Column: Could the mega-merger of two California oil giants benefit the climate?

Welcome to Boiling Point! My name is Tony Briscoe. I’m the air quality and environmental health reporter at the L.A. Times. I’m filling in for my colleague Sammy Roth, who is working hard to publish the next edition of his “Repowering the West” series.

For much of California’s history, fossil fuel companies have profited handsomely from drilling wells and tapping the state’s deep oil and gas reserves.

But after nearly 160 years of drilling and extraction, the state is riddled with over 100,000 unplugged wells.

About 60,000 of those are considered active wells, although they now only produce just four barrels of oil a day on average. Another 40,000 or so of these unplugged wells haven’t produced oil or natural gas in years.

If you live in Echo Park, Wilmington or Long Beach, parts of your community sit atop these idle wells — which, if left uncapped, are prone to leaking planet-warming methane and toxic air contaminants.

Carbon Tracker, a London-based financial think tank, estimated it will cost around $10 billion just to plug these defunct wells in California.

In a state where many made their fortune drilling for black gold, these once-lucrative oil and gas fields are on the precipice of becoming huge financial liability. The question is, for whom?

Fossil fuel companies have historically lobbied against laws that would require them to set aside enough money to ensure that their idle wells will be sealed. The problem is, if these companies go bankrupt before they plug their wells, taxpayers often assume the financial burden.

“If we don’t tackle this issue now, as a state, we anticipate this becoming a socialized remediation, which is absolutely what we don’t want,” said Jasmine Vazin, a senior organizer with the Sierra Club. “Californians can’t afford to pay rent. The last thing our tax dollars need to go towards is bailing out Big Oil to clean up their mess.”

But, under a recently passed state law (Assembly Bill 1167), any oil or gas company that drills or acquires new wells will need to dedicate more money up-front to ensure they are eventually sealed.

Its passage preceded one of California’s most significant oil and gas acquisitions in recent memory.

In February, California Resources Corp. announced its intent to buy Aera Energy, a $2.1-billion deal that would combine two of the state’s largest fossil fuel companies.

If you’re not familiar, C.R.C. (formerly Occidental Petroleum’s California operations) is the state’s third-largest oil producer and a leading natural gas producer. Aera, which started as a joint venture between Shell and ExxonMobil, is the state’s second largest oil producer.

The merger would position the new entity as the state’s undisputed leader in oil and gas production over rival Chevron.

It would also significantly bolster the landholdings of C.R.C., which already is the largest private owner of mineral rights in California. This would expand its drilling opportunities and double its capacity to store industrial carbon emissions underground (a new business model that C.R.C. and Aera are investing in.)

“Together, this combination will create an unquestioned leader in energy transition, producing low carbon intensity fuels that California needs while accelerating the decarbonization of the State’s industrial and energy industries,” said Francisco Leon, C.R.C.’s chief executive.

But Aera and C.R.C. are the second and third largest owners of idle wells. So, some environmental groups also quietly cheered the deal, because, under A.B. 1167, the acquisition would mean C.R.C. will have to set aside a lot more money to ensure Aera’s sprawling portfolio of 23,000 oil and gas wells are eventually plugged.

The law requires oil companies that acquire new wells to obtain a bond (a financial agreement similar to an insurance policy) that would cover the full cost of well-plugging.

“You could see C.R.C. having to fund those total costs imminently and then that would be put into place for the future plugging of those walls, which would be an ideal scenario,” said Vazin, the Sierra Club organizer.

Although this should provide a financial safety net for Aera’s wells, it would not require C.R.C. to secure additional funding to cover its. The bulk of both companies’ wells are in Kern County, but C.R.C. is one of the leading owners of idle wells in Los Angeles County, too.

The potential merger, however, heightens concerns that C.R.C. might assume too much debt, due in part to long-delayed well-plugging costs.

C.R.C. was spun off from Occidental Petroleum in 2014, which wanted to reduce its financial exposure to California’s mature and declining oil wells. Six years later, not long after the onset of the pandemic, C.R.C. filed for bankruptcy, as the company struggled to manage its debt amid low fuel costs.

Many of Aera’s wells, like other California oil companies, are only producing marginal amounts of oil.

“If we don’t solve this quickly enough, these companies are going to default one by one — through bankruptcies, through spin-offs, through selling to other companies,” Vazin said. “And if we kick this down the road, it will add to the complexity of getting polluters to pay.”

The question some are asking now is: Will short-term profits from extracting fossil fuels from these oil and gas wells cover the cost to plug them?

If sale price is any indication, Aera was purchased by German asset management company and Canadian pension fund in 2023 for $4 billion. C.R.C. has offered to acquire the company for $2.1 billion worth of stock.

“It’s been devalued over 50% in one year’s time, really evidencing our hypothesis that these wells are more of a liability than they are a profit maker,” Vazin said.

In a recent news release, C.R.C. and Aera officials expressed hope that the merger could boost oil production, at least in the short term. But the companies faced a tremendous setback this month.

A California appellate court decision invalidated a Kern County ordinance that allowed oil companies to receive new drilling permits in an expedited timeline. The ruling is expected to drastically slow drilling, requiring companies to complete an extensive environmental review for each new drill site.

“As a result, California is going to continue to increase its dependence on imported foreign crude rather than energy produced by Kern citizens,” said Rock Zierman, CEO of the California Independent Petroleum Assn.

In light of the ruling, C.R.C. informed its investors that it would scale back drilling and that its oil production would decline 4-7% in 2024.

The truth is, as much as oil companies have recorded record profits, the overall industry is in decline and in the process of being phased out in California.

Experts say it underscores the importance of not only funding well-plugging costs, but also requiring idle oil wells to be be plugged sooner.

Pennsylvania, Colorado, West Virginia and North Dakota all have laws requiring idle wells to be plugged within a year. California law, however, allows these wells to remain unsealed indefinitely, so long as companies pay nominal fees for their idle wells (between $150 to $1,500 per well).

Last week, Assemblymember Gregg Hart (D-Santa Barbara) introduced a bill that would finally set a timeline. It would require California’s largest oil operators, including C.R.C and Aera, to plug 20% of their idle wells per year.

“The facts are clear — this serious problem is getting worse and can’t be ignored,” Hart said in a statement.

The first hearing on the bill is scheduled for today.

On that note, here’s what’s happening around the West:

TOP STORIES

Thousands of steelhead trout have mysteriously died near California’s water pumps. Environmentalists and fishing groups are now challenging the operational plans of the State Water Project and the Central Valley Project, according to Times reporters Hayley Smith and Ian James. The agencies say they are reducing pumping to avoid harming the threatened species.

Wildfires are ravaging the Mexican state of Oaxaca, a region known for its production of mezcal tequila. As the smoky beverage grows in popularity, agave plants are increasingly displacing forests in Oaxaca, Times reporter Melissa Gomez writes. Some fear that the change in land use is fueling natural disasters. It’s also caused some to question the response of state authorities.

THE ENERGY TRANSITION

Texas’ solar energy growth outpaced California in 2023. The Lone Star State added 6.3 gigawatts of solar energy, largely driven by industrial-scale installations, according to Wall Street Journal columnist Rob Curran. This is the second time in three years that Texas added more solar energy to its grid than California. The rate of solar installations in California has taken a nosedive after the state’s utility agency slashed rebates for surplus power produced by residential solar panels.

Plans for California’s first offshore wind installations are at odds with a proposed marine sanctuary. Wind farm developers want to construct turbines near the proposed site of Chumash Heritage National Marine Sanctuary in Morro Bay, much to the chagrin of some tribal members, E&E reporter Heather Richards writes. The situation complicates the Biden administration’s tandem goals of building out renewable energy and equitably preserving natural habitats.

POLITICAL CLIMATE

California gas prices could rise 50 cents next year due to a climate program. State air regulators say a climate program aimed at disincentivizing fossil fuels will raise operating costs for oil and gas producers. And those costs could get passed on to California drivers to the tune of $0.47 next year and $0.52 by 2026, according to Sacramento Bee climate reporter Ari Plancha.

Public officials have tried to spin hosting the Olympic Games as a climate benefit, but the actual event is not environmentally friendly. The Summer Games result in the release of 1.5 million to 3.5 million metric tons of carbon emissions on average — the equivalent of a large city’s annual carbon footprint, according to Politico climate reporter Blanca Begert. This is largely due to air travel and building construction. Ahead of the 2028 Olympics, there are concerns that Los Angeles is still lagging behind in its clean transit goals.

An Arizona lawmaker’s “anti-Marxist” bill could undermine climate action. State Sen. Anthony Kern, a Republican, introduced a bill that would prohibit public money from funding activities he considers “anti-freedom,” Arizona Republic environmental reporter Hayleigh Evans writes. Opponents fear that would hinder initiatives to reduce motor vehicle use, monitor greenhouse gas emissions or fund climate change research.

AROUND THE WEST

A water-borne parasite has arrived in California and has sickened dogs. The flatworm, which is endemic to the American South, has been observed in the Colorado River in California for the first time, according to Times reporter Andrew J. Campa. Their arrival has prompted warnings to pet owners to avoid letting their dogs swim or drink from the river.

With a warmer climate, California crops are getting thirstier. In the San Joaquin Valley, the total water demand for orchards, vineyards, and row crops has risen 4.4% in the past decade compared to the previous 30 years, according to a new federal study. That includes a staggering 12.3% increase observed in 2021 alone, according to San Francisco Chronicle enterprise reporter Kurtis Alexander. Despite occasional wet years as we’ve recently experienced, evaporation rates are increasing due to warming temperatures, highlighting a looming challenge in managing our water resources.

Recycling is important to reduce the amount of waste sent to regional landfills. The problem is, we’re still doing it wrong. L.A. Times reporter Karen Garcia toured a recycling facility to learn where our waste goes, how it’s processed and what we can do better, for the video series, Your Best L.A.: Sustain. (Pro tip: Don’t try to recycle Christmas lights).

ONE MORE THING

EPA administrator Michael Regan recently visited the Port of Los Angeles to tout that the Biden administration has dedicated $3 billion to reduce pollution from America’s seaports. The San Pedro port complex, which handles 40% of the nation’s containerized cargo, is Southern California’s largest fixed source of smog-forming emissions. Daily Breeze reporter Donna Littlejohn writes that the Port of Los Angeles and Port of Long Beach are expected to apply for funds.

This column is the latest edition of Boiling Point, an email newsletter about climate change and the environment in California and the American West. You can sign up for Boiling Point here. And for more climate and environment news, follow @Sammy_Roth on X.