WEST virginia legislature

2019 regular session

Committee Substitute

for

Senate Bill 541

By Senators Romano, Azinger, Baldwin, Beach, Boso, Clements, Facemire, Hardesty, Jeffries, Lindsay, Mann, Palumbo, Smith, Stollings, Swope, Woelfel, Plymale, Maroney, and Cline

[Originating in the Committee on Energy, Industry, and Mining; Reported on February 21, 2019]

A BILL to amend and reenact §22-6-26 of the Code of West Virginia, 1931, as amended; to amend said code by adding thereto a new section, designated §22-6-26a; and to amend and reenact §22-10-6 of said code; all relating to the plugging of orphaned oil and gas wells; providing plugging assurance upon transfer of a well; providing exemptions from plugging assurance where a well is providing free gas and not causing pollution; and requiring money that results from the forfeiture of an oil and gas operator’s bond as a result of the operator’s failure to plug a well or otherwise comply with state statutes and rules to first be applied to correct or mitigate an immediate threat to the environment or hindrance or impediment to the development of mineral resources of this state that caused the forfeiture of the bond.

Be it enacted by the Legislature of West Virginia:

ARTICLE 6. OFFICE OF OIL AND GAS; OIL AND GAS WELLS; ADMINISTRATION; ENFORCEMENT.

§22-6-26. Performance bonds; corporate surety or other security.

(a) No permit shall be issued pursuant to this article unless a bond as described in subsection (d) of this section which is required for a particular activity by this article is or has been furnished as provided in this section.

(b) A separate bond as described in subsection (d) of this section may be furnished for a particular oil or gas well, or for a particular well for the introduction of liquids for the purposes provided in §22-6-25 of this code. A separate bond as described in subsection (d) of this section shall be furnished for each well drilled or converted for the introduction of liquids for the disposal of pollutants or the effluent therefrom. Each of these bonds shall be in the sum of $5,000, payable to the State of West Virginia, conditioned on full compliance with all laws, rules relating to the drilling, redrilling, deepening, casing and stimulating of oil and gas wells (or, if applicable, with all laws, rules relating to drilling or converting wells for the introduction of liquids for the purposes provided in section §22-6-25 of this code or for the introduction of liquids for the disposal of pollutants or the effluent therefrom) and to the plugging, abandonment and reclamation of wells and for furnishing such reports and information as may be required by the director.

(c) When an operator makes or has made application for permits to drill or stimulate a number of oil and gas wells or to drill or convert a number of wells for the introduction of liquids for the purposes provided in §22-6-25 of this code, the operator may in lieu of furnishing a separate bond furnish a blanket bond in the sum of $50,000, payable to the State of West Virginia, and conditioned as aforesaid in subsection (b) of this section.

(d) The form of the bond required by this article shall be approved by the director and may include, at the option of the operator, surety bonding, collateral bonding (including cash and securities) letters of credit, establishment of an escrow account, self-bonding or a combination of these methods. If collateral bonding is used, the operator may elect to deposit cash, or collateral securities or certificates as follows: Bonds of the United States or its possessions, of the federal land bank, or the homeowners' loan corporation; full faith and credit general obligation bonds of the State of West Virginia, or other states, and of any county, district or municipality of the State of West Virginia or other states; or certificates of deposit in a bank in this state, which certificates shall be in favor of the division. The cash deposit or market value of such securities or certificates shall be equal to or greater than the amount of the bond. The director shall, upon receipt of any such deposit of cash, securities or certificates, promptly place the same with the Treasurer of the State of West Virginia whose duty it shall be to receive and hold the same in the name of the state in trust for the purpose of which the deposit is made when the permit is issued. The operator shall be entitled to all interest and income earned on the collateral securities filed by such operator. The operator making the deposit shall be entitled from time to time to receive from the State Treasurer, upon the written approval of the director, the whole or any portion of any cash, securities or certificates so deposited, upon depositing with the Treasurer in lieu thereof, cash or other securities or certificates of the classes herein specified having value equal to or greater than the amount of the bond.

(e) When an operator has furnished a separate bond from a corporate bonding or surety company to drill, fracture or stimulate an oil or gas well and the well produces oil or gas or both, its operator may deposit with the director cash from the sale of the oil or gas or both until the total deposited is $5,000. When the sum of the cash deposited is n $5,000, the separate bond for the well shall be released by the director. Upon receipt of such cash, the director shall immediately deliver the same to the Treasurer of the State of West Virginia. The Treasurer shall hold such cash in the name of the state in trust for the purpose for which the bond was furnished and the deposit was made. The operator shall be entitled to all interest and income which may be earned on the cash deposited so long as the operator is in full compliance with all laws, rules relating to the drilling, redrilling, deepening, casing, plugging, abandonment and reclamation of the well for which the cash was deposited and so long as the operator has furnished all reports and information as may be required by the director. If the cash realized from the sale of oil or gas or both from the well is not sufficient for the operator to deposit with the director the sum of $10,000 within one year of the day the well started producing, the corporate or surety company which issued the bond on the well may notify the operator and the director of its intent to terminate its liability under its bond. The operator then shall have 30 days to furnish a new bond from a corporate bonding or surety company or collateral securities or other forms of security, as provided in the next preceding paragraph of this section with the director. If a new bond or collateral securities or other forms of security are furnished by the operator, the liability of the corporate bonding or surety company under the original bond shall terminate as to any acts and operations of the operator occurring after the effective date of the new bond or the date the collateral securities or other forms of security are accepted by the Treasurer of the State of West Virginia. If the operator does not furnish a new bond or collateral securities or other forms of security, as provided in the next preceding paragraph of this section, with the director, the operator shall immediately plug, fill and reclaim the well in accordance with all of the provisions of law and rules applicable thereto. In such case, the corporate or surety company which issued the original bond shall be liable for any plugging, filling or reclamation not performed in accordance with such laws and rules.

(f) Any separate bond furnished for a particular well prior to the effective date of this chapter shall continue to be valid for all work on the well permitting prior to July 11, 1985; but no permit shall hereafter be issued on such a particular well without a bond complying with the provisions of this section. Any blanket bond furnished prior to July 11, 1985 shall be replaced with a new blanket bond conforming to the requirements of this section, at which time the prior bond shall be discharged by operation of law; and if the director determines that any operator has not furnished a new blanket bond, the director shall notify the operator by certified mail, return receipt requested, of the requirement for a new blanket bond; and failure to submit a new blanket bond within sixty days after receipt of the notice from the director shall work a forfeiture under subsection (i) of this section of the blanket bond furnished prior to July 11, 1985.

(g) Any such bond shall remain in force until released by the director and the director shall release the same upon satisfaction that the conditions thereof have been fully performed. Upon the release of any such bond, any cash or collateral securities deposited shall be returned by the director to the operator who deposited same.

(h) Whenever the right to operate a well is assigned or otherwise transferred, the assignor or transferor shall notify the department of the name and address of the assignee or transferee by certified mail, return receipt requested, not later than five days after the date of the assignment or transfer. No assignment or transfer by the owner shall relieve the assignor or transferor of the obligations and liabilities unless and until the assignee or transferee files with the department the well name and the permit number of the subject well, the county and district in which the subject well is located, the names and addresses of the assignor or transferor, and assignee or transferee, a copy of the instrument of assignment or transfer accompanied by the applicable bond, cash, collateral security or other forms of security, described in §22-6-12, §22-6-14, §22-6-23 or §22-6-26 of this code, plugging assurance as required by §22-6-6a of this code and the name and address of the assignee's or transferee's designated agent if assignee or transferee would be required to designate such an agent under §22-6-6 of this code, if assignee or transferee were an applicant for a permit under said section six:  Provided, That plugging assurance is not required if the well is providing free gas to a residence or farm facility, and: (1) The operator furnishes to the Chief of the Office of Oil and Gas a current certification from an owner or occupant of the residence or farm facility that the well is providing free gas; and (2) the well is not causing pollution on the surface, subsurface, or groundwater, or otherwise creating a present risk to public safety of persons or property. Every well operator required to designate an agent under this section shall within five days after the termination of such designation notify the department of such termination and designate a new agent.

Upon compliance with the requirements of this section by assignor or transferor and assignee or transferee, the director shall release assignor or transferor from all duties and requirements of this article, and the deputy director shall give written notice of release unto assignor or transferor of any bond and return unto assignor or transferor any cash or collateral securities deposited pursuant to §22-6-12, §22-6-14, §22-6-23, or §22-6-26 of this code.

(i) If any of the requirements of this article or rules promulgated pursuant thereto or the orders of the director have not been complied with within the time limit set by the violation notice as defined in sections §22-6-3, §22-6-4, and §22-6-5 of this code, the performance bond shall then be forfeited.

(j) When any bond is forfeited pursuant to the provisions of this article or rules promulgated pursuant thereto, the director shall give notice to the Attorney General who shall collect the forfeiture without delay.

(k) All forfeitures shall be deposited in the Treasury of the State of West Virginia in the special reclamation fund as defined in §22-6-29 of this code.

§22-6-26a. Plugging assurance.

(a) The Chief of the Office of Oil and Gas shall set an estimated future plugging cost for each type of well for which plugging assurance is required based on: 

(1) The date the well was drilled;

(2) The engineering design of the well;

(3) The formation or formations from which it is producing;

(4) The expected amount of time during which the well will produce in paying quantities;

(5) An estimated rate of inflation of the cost of plugging;

(6) The administrative costs to the State Treasurer and the Office of Oil and Gas to administer the plugging assurance method chosen by the operator, which cost the State Treasurer is authorized to deduct from the well plugging funds and pay the costs to the Treasure’s banking services account and to an Office of Oil and Gas account; and

(7) Any other relevant data at the discretion of the Chief of the Office of Oil and Gas.

The operator may contest an estimated future plugging cost established by the Chief of the Office of Oil and Gas for a well for which plugging assurance is required using certified estimates from registered professional engineers in conjunction with other licensed professionals knowledgeable in the fields of petroleum engineering and finance who have experience with reservoir development and plugging.

(b) When plugging assurance is required by this section, the assurance may be satisfied by one of the following methods:

(1) Bonding. — A single well bond which meets the requirements of the Office of Oil and Gas as determined by the State Treasurer and which is equal to the estimated future plugging cost for the well: Provided, That self-bonding is prohibited.

(2) Cash or collateral. — A deposit of cash or collateral with the State Treasurer which meets the requirements of the Office of Oil and Gas and is equal to the estimated future plugging cost for the well.

(3) Escrow account. — The operator may establish and make payments into an escrow account with the State Treasurer for estimated future plugging costs. The State Treasurer shall establish the escrow account when requested by the operator and shall accept and deposit payments therein. Payments to the escrow account shall require proportionately higher payments during current production and decrease as production declines. The payment schedule into the escrow account for the estimated future plugging costs for the well shall be determined by the Chief of the Office of Oil and Gas in consultation with the State Treasurer considering the following criteria:

(i) Production estimates made by the Chief of the Office of Oil and Gas;

(ii) Estimated prices for the product from recognized futures exchanges or other estimates made by the Chief of the Office of Oil and Gas;

(iii) Estimated future plugging costs; and

(iv) Earnings and discount rates estimated by the State Treasurer.

(4)(A) Staggered assurance payments. -– For wells that are not producing in paying quantities on or before December 31, 2019, and not providing free gas to a residence or farm facility and: (1) The operator furnishes to the Chief of the Office of Oil and Gas a current certification from an owner or occupant of the residence or farm facility that the well is providing free gas; and (2) the well is not causing pollution on the air, surface, subsurface, or groundwater, or otherwise a creating a present risk to public safely of persons or property, if an operator chooses to provide plugging assurance in cash or collateral, an operator may furnish plugging assurance at a rate of 20 percent of the estimated future plugging cost for the well for five years: Provided, That the operator demonstrates to the satisfaction of the Chief of the Office of Oil and Gas that an unjust hardship to an operator will occur as a result of the financial responsibility requirements of this section.

 (c) If the operator posts plugging assurance in the form of cash or collateral, the State Treasurer shall hold the funds in an account in the State Treasury and shall invest the funds with the West Virginia Board of Treasury Investments.  All interest or other earnings in excess of the estimated future plugging cost shall be paid yearly to the operator by the State Treasurer.

(d) The funds to plug the well, for which the escrow account was established, shall be paid by the State Treasurer to the operator or to the contractor or contractors selected by the operator to plug the well once the Chief of the Office of Oil and Gas certifies that the well has been plugged according to all lawful requirements. Excess funds and earnings in excess of actual plugging costs may be credited toward future assurance payments for other wells or shall be refunded to the operator within 60 days of plugging certification by the Chief of the Office of Oil and Gas. 

(e) The State Treasurer is authorized to deduct the costs incurred to administer the program by the State Treasurer and by the Office of Oil and Gas once a year after providing notice and a summary of the incurred costs to the operator and pay the costs to the Treasure’s banking services account and to an Office of Oil and Gas account.

(f) Nothing in this section may be interpreted or deemed to require plugging assurance or plugging of a well by a mineral owner or surface owner.

ARTICLE 10. ABANDONED WELL ACT.

§22-10-6. Establishment of priorities for plugging expenditures.

(a) Within one year of the effective date of this article, the director shall promulgate legislative rules establishing a priority system by which available funds from the Oil and Gas Reclamation Fund, established pursuant to §22-6-29 of this code, will be expended to plug abandoned wells. The rules shall, at a minimum, establish three primary classifications to be as follows:

(1) Wells which are an immediate threat to the environment or which may hinder or impede the development of mineral resources of this state so as to require immediate plugging;

(2) Wells which are not an immediate threat to the environment or which do not hinder or impede the development of mineral resources of this state, but which should be plugged consistent with available resources; and

(3) Wells which are not a threat to the environment and which do not hinder or impede the development of mineral resources of this state and for which plugging may be deferred for an indefinite period.

(b) Such The classifications shall, among other things, take into consideration the following factors, as appropriate:

(1) The age of the well;

(2) The length of time the well has been abandoned;

(3) The casing remaining in the well;

(4) The presence of any leaks either at the surface or underground;

(5) The possibility or existence of groundwater contamination;

(6) Whether the well is located in an area to be developed for enhanced recovery;

(7) Whether the well hinders or impedes mineral development; and

(8) Whether the well is located in close proximity to population.

(c) Notwithstanding the other provisions of this section, the bond posted for a specific well shall first be used to plug the well or correct or mitigate problems or issues on the land where the well is located if:

(1) The bond is forfeited as a result of failure to plug an abandoned well or repair a well that is causing immediate threat to the environment or which hinders or impedes the development of mineral resources of this state;

(2) The operator was cited for and then failed to correct an immediate threat to the environment or hinderance or impediment to the development of mineral resources of this state with the well or the well site; or

(3) The operator failed to reclaim surface disturbance causing immediate threat to the environment or which hinders or impedes the development of mineral resources of this state.

NOTE: The purpose of this bill is to require “plugging assurance” for an oil or gas well that is transferred from one operator to another in order to prevent additional orphaned wells with no solvent operator to plug them. This problem is in part caused by operators who can afford to plug wells transferring them to operators who will not be able to plug wells and who, under current law, only have to post one $50,000 “blanket” “performance” bond no matter how many wells they operate. The bill requires money that results from the forfeiture of an oil and gas operator’s bond as a result of the operator’s failure to plug a well or otherwise comply with state statutes and rules to first be applied to correct or mitigate an immediate threat to the environment or hindrance or impediment to the development of mineral resources of this state that caused the forfeiture of the bond.

Strike-throughs indicate language that would be stricken from a heading or the present law and underscoring indicates new language that would be added.