Critics question state's handling of Aera purchase by CRC
JOHN COX, The Bakersfield Californian
5 min read
California regulators have come under criticism recently that they looked the other way during one of the biggest business deals in Kern County oil fields in years.
Lawmakers and environmental groups say the Newsom administration should have applied a new state law designed to protect taxpayers and public health when oil producer California Resources Corp. bought Bakersfield-based Aera Energy LLC. The acquisition closed July 1.
Applying the Orphaned Well Prevention Act — that is, forcing CRC to post indemnity bonds on Aera's idle or minimally productive wells – could have raised costs associated with the acquisition by $1 billion or more, by some estimates.
The state Department of Conservation said by email Thursday that its California Geologic Energy Management Division did not require added financial assurances from CRC because, under the acquisition, stock ownership of Aera was transferred but "not any of Aera's assets or wells."
It noted that the form the acquisition took, a stock transfer, is not specifically mentioned in the law, better known as Assembly Bill 1167.
Critics including AB 1167's author say the legislation was written precisely for such situations. They say the state's decision not to apply the law in the case of the Aera acquisition puts air and groundwater quality at risk, and that taxpayers could become financially responsible if one day CRC is unable to pay to plug and abandon Aera's idle or marginal wells.
"By refusing to enforce the policy, CalGEM is setting up our state for a potential financial catastrophe," the bill's author, Assemblyman Wendy Carrillo, D-Los Angeles, said in a statement.
Plugging and properly abandoning idle wells has taken on greater urgency in recent years as dozens of leaks have been discovered in the Bakersfield area alone. The state has estimated the average cost to clean up an idle well is $68,000, though the expense varies and some say the average is higher.
More than $100 million in state and federal taxpayer dollars has been set aside since the pandemic to address a portion of the wells. In addition, oil producers are required to plug and abandon a certain share of their idle wells every year.
The acquisition of Aera from German and Canadian owners makes CRC California's largest oil producer. The merged entity is now responsible for what observers estimate at 40% of California's idle wells — 16,000 as compared with the 6,700 CRC owned before the acquisition.
CRC said in an email it and Aera have programs for managing the full life cycle of its wells, and that together they have plugged more than 5,000 wells during the last three calendar years. The Long Beach-based company said the merged operations will continue to carry out such work at a pace faster than the state requires.
There can be value in not plugging all idle wells, CRC noted: Some can be uses for the climate action known as carbon capture and sequestration, in which greenhouse gas is injected and stored permanently deep underground.
"We are also investing in new technologies that have the potential to reuse idle wells for generating renewable energy, such as geothermal power, to advance the energy transition in California," the email stated. It also referred to a $30 million blanket indemnity bond it has put up.
Year-end 2023 paperwork CRC filed with the U.S. Securities and Exchange Commission warned that AB 1167, which was signed into law Oct. 7 and took effect in January, "may lead to the delay or additional costs with respect to certain acquisitions or dispositions, which could impact our ability to grow or explore new strategic areas — or exit others — within the state of California."
While the Aera acquisition was still pending, the company shared with the Department of Conservation a diagram showing CRC will own the merger subsidiary, along with Aera's holding company and Aera itself. It came with a note saying, "There will be no change in the organizational structure of Aera Energy LLC or its operating subsidiaries as a result of this transaction."
An energy finance analyst at the Ohio-based Institute for Energy Economics and Financial Analysis, Clark Williams-Derry, disputes the state's assertion that CRC's status as a publicly traded company — or the fact that the Aera acquisition was carried out as an all-stock transaction — has any bearing on the applicability of AB 1167.
While emphasizing he is not a lawyer, Williams-Derry opined that Aera could have been purchased with cash and the result would be the same: CRC is now the sole owner of Aera's assets. Because of that, he added, CRC has acquired the right to drill, operate, maintain and control Aera's assets.
The companies' merger agreement states that Aera's assets and ownership entities were merged into an organization that is now a wholly owned subsidiary of CRC called Petra Merger Sub S LLC, which Williams-Derry noted has the same address as CRC.
"CRC, through its wholly owned subsidiaries, is now the sole owner of the Aera assets," he wrote.
But the Department of Conservation's email said AB 1167's bonding requirements are explicitly directed at transfers of the right to operate wells, and that the operator is the one that, by virtue of ownership or other agreement, has the right to drill, operate, maintain or control a well or production facility.
Because CRC is publicly traded, and its ownership shares trade daily, "None of those new corporate owners has any power to control the corporation's assets or to operate its wells and facilities," the email stated.
In a June 27 letter to Assemblywoman Carrillo, department Director David Shabazian said "additional statutory changes" would be needed to subject a deal like the Aera acquisition to the bonding requirements of AB 1167.
Environmental groups have expressed concern other oil companies will take a lesson from CRC so they, too, can avoid the new bonding requirements.
Representatives of six such organizations sent a letter to the head of CalGEM on June 21 saying operators that otherwise would have complied with AB 1167 "will now have a roadmap for structuring those transactions so as to evade compliance."
