Last October, California passed the nation’s strongest law to address the glut of oil and gas wells that are unplugged and ownerless, many leaking pollutants into the environment.

The legislation required that, as part of any sale or transfer of wells, the purchasing company set aside enough money in financial instruments known as bonds to cover the entire cleanup cost of low-producing wells if the companies go out of business without plugging them. It was a striking departure from the piecemeal steps taken by other state legislatures and federal agencies to reduce the number of orphan wells. California lawmakers repeatedly cited ProPublica’s work on the subject as a reason to act.

But in its first major test, California regulators sidestepped the law.

The California Geologic Energy Management Division, the state’s oil regulatory body, announced in late June that the law does not apply to the merger of California Resources Corp. and Aera Energy, two of the three companies that account for the vast majority of the state’s oil and gas production. If the law had been enforced, the deal would have provided billions of dollars in new bonds to ensure taxpayers weren’t eventually left with the cleanup bill.

Department of Conservation Director David Shabazian explained the agency’s decision in a letter to Assemblymember Wendy Carrillo, the Los Angeles Democrat who sponsored the new law. The bonding requirements “do not apply to stock transfers, nor does the law make any mention of such transactions,” Shabazian wrote. In other words, because Aera is still listed as the operator of the wells, the state can’t act.

That explanation did not appease Carrillo.

“This deal is exactly why we passed AB 1167, the Orphaned Well Prevention Act,” she said in an email to ProPublica and Capital & Main. “If a company is drilling for oil in California, they should be responsible for cleaning and closing that oil well. Not enforcing the law as intended sets-up our state for a potential financial catastrophe.”

The merger created the largest oil company in the state, with about 16,000 idle wells, which neither produce oil and gas nor are plugged and are at a higher risk of becoming orphans. That’s 40% of the total number of idle wells in the state.

“It’s an absurd interpretation of the law,” said Kyle Ferrar, who helped write AB 1167 as Western program coordinator with environmental group FracTracker Alliance. “They’re essentially creating a model to get around this bill.”

Richard Venn, a California Resources spokesperson, said in an emailed statement that the companies have plugged more than 5,000 wells and “have active and well-established programs for managing the full life cycle of wells and we have the size and financial resources to address all of our plugging obligations. The merger strengthens those resources.”

“Enormous Dereliction of Duty”

In December, the California Geologic Energy Management Division wrote to the state’s oil companies notifying them that they should submit paperwork before completing “any acquisition” — agency staff bolded those words — to assist the state in determining necessary bonding levels under AB 1167. “This notice is to ensure that operators are aware of new bonding requirements that must be complied with in advance of acquiring certain wells and production facilities,” regulators wrote.

But the state concluded the California Resources and Aera merger didn’t trigger the bonding requirements because of the way it was structured.

In the state’s letter explaining regulators’ reasoning, Shabazian wrote that “if the operator of the well remains constant, changes in ownership of the operator’s holding company do not require new bonds.”

If regulators had applied the law to the merger, California Resources would have been required to put up an estimated $2.4 billion bond to guarantee Aera’s wells will be plugged, according to an analysis of state data. In comparison, that’s about eight times the total value of all outstanding cleanup bonds for all oil companies in the state.

Instead, Aera will continue operating with only a $3 million bond.

“This particular transaction is itself tremendously consequential, potentially the most consequential transaction that the state will see,” said Kassie Siegel, a senior counsel with the environmental group the Center for Biological Diversity.

Siegel worries that the state’s “enormous dereliction of duty” opens a loophole for the industry. Regulators are “creating a roadmap for other companies to similarly evade the law,” she said.

The agency’s decision also came after Aera spent about $250,000 lobbying in California in the first quarter of the year, including on “1167 implementation,” according to the company’s lobbying disclosure form.

Neither Aera nor state regulators answered questions about the company’s lobbying.

Despite California Resources’ assertions that the company resulting from the merger is financially stable, it faces serious challenges.

California Resources was formed when Oxy Petroleum spun off its West Coast assets, and the company has already gone through Chapter 11 bankruptcy. California Resources acknowledged in filings with the U.S. Securities and Exchange Commission that the merger left it and Aera with more than $1 billion in impending cleanup costs between them. In the records, the company also suggested that some of its key assets will reach the end of their economic lives in the coming years.

Aera, meanwhile, was sold by Shell and ExxonMobil in 2022 and ended up in the hands of German asset management group IKAV, investment fund Oaktree Capital Management and the Canada Pension Plan Investment Board.

IKAV did not respond to requests for comment, while the Canada Pension Plan Investment Board and Oaktree declined to answer questions.

The office of Gov. Gavin Newsom, who signed AB 1167 into law with a warning that it might need to be amended, also did not answer questions about whether he agreed with his agency’s interpretation of the legislation.