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At the start of 2020, California Resources Corp., one of the state’s largest oil and gas producers, was in financial trouble. The firm’s stock price had plunged, and its credit rating was in junk bond territory.

Then the pandemic struck, roiling international oil markets. A few months later, in July 2020, CRC and nearly two dozen of its subsidiaries filed for bankruptcy, citing the “unprecedented market conditions.” The company was nearly $5 billion in debt.

The day after the filing, two environmental groups, the Sierra Club and the Center for Biological Diversity, sent a letter to Gov. Gavin Newsom, raising concerns that CRC might use its bankruptcy proceedings to avoid cleaning up the thousands of oil wells it owned or operated. Oil and gas wells can leak pollutants into the air and groundwater, including planet-warming methane. The letter warned that California taxpayers could be on the hook for CRC’s cleanup costs if the company went out of business or was able to avoid its environmental obligations.

CRC bounced back quickly, though, leaving behind most of its debt when it emerged from bankruptcy in October 2020. Since then, its stock price has quadrupled, and in July, it completed a $2.1 billion merger with another California oil company, Aera Energy. In addition to cementing its role as the state’s largest oil producer, CRC says the deal will help make it more competitive as it expands into a growing industry: carbon removal and storage.

But the merger has also substantially increased the liabilities that worried environmentalists: Companies affiliated with CRC, including Aera and CRC subsidiaries, are now responsible for cleaning up more than 11,000—or nearly a third—of the state’s idle wells.

Those wells could become California’s burden. In an April filing with the Securities and Exchange Commission, CRC said the projected cost to clean up the companies’ wells was more than $1 billion. The firms have set aside $114.7 million in the form of bonds to partially cover those costs, records obtained by Inside Climate News and KVPR show.

The companies met the state’s bonding requirements, according to the California Geologic Energy Management Division (CalGEM), which regulates oil and gas wells. But those requirements are inadequate, environmental and legal experts claim, and may leave California taxpayers with a huge clean-up bill.

“CRC’s unfunded cleanup liability—the gap between its bonds and the actual cost of cleanup — should be a major concern to taxpayers and to anyone who cares about California’s environment,” said Clark Williams-Derry, an analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), in an email. He authored a February 2020 report warning that CRC was at risk of bankruptcy and did not have enough money to cover the costs of cleaning up its wells, which at that time he estimated were $1.2 billion.

Some experts are also concerned that CRC’s carbon storage plans could allow it to delay cleaning up idle wells, because the company might repurpose a portion of them for carbon injection.

In an email, Richard Venn, a CRC spokesman, said the company and its subsidiaries “are in compliance with their State bonding requirements” and have “active and well-established programs for managing idle wells.”

Venn did not respond to a specific question about whether the company would use idle wells for any of its 38 proposed carbon injection wells, but said, “Idle wells have the potential for reuse and reinvestment in future development activities.”

“Too Low”

California requires oil producers to clean up the wells they own or operate once those wells are no longer productive. But companies can leave wells idle without putting them back into production or plugging them. (The cleanup process, also known as plugging or decommissioning, involves sealing a well with a cement plug to prevent chemicals from leaking into the air or leaching into groundwater.)

The state considers a well idle if it has not produced oil for two years or more, but there’s no limit on how long a well can remain inactive. One of CRC’s wells has been idle for more than a century; many have been idle for four decades.

Idling a well is often cheaper than plugging it. The state charges producers an annual fee for every idle well, ranging from $1,000 to $22,500 dollars—costs that recently increased—depending upon how long a well has been inactive. The cost to plug a well ranges from $1,200 to $391,000, according to a 2018 report prepared for CalGEM.

In addition to these fees, the state requires producers to set aside money to plug wells, but experts say those funds are not enough to cover all likely cleanup costs. 

“Historically, bonding requirements in California have been much too low,” says Joshua Macey, a professor at Yale Law School who specializes in bankruptcy and environmental law. 

In recent years, California has enacted legislation aimed at increasing those requirements. A law approved in 2019 allows the state to collect additional bond money—up to $30 million, for onshore oil wells.

Most of the $114.7 million in bonds that Aera, CRC and CRC’s subsidiaries have set aside is a result of requests for additional funds the state has made since the law took effect, according to bonding records obtained by KVPR and Inside Climate News.

Last year, the governor signed another bill, AB 1167, that requires companies acquiring wells to buy bonds to cover the full costs associated with plugging them. But in June, state regulators determined the law did not apply to CRC’s merger with Aera, because under the terms of that deal, Aera is still considered the operator of its wells.

The decision frustrated environmental advocates and some lawmakers, including Assemblymember Wendy Carrillo (D-Los Angeles), who authored the legislation.

“The legislature can pass laws, but their interpretation is up to the agency and whomever the Governor has appointed to lead on the issue,” Carrillo said in an emailed statement. Not enforcing the law, she wrote, “gives more power to the oil industry and continues to disenfranchise Californians that live in communities disproportionately impacted by environmental injustice.”

A Steady Decline

Last year, the U.S. produced more oil than any other country in history, pumping out 4.7 billion barrels. The use of new drilling techniques in recent decades, like hydraulic fracturing (commonly known as fracking), have helped boost U.S. oil production. But California’s oil output has been on a steady decline since the mid-1980s. In 2023, California produced 118.3 million barrels, down from 394 million in 1985, when production in the state was at its peak. 

The future of the state’s oil industry is largely limited by geology, according to Williams-Derry. California’s Monterey Shale oil deposit was once thought to hold up to two-thirds of the country’s oil—more than 15 billion barrels. Occidental Petroleum, CRC’s former parent company, held the rights to much of it. When a federal research agency announced in 2014 that the region was actually likely to yield less than five percent of those mammoth reserves, the company appeared to be headed for a big loss. 

But by then, Occidental—which had become an oil giant, expanding its operations to other countries and states—was already months into a plan to jettison the majority of its California assets into the corporate container of CRC.

“It was good to get rid of the properties with this much higher liability compared to production,” says Dwayne Purvis, a Texas-based oil and gas engineering consultant who has worked in the oil industry for nearly three decades.

Now, California, which has the nation’s most aggressive climate policies, is planning to phase out oil drilling by 2045. Already many of the state’s active wells can no longer produce oil economically, according to Purvis. 

As oil production in the state continues to decline, the number of idle wells is likely to increase. Regulators, environmental groups and some legislators are worried that financially-struggling producers will desert those wells, creating more pollution and an additional financial burden for the state. California taxpayers are already on the hook for the costs to clean up more than 5,000 wells that have “no responsible solvent owner,” according to CalGEM. The average cost to plug an orphaned well in the state is $111,000.

CRC’s production has been in decline since at least 2016. Today, CRC operates just one rig to drill new wells, and though its total operating revenues have increased from 2021 to 2023, its oil and gas sales fell by more than $480 million from 2022 to 2023.

Oil companies operating in central California are “certainly making money on a month-to-month basis,” says Purvis. “But the question is whether or not they’re going to have enough money to decommission when the time comes.”

Williams-Derry is not optimistic.

“As CRC’s wells produce less and less oil, it’s likely that the company will produce less and less cash. Within a decade, it’s likely that CRC will still have a massive number of wells to plug, but will no longer have cash flow to pay to plug wells,” he said in an email. “Once that happens, the cost of cleanup will fall on taxpayers—or, worse, thousands of idle wells [will] simply be left to rust and degrade.”  

A Strategy for Delay?

Not long after it emerged from bankruptcy, CRC began touting its plans to build carbon removal and storage facilities in Kern County, where most of the state’s oil is produced.

CRC’s project in Kern would store planet-warming carbon dioxide a mile below an oil field that has long generated profits for the company. It would be the first carbon storage site in California—and one of only a handful in the United States. In October, the county’s Board of Supervisors voted to approve the project. Last month, a coalition of environmental and community groups sued the County, arguing that it failed to address climate, health and safety concerns, as required by state law. 

The county said it does not comment on litigation. Venn, the CRC spokesperson, said in an email that CRC is “confident in the environmental review process conducted by Kern County and look[s] forward to implementation of this project.”

The U.S. Environmental Protection Agency could make a final decision on at least one of CRC’s injection well applications by the end of the year. In an email, an EPA spokesperson said the agency did not expect the lawsuit to impact its approval timeline.

Around the world, companies are investing in plants that remove planet warming carbon-dioxide and store it deep underground to help combat climate change. Those facilities are expensive to build, and thus far can remove only a small fraction of global carbon emissions. It’s too soon to know if the plants will be able to scale up or turn a profit.

“It offers a way to be paid to do something with these wells, as opposed to simply paying to do cleanup. It’s arguably a way to say, we don’t need to do cleanup now.”

— Joshua Macey, Yale Law School professor

CRC says its carbon storage projects will increase revenue, help it meet its environmental goals—by 2045, the company says it will have net neutral emissions—and contribute to California’s fight against climate change. 

Whether CRC will be able to use incentives from the Inflation Reduction Act, the Biden Administration’s signature climate legislation, to subsidize its projects is unclear. President-elect Donald Trump has threatened to repeal the law. But CRC sees “multiple ways to bring these projects forward,” CEO Francisco Leon said during an investor call the day after the election. “We don’t see that changing at all with the election.” 

Some experts say that carbon capture projects could provide an additional revenue stream as oil production declines. “This is a way for a company like CRC to ensure that they have a sustainable business going forward,” says Rohan Dighe, a research analyst at energy consultancy Wood Mackenzie.

Macey, the Yale law professor, is among those who say that CRC’s move into carbon management could give the company another reason to put off plugging idle wells.

“It offers a way to be paid to do something with these wells, as opposed to simply paying to do cleanup,” he said. “It’s arguably a way to say, we don’t need to do cleanup now.”

Dighe calls that view a “little bit cynical.” He says operators will need to ensure any wells used for carbon storage have been appropriately maintained and engineered to prevent leaks. “It’s not going to be as straightforward as just repurposing,” he said.

But Williams-Derry is skeptical.

Carbon capture projects, he said, help the company “delay the day of reckoning” for cleaning up wells, allowing it to “kick the can down the road.”

“Eventually,” he said, “they’re going to run out of road.”

This story is part of a series, After Oil: California’s Big Bet, which examines the impact of the state’s decision to phase out oil drilling in its largest oil-producing county. This report is a collaboration between Inside Climate News and KVPR.