The Short End of the Dipstick

This story is a collaboration publication between Santa Barbara Independent and Bluedot Living.

The bargain sounds reasonable: In exchange for punching holes in the Earth and extracting a useful product, fossil fuel companies agree to clean up after themselves. In reality, it rarely works out that simply. Oil companies are historically terrible at capping their old wells and remediating any damage done. 

Leaky Old Wells

The United States has well over a million oil wells, and those no longer in use need to be closed properly — otherwise they can leak oil, methane, and a host of other poisons into our air and water. The infrastructure, like platforms and pipelines, should be removed, too, by law. California alone has 40,000 idle or abandoned oil and gas wells that will cost about $23 billion to cap, according to the Sierra Club, and about 60,000 active wells that will need to be plugged in the future. The state had to plug two “orphan” wells at Summerland earlier this year. 

Clark Williams-Derry is an energy finance analyst with the Institute for Energy Economics and Financial Analysis (IEEFA), a nonprofit that researches energy markets with a mission to “accelerate the transition to a diverse, sustainable, and profitable energy economy.” He said that legally, “oil companies have a responsibility to clean up after themselves. The problem is that the way these things are enforced is that the enforcement agencies, the regulators, often let them slither away from their responsibilities, kind of like a snake sheds its skin.” 

The Playbook

The situation off the Santa Barbara coast right now is straight out of the oil company playbook to sidestep “decommissioning” costs (a playbook explained in detail by ProPublica): A major oil company (ExxonMobil) sees the end of the road and sells tired wells and rusty assets to a smaller company (Sable Offshore) willing to take on risk. The smaller company squeezes what it can out of investors and the ground, then goes bankrupt, leaving taxpayers on the hook for cleanup costs. “Regulators have gone along with this almost as if they are the servants of the oil industry and the coal industry rather than public servants,” said Williams-Derry.

In the case of Sable, a small company started solely for the purpose of restarting the Santa Ynez Unit (offshore oil drilling platforms Harmony, Heritage, and Hondo, and their pipelines) and funded almost entirely with a loan from Exxon, is gambling that they will be able to do something that one of the largest and most-sophisticated operators in the modern history of oil and gas production couldn’t.

But who’s really taking the risk? Sable is “gambling with someone else’s money,” Williams-Derry said, and in reality, the citizens of Santa Barbara are shouldering the risk. “Both the finance and the environmental risks are more on the public than it is on Sable’s executive suite,” Williams-Derry continued. “What the oil industry wants us to think is that a company like Sable is an entrepreneurial, risk-taking company that is willing to give it a shot, right? As opposed to a deliberate financial creation of Exxon to remove these projects from its books.”

A 2020 federal report estimated the cost of decommissioning the Santa Ynez Unit at $471.5 million. ExxonMobil is a roughly $500 billion company. “Just because it’s ‘only’ a few hundred million dollars,” Williams-Derry suggested, “doesn’t mean that Exxon isn’t going to spend a few tens of millions of dollars trying to dodge the liability.”

Holding Them Accountable

Williams-Derry noted that the Santa Ynez Unit platforms are in federal waters, where there are legal provisions that at least have the potential to tie liability back to a former owner, even if they sell the wells. Whether or not this would be enforced, Williams-Derry thought, “is an open question.”

One close observer of the petroleum industry, Megan Biven, agrees. “If something were to happen to Sable Offshore, the government retains the right to order Exxon to close everything down. So those liabilities remain on Exxon’s books, officially.” 

A former regulator with the federal Bureau of Ocean Energy Management (BOEM), which oversees offshore oil resources, Biven founded True Transition, a nonprofit that fights for energy industry workers and for the environment. She does not oppose oil and gas production, but thinks there needs to be higher bars set for both worker conditions and environmental protection.

Of course the height of the bar depends on where the companies are operating. “Shell in Nigeria is different than Shell in the North Sea is different in the Gulf of Mexico,” she said. The Gulf, where the vast majority of America’s offshore oil is produced from 5,000 platforms, “is known as the wild west in the international world, because they are allowed to get away with a lot more than they should,” according to Biven, a Louisiana native.

The Gulf oil industry offers a cautionary tale where a number of high-profile bankruptcies have forced the federal government to get in line with other creditors as it tries to recover cleanup costs. California’s tourism economy and relatively pristine environment make it different from the Gulf, she said: “No drop of oil can be tolerated. It’s a different world than off the coast of Louisiana.”

A Nationwide Game 

Biven also notes that federal offshore oil production is more tightly regulated than onshore production overseen by the states. “The Gulf is still 100% better than the Permian.” The Permian, America’s largest onshore oil field in Texas and New Mexico, is regulated by state agencies that she said are “completely toothless.” 

California at least has a new rule (AB 1167) that mimics the federal laws and could help end the practice of unloading old wells onto shaky companies without the resources to cap them. But when faced with its first big test of the new law — a merger between California Resources Corp and Aera Energy that together control 40,000 wells in the state — California regulators declined to enforce it.

The fossil fuel industry has been playing this game for a long time. In Appalachia where the coal industry has been in decline as natural gas gets cheaper, most major coal companies have gone through at least one bankruptcy. Williams-Derry said, “Appalachia is filled with mines that will probably never be cleaned up.” Meanwhile abandoned mines catch fire and burn for decades, forcing towns to be condemned and the federal and state governments must step in to care for miners suffering from black lung and other related diseases. As oil slowly fades, a similar situation could play out.

The Home Game

This isn’t even the first time we’ve seen this changing ownership from a wealthy large company to a small, upstart, untested company off our nearby coast.

Take Platform Holly just offshore of Goleta in state waters (within three miles of shore). The California State Lands Commission was forced to step in after the owner, Venoco LLC, went bankrupt in 2017. After plugging the wells, the state is now planning to dismantle the hulk at an estimated cost of $350 million. Bonds from Venoco and ExxonMobil will cover about $70 million. We will pay the rest.

Or take Rincon Island, off Mussell Shoals. The Desert Sun detailed how the oil facilities on Rincon Island filtered down from energy giant Atlantic Richfield (ARCO) through other companies, ending up owned by a subsidiary of Greka Energy Corp. Greka wrung the island dry, racking up loads of environmental and safety violations in the process, before going bankrupt in 2016. California taxpayers are paying the vast majority of the $50-million-plus clean-up costs, while the CEO of Greka retired to his Los Olivos winery. The profits from oil and gas were privatized, the costs were socialized. 

Playing by Better Rules

There are examples where fossil fuel infrastructure has been properly decommissioned. Chevron has a program to decommission five platforms and related infrastructure off California. 

There is also a debate whether it is best to remove the platforms completely or keep a portion of them underwater, where they serve as productive underwater reefs. Marine life experts applaud the idea, while others see it as oil companies further escaping their responsibilities, and note the material, usually steel, can be recycled.

In any case, Biven sees cleaning up America’s unproductive wells — an effort that should be funded by the oil industry — as a huge potential source of employment for struggling energy workers. 

While oil production is happening, Biven said, “let’s have the highest standards that we can muster. … And let’s ensure that Americans get a bigger return on it.” She pointed to Norway, which has tough environmental regulations and uses offshore oil revenues to fund a pension system that now boasts about $350,000 per Norwegian in its coffers. Of the U.S., she said, “We’re the biggest producer on the planet, but the ones who are benefiting are a collection of companies.” (Interestingly, Norway gets about 99% of its domestic energy from clean hydropower, and it leads the world in electric vehicle adoption.)

Oil companies also aren’t forced to account for the air pollution and climate change wrought by their products (“externalities” in economist talk). All that adds up to a massive subsidy for an industry already swimming in generous government fossil fuel production subsidies.

Currently, we’ve sold off the nation’s collective fossil fuel wealth into private companies who make huge profits. And all we got in return was cheap gas and a bunch of oily messes we’re going to have to pay to clean up. Until we hold regulators accountable for holding the oil companies accountable, we’ll be left holding the oily end of the dipstick.