed intent, the industry has articulated many uncertainties about how costs will be estimated and how the law will apply. CalGEM has indicated it will issue a Notice to Operators, but it remains to be seen what issues the notice will address.

 

CalGEM Releases Proposed Regulations Addressing Cost Estimates
                In connection with section 3205.7 of the California Public Resources Code, discussed above, which was added in 2020 by Senate Bill 551, the California Department of Conservation’s Geologic Energy Management Division (CalGEM) initiated a pre-rulemaking process in April 2022 to develop regulations surrounding cost estimates. As reported in Vol. 39, No. 2 (2022) of this Newsletter, the preliminary discussion draft on cost estimate regulations for oil and gas operations proposed to add section 1753 et seq. to the California Code of Regulations, title 14, requiring well operators to submit certain cost estimates to CalGEM associated with well abandonment, production facility decommissioning, and site remediation. The proposed rule outlined two methods for estimating costs, prescribed due dates for cost estimate reports, and set forth documentation requirements for those cost estimates. See Preliminary Discussion Draft, CalGEM, “Cost Estimate Regulations for Oil and Gas Operations” (Apr. 4, 2022). The pre-rulemaking comment period closed May 20, 2022. Notice of Public Comment Period, CalGEM, “Pre-Rulemaking Public Comment Period on Cost Estimate Regulations for Oil and Gas Operations” (Apr. 4, 2022).

                Then—well over a year later—on August 18, 2023, CalGEM released its Cost Estimate Regulations for Oil and Gas Operations for official public comment. See Notice of Proposed Rulemaking Action, CalGEM, “Cost Estimate Regulations for Oil and Gas Operations” (Aug. 18, 2023). As currently drafted, the proposed regulations largely resemble those set forth in the preliminary discussion draft, adding section 1753 et seq. to title 14 of the California Code of Regulations, and requiring well operators to submit certain cost estimates to CalGEM, including costs associated with well abandonment, production facility decommissioning, and site remediation. According to CalGEM,

Method 1 is a prescribed methodology whereby an operator uses values developed by CalGEM to estimate the costs associated with well plugging and abandonment, production facility decommissioning, and site remediation based upon the condition, location, and history of the operator’s assets. Method 2 allows for the operator to forego the assumed costs under Method 1 and develop their own site-specific cost estimates, providing the estimates are persuasively supported by detailed documentation.

Id. at 5.

                Like the initial discussion draft, the proposed rule continues to outline two methods for estimating costs, prescribes due dates for cost estimate reports, and sets forth documentation requirements for those cost estimates. Changes were made, however, to how regions are categorized and to the specific figures assigned to many components of calculation Method 1. Additionally, the proposed rule adds section 1753.1.2, “Cost Estimate Reporting Compliance,” which provides that CalGEM will provide operators with a written notice that their cost estimate report complies or does not comply with the relevant regulations and, if not, an opportunity after initial review to provide additional information to cure the same.

                The official public comment period for the proposed rule closed on October 4, 2023. Presumably, CalGEM will now proceed to review any comments received and decide whether to incorporate relevant comments into the final text of the regulations.

 

Petitioners Challenge Zoning Administrator Actions in LA City Ordinance Litigation; Trial on Preemption Set for August 1, 2024
                As last reported in Vol. 40, No. 1 (2023) of this Newsletter, four separate but related lawsuits were filed in January 2023 by industry members Warren Resources, Inc., and related entities (collectively, Warren); E&B Natural Resources Management Corp. and related entities (collectively, E&B); Native Oil Producers and Employees of California (NOPEC) and Western States Petroleum Association (WSPA); and the National Association of Royalty Owners-California (NARO) challenging a Los Angeles City ordinance to amend the City Zoning Code to make oil wells a nonconforming use, to ban the drilling of new wells, and to prohibit the maintenance, drilling, re-drilling, or deepening of existing wells. Bridgeland Resources, LLC. filed a petition for writ of mandate challenging the ordinance in April 2023, which action was related to the earlier-filed petitions. Warren, E&B, and NARO also filed administrative appeals of the Zoning Administrator Interpretation of prohibited maintenance (ZAI) and Zoning Administrator Memorandum No. 141 (ZA Memo 141), both of which were issued in January 2023 after adoption of the ordinance. ZA Memo 141 outlines the process by which an operator could apply for a health and safety exception to the ordinance prohibitions.

                The City Planning Commission (CPC) held a hearing on the petitioners’ appeals of the ZAI and ZA Memo 141 on September 14, 2023, wherein the CPC largely denied the petitioners’ appeals, granting them only with respect to a minor point of clarification requiring a modification of the ZAI. See L.A. City Planning Comm’n, “Regular Meeting Agenda” (Sept. 14, 2023). The CPC issued its final letter of determination on October 4, 2023, at which point its decision to adopt the modified ZAI was deemed final and not appealable. L.A. City Planning Comm’n, “Letter of Determination” (Oct. 4, 2023). Thereafter, each of the petitioners amended their respective petitions to include California Environmental Quality Act (CEQA), legal, and constitutional challenges to the ZAI and ZA Memo 141.

                Among their legal challenges to the ordinance, ZAI, and ZA Memo 141, petitioners Warren, E&B, and NARO assert causes of action based on state law preemption by section 3106 of the California Public Resources Code. On August 3, 2023, the California Supreme Court issued a ruling in Chevron U.S.A. Inc. v. County of Monterey, 532 P.3d 1120 (Cal. 2023), finding Monterey County’s Measure Z initiative, which banned certain oil production methods, was preempted by section 3106. See Vol. 40, No. 3 (2023) of this Newsletter. Thereafter, the petitioners and the City of Los Angeles stipulated to have the court in the related ordinance litigations address the petitioners’ causes of action based on state law preemption in a Phase 1 trial on the merits, leaving the petitioners’ CEQA and writ causes of action for a Phase 2, if needed, and remaining non-writ claims for a Phase 3. The court set trial for August 1, 2024.

                Editor’s Note: The reporters serve as counsel for Warren E&P, Inc., Warren Resources of California, Inc., and Warren Resources, Inc., in their lawsuit against the City of Los Angeles.

 

Ventura County Board of Supervisors Votes to Initiate Amendments to 2040 General Plan to Facilitate Settlement of Pending Lawsuits
                On September 12, 2023, the Ventura County Board of Supervisors held a meeting in which it implemented the Board actions needed to facilitate the settlement reached in August 2023 in the actions challenging the County’s 2040 General Plan, which was adopted by the County in 2020. See Aera Energy LLC v. Cnty. of Ventura, No. 56-2020-00546180 (lead) (Cal. Super. Ct., Ventura Cnty., filed Oct. 15, 2020); see also Vol. 40, No. 3 (2023) of this Newsletter. First, the Board was asked to adopt a resolution to issue clarifications with regard to certain policies or terms used in the 2040 General Plan, which clarifications would not alter the text or meaning of those policies and would not require California Environmental Quality Act review. Second, the Board was asked to direct the Planning Division to initiate General Plan amendments as to two policies: (1) COS-7.7 (“Conveyance for Oil and Produced Water,” requiring new discretionary oil wells to use pipelines, not trucking, to transport oil and produced water), and (2) COS-7.8 (“Gas Collection, Use and Disposal,” prohibiting flaring except in cases of emergency or for testing). The motion passed 4–1. See Ventura Cnty. Bd. of Supervisors, “Meeting Minutes” (Sept. 12, 2023).

                If approved, the amendments to COS-7.7 will replace the prohibition on trucking oil and produced water with a limitation that pipelines shall be used “if feasible” but trucking may be used if the proponent demonstrates that pipelines are infeasible. The amendments to COS-7.8 will similarly replace the prohibition on flaring with a limitation that oil and gas shall be sold or properly disposed “if feasible” and flaring is permitted if the proponent demonstrates that operating without flaring is infeasible. See Ventura Cnty. Bd. of Supervisors, Video, Regular Meeting” (Sept. 12, 2023).

                The Board’s action on September 12 simply initiated the amendment process, which still requires public hearings before the Planning Commission and Board, as well as Board approval in the future. As a result, the Planning Commission set a hearing initially for November 2, 2023, that was ultimately rescheduled for December 7, 2023, to address the proposed amendments to policies COS-7.7 and COS-7.8. See Ventura Cnty. Bd. of Supervisors, Notice of Cancellation” (Nov. 2 and Nov. 16, 2023).

                The Board retains its discretion to approve or reject the proposed amendments.

 

Ventura County Planning Commission Sends Proposed Zoning Amendments Back to Planning Division Staff for Further Analysis
                After a long pause on its proposed ordinance amendments on bonding, insurance, and permit limits following two Planning Commission public hearings and a November 2022 virtual webinar wherein potential revisions were discussed, see Vol. 39, No. 4 (2022), Vol. 39, No. 3 (2022), and Vol. XXXVII, No. 4 (2020) of this Newsletter, the Ventura County Planning Division presented revised draft ordinance amendments to the Non-Coastal and Coastal Zoning Ordinances to the Planning Commission on September 21, 2023. See Cnty. of Ventura Res. Mgmt. Agency, “Proposed Amendments to Oil and Gas Regulations,” https://vcrma.org/en/proposed-oil-and-gas-regulations. The amendments establish “a 15-year term for new and extended conditional use permits for oil and gas operations, and updated surety and insurance requirements for oil and gas operations, including a surety to address Long­Term Idle Wells.” Ventura Cnty. Planning Comm’n, “Meeting Minutes,” Item No. 6 (Sept. 21, 2023). According to the county’s website, the revisions come as a result of input received from the Planning Commission, stakeholders, the industry, and “additional technical analysis completed by staff.”

                Under section 65857 of the California Government Code, “any modification of the proposed ordinance . . . not previously considered by the planning commission during its hearing, shall first be referred to the planning commission for report and recommendation . . . .” As a result, the Planning Division was required to present the revised ordinance amendments to the Planning Commission for the Planning Commission to then recommend adoption by the Board of Supervisors. According to the Staff Report, Planning Division staff did not make any changes from the 2022 provisions setting a proposed 15-year term limit on new discretionary permits with 15-year renewal terms thereafter. Among the surety revisions proposed, the Planning Division has combined surface restoration and well abandonment into one surety estimate, based on the California Department of Conservation’s Geologic Energy Management Division’s (CalGEM) estimate of the same for Ventura County wells, with a lower or no cap on the amounts required. The revisions also include provisions intended to address operators’ concerns that county sureties would be duplicative of those required by CalGEM, eliminate the tiers originally proposed in 2022, and lower the total surety amount for each operator. Lastly, the revisions decrease “most of the proposed insurance coverage amounts,” though still providing for an increase from previous requirements.

                At the September 21, 2023, Planning Commission meeting, the Commission voted not to recommend adoption of the Planning Division’s report and recommendation to the Board and to instead send the amendments back to Planning Division staff to further consider: (1) operators’ idle well management plans; (2) the extent to which state programs address the issues the amendments are intended to address; (3) a feasibility study; (4) a study of public health and safety by the Air Pollution Control District for emissions and assessment of oil and gas operations on human health; (5) alternative funding sources to insurance and sureties; and (6) the process whereby CalGEM can accept county sureties and ensure that funds will be used only on county wells. Ventura Cnty. Planning Comm’n, “Meeting Minutes,” Item No. 6 (Sept. 21, 2023).

 

CBD Sues BLM for Approving Applications for Permits to Drill
                On June 22, 2023, the Center for Biological Diversity, the Wilderness Society, Friends of the Earth, and the Natural Resources Defense Council filed a complaint for declaratory and injunctive relief against the Bureau of Land Management and certain individuals in their official capacities (collectively, BLM) and California Resources Production Corporation (CRPC) in the U.S. District Court for the Eastern District of California. See Complaint for Declaratory and Injunctive Relief, Ctr. for Biological Diversity v. BLM, No. 1:23-cv-00938 (E.D. Cal. June 22, 2023). The Complaint challenges BLM’s approval of six applications for permits to drill (APDs) issued to CRPC, alleging BLM failed to comply with the Clean Air Act (CAA), the National Environmental Policy Act (NEPA), the Federal Land Policy and Management Act (FLPMA), the Mineral Leasing Act (MLA), and the Freedom of Information Act (FOIA).

                The Complaint asserts seven claims for relief, including that BLM’s determination that emissions from the six wells are de minimis (and therefore need no conformity review under the CAA) is arbitrary and capricious; that BLM violated NEPA’s public participation requirements; that BLM further violated NEPA by failing to take a “hard look” at the direct, indirect, and cumulative impacts of the permits on certain environmental considerations and by failing to consider reasonable alternatives to the drilling permits; that BLM failed to provide certain information to the public in violation of the MLA; that BLM violated FLPMA by failing to give the public adequate notice and an opportunity to be heard on the six drilling permits; and that BLM failed to promptly disclose certain records to the plaintiffs upon their request in violation of the FOIA. Among the relief sought, the plaintiffs ask the court to vacate the environmental assessment, decision record, and finding of no significant impact for the six drilling permits, and enjoin drilling and pre-construction activities pursuant to the permits at issue.

                In response, BLM filed a motion for voluntary remand, asking the court to grant a remand of BLM’s decision record to the agency without vacatur “to allow the agency to reexamine analyses in the Environmental Assessment performed pursuant to [NEPA] and the [CAA].” Notice of Motion and Motion for Voluntary Remand at 1, Ctr. for Biological Diversity v. BLM, No. 1:23-cv-00938 (E.D. Cal. Nov. 7, 2023). BLM’s Motion indicates its intent to reevaluate the drilling permits’ cumulative effects on the environment, impacts on environmental justice, and emissions analysis. It argues that remand should be without vacatur of the existing decision record because (1) there will be no prejudice to the plaintiffs or harm to the environment since CRPC will not begin drilling activities under the APDs until August 2024; (2) remand is in lieu of a decision on the merits, meaning the court has not found the agency action unlawful, and is intended to allow the agency to reexamine its concerns in the first instance; and (3) it is possible the agency will reach the same decision upon remand. Id. at 6, 9–11. BLM provides that “the cumulative effects and environmental justice analyses would benefit from further consideration,” and further that it “wants to reexamine the methodology underpinning the air emission calculation” as it differs from the California standard methodology. Id. at 7–8. BLM indicates its intent to initiate an administrative process to reexamine its approval of the APDs and will then decide to affirm its original decision, issue a new decision, or conduct additional NEPA review. Id. at 8.

                The plaintiffs, on the other hand, have indicated an intent to oppose the Motion on the ground that vacatur is appropriate, while CRPC has “reserve[d] its right to take a position until after it reviews [BLM]’s brief.” Stipulation, Joint Proposed Briefing Schedule, Ctr. for Biological Diversity v. BLM, No. 1:23-cv-00938 (E.D. Cal. Sept. 26, 2023).

 

Court Denies CBD’s Ex Parte Application for Administrative Stay of CalGEM’s Permit Approvals
                In Vol. 40, No. 3 (2023) of this Newsletter, we reported on a new petition for writ of mandate filed by the Center for Biological Diversity (CBD) against the California Department of Conservation’s Geologic Energy Management Division (CalGEM) seeking to invalidate six permits for injection wells in the Arroyo Grande Oilfield in San Luis Obispo County and 15 oil wells in the Wilmington Oilfield in Los Angeles County on the ground that CalGEM relied on “antiquated, inapplicable, and inadequate environmental reviews of other agencies” in issuing the permits. Petition for Writ of Mandate at 2, Ctr. for Biological Diversity v. CalGEM, No. 23CV033371 (Cal. Super. Ct. May 11, 2023). In August 2023, CBD filed an ex parte application for administrative stay, seeking a stay of CalGEM’s approvals of the 15 Wilmington Oilfield wells issued to real party in interest THUMS Long Beach Company (THUMS). Both CalGEM and THUMS opposed the application. The court denied the same on August 18, 2023, and issued a written order to the same effect but containing no analysis on September 19, 2023. Order Denying Ex Parte Application for Administrative Stay, Ctr. for Biological Diversity v. CalGEM, No. 23CV033371 (Cal. Super. Ct. Sept. 19, 2023).

 

CBD Seeks Writ of Mandate Against the City of Long Beach, State Lands Commission, and CRC/THUMS
                On September 14, 2023, the Center for Biological Diversity (CBD) filed another petition for writ of mandate and complaint for declaratory and injunctive relief, this time in Los Angeles County Superior Court against the City of Long Beach (City), the State Lands Commission (Commission), and real parties in interest California Resources Corporation (CRC) and THUMS Long Beach Company (THUMS). Petition for Writ of Mandate and Complaint for Declaratory and Injunctive Relief, Ctr. for Biological Diversity v. City of Long Beach, No. 23STCP03581 (Cal. Super. Ct. Sept. 14, 2023). Therein, CBD seeks a writ of mandate requiring the City or the Commission to analyze and disclose the environmental impacts of the City’s approval of its 2023 Program Plan—the five-year plan by which the City sets forth its oilfield management and drilling and operational activities for the Long Beach Unit (LBU).

                The City drafts the Program Plan, which is then submitted to the Commission for review. The Commission may request changes to the plan, which the City and field operator, CRC/THUMS, can either accept or reject and ask a court to review. Id. ¶¶ 1, 3. The Complaint alleges that the 2023 Program Plan—which was finally approved May 25, 2023—prescribes an increase in production of oil and natural gas from the previous five-year plan, which activities create certain environmental and health risks that require California Environmental Quality Act (CEQA) review. Id. ¶¶ 71, 72, 108. The Complaint also asserts that CEQA review has never been performed in connection with any previous LBU Program Plan. Id. ¶ 61. CBD now asserts two causes of action for violations of CEQA, seeking to have the Program Plan set aside and activities described in the plan halted until the City or Commission performs a CEQA analysis.