Well-plugging costs add wrinkle to San Francisco’s planned oil pullout

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This much is clear about San Francisco’s plan to withdraw itself from Kern County oil production: It isn’t going to be cheap. Question is, who’s going to pay for it?

The answer has yet to emerge from ongoing negotiations between the city and Chevron Corp., which has for decades operated 82 active wells on San Francisco’s behalf in the Kern River Oil field.

From the city’s perspective, Chevron should cover the cost of “abandoning” the wells, a highly regulated and costly process that involves using cement to permanently seal the bores.

“While I can’t get into specifics of our negotiations with Chevron, we believe our lease assigns decommissioning responsibilities to the tenant, in this case, Chevron,” John Updike, senior real estate project manager for the City and County of San Francisco, wrote in an email last week.

Chevron has declined to say publicly whether it agrees with that assessment. But the fact that the matter is still under discussion as part of a broader negotiation may suggest the company is not ready to concede the point as it tries to work out a deal on how to wind down its lease of some 800 acres of city-owned land, a quarter of which is used for oil production.

ENVIRONMENTAL POLICY

The well-abandonment question has arisen as part of San Francisco’s 2016 ordinance requiring that no city-owned property be used for oil production. The keep-it-in-the-ground policy was crafted specifically to address Chevron’s lease, which officials felt was contradictory to San Francisco’s efforts to combat climate change.

Instead of oil production, San Francisco officials said they intend to convert the land, particularly the northern portion used for cattle grazing, into wildlife habitat.

The city did not buy the property but received it in 1941 as part of a 1,500-acre donation. The land’s oil production royalties have averaged lately about $24,000 per month.

That money helps pay for upkeep at Golden Gate Park and fund San Francisco’s public library system. The royalty revenues are expected to end once Chevron’s lease expires at the end of March.

ROUGH ESTIMATES

Updike estimated the oil abandonment costs at between $1 million and $5 million. People in the industry locally say that may be about right, considering the average cost of such a procedure is about $50,000 per well.

But they emphasize that’s a best-case scenario. If any of the well bores are damaged, industry observers said, expensive repair work may be in order, dramatically raising the job’s total cost.

“The abandonment costs can vary widely depending on the condition of the well,” said Steve Layton, president of Bakersfield-based oil producer E&B Natural Resources Management, which is not involved in the negotiations.

He added that estimating the project’s costs is a “tricky question” without knowing the details of each well. Abandoning a problem well can cost a “very large sum,” he said.

A SPECIAL CASE

Several oil industry professionals said assigning financial responsibility for the work could also be difficult because of the novelty of the situation. They said it’s exceedingly rare for landowners to try to shut in oil wells on their property, and that the more common approach taken by someone opposed to petroleum production is to turn over the property to a family member who’s not against the practice.

“I just don’t know who’s liable for that” well-abandonment expense, said Bakersfield resident Ed Hazard, president of the California chapter of the National Association of Royalty Owners.

Never having seen a comparable situation, Hazard said the lease agreement between San Francisco and Chevron probably spells out who has responsibility for abandoning the wells. Even so, he said, leases generally are held “in perpetuity,” meaning they remain in effect as long as everyone involved makes money.

LONGSTANDING AGREEMENT

San Francisco’s lease to Chevron dates to 1993, when amendments were made to an earlier lease signed in 1963 with Shell Oil Co. San Francisco records state the municipality receives 15.5 percent of the oil revenue from the property, with the rest going to Chevron.

Bakersfield oil and gas consultant Fred Rappleye, who like Hazard had no direct knowledge of Chevron’s lease or the company’s ongoing negotiations with San Francisco, agreed it’s unusual for an oil lease agreement to have an expiration date.

Rappleye said he suspects the company isn’t anxious to let the lease end and watch the land revert to habitat.

“Chevron probably doesn’t want to do it,” he said, “because there’s probably still some oil around.”