This article was published by The Energy Mix on April 23, 2024.
By Christopher Bonasia
The pension contributions of millions of Canadians are propping up a California gas company that stands to own 40 per cent of the state’s idle oil wells, even as stricter state regulation on well cleanup and a new court ruling bring to light the financial perils linked with such investments, The Energy Mix has learned.
The Canada Pension Plan Investment Board (CPP Investments), which manages pensions for nearly all Canadian workers outside Quebec, owns 49 per cent of California’s Aera Energy. In February, oil producer California Resources Corporation (CRC) revealed plans to acquire Aera, potentially creating the state’s largest oil and gas company. Such a merger would expose CPP’s investment to new regulations, including a bond requirement for CRC to cover the US$1.2-billion cost of plugging its idle wells.
Furthermore, a recent Kern County court ruling increases the stringency of well permitting requirements, which could impede the new company’s growth.
The investment catches Canadians’ hard-earned savings in a troubling double bind—a fossil fuel company’s risk of operational and financial failure amid tightening regulation, or conversely, soaring success that comes with soaring emissions, ultimately threatening the safe climate that pensioners expect to enjoy and today’s work force expects to retire into.
Overall, CPP Investments’ share in Aera amounts to “chump change” for the fund, Patrick DeRochie, senior manager with Shift Action for Pension Wealth and Planet Health, told The Energy Mix. Any such single investment—even if it is completely written off—won’t affect the fund’s ability to pay out Canadians’ pensions.
But the climate crisis itself could compromise the investment manager’s mandate, as “there is no retirement security for Canadians without a safe climate future to retire into.”
“The Canada Pension Plan might be able to weather a bad investment in a risky oil and gas producer,” DeRochie said. “But it can’t weather the catastrophic consequences of a world that allows the climate crisis to spiral out of control.”
CPP Investments should acknowledge that avoiding the worst effects of climate change demands a managed phaseout of fossil fuel production “instead of gambling our national retirement fund on fossil fuel assets that have to be phased out as rapidly as possible,” DeRochie added.
But as CPP Investments sees it, a climate strategy to lower emissions involves “working directly with high-emitting companies” to implement decarbonization action plans, a spokesperson told The Mix. They pointed to CPP Investments’ plans to expand its global offshore wind platform, Reventus Power, as evidence that it is also committed to increasing its green assets.
The Back Story
CPP Investments is a Canadian Crown corporation created to oversee and invest the funds contributed to and held by the Canada Pension Plan (CPP). It manages investments on behalf of more than 22 million Canadians, who pay into the fund and receive pensions when they retire. The firm is taking some positive steps to “navigate its portfolio through the energy transition,” Shift Action says, but “remains a significant owner of fossil fuel assets, including those that are expanding oil and gas production.”
Among the pension funds that Shift assesses, CPP Investments “stands out as the biggest investor in and defender of fossil fuel investment in the Canadian pension sector,” the organization states. This includes its 49 per cent stake in Aera Energy, which is among the top three holders of idle oil and gas wells in California, along with Chevron and CRC. After the planned merger between Aera and CRC, the new entity will become the largest holder of idle wells—while new legislation in California threatens to make that an even greater burden.
The Aera-CRC Merger
In February, CRC announced plans to buy Aera Energy for $2.1 billion in a merger that would more than double its production capacity. CRC said the deal would unlock potential for future carbon capture and storage (CCS) capacity through the available pore space in depleted wells, Oil Price reports.
Critics and climate advocates have said the merger is a “ploy for Aera to avoid plugging very low producing wells,” while allowing CRC to take advantage of California’s reliance on unproven CCS “to extend the lives of oil producers.”
“CRC has been a sponge for oil companies divesting low producing oil and gas wells in California,” said Kyle Ferrar, Western Program Coordinator for FracTracker Alliance, in a release co-written with Consumer Watchdog. “FracTracker research shows that average daily per well production for Aera is very low and it will be difficult for CRC to generate profit off of these wells to properly plug them, much less remediate the environmental contamination of Aera’s oil fields.”
That amounts to CRC and Aera “rearranging the deck chairs on the Titanic,” consumer advocate Liza Tucker said.
“Unfortunately, CCS is a false solution to transitioning off oil and gas,” she added. But when carbon is destined for a process the industry calls enhanced oil recovery (EOR), “compressed carbon injected into depleted wells and stored in underground reservoirs risks leaks into air and groundwater, and potentially catastrophic effects as well.”
Following the merger, if it goes through, the resulting entity will be the largest oil and gas producer in California, owning 40 per cent of the state’s idle wells. CPP Investments will hold an 11.2 per cent stake in the merged company.
New Orphan Well Legislation
Idle wells represent a financial liability because they’re expensive to decommission. It costs around $110,000 to shutter one well, so many companies put off or delay the process. In many cases, idle wells are not properly decommissioned when companies go bankrupt after previously purchasing retired wells at bargain basement prices from a larger company. In this case, the now unowned, idle wells become “orphaned” and the cost of their cleanup shifts to taxpayers.
Orphan wells have become a major problem in California, with a price tag of $23 billion to plug and remediate them all, the U.S. Sierra Club found [pdf] in 2023. “The enormity of the idle and orphan well crisis isn’t a coincidence, but an outcome of the industry’s powerful influence in California,” the report stated.
The state is addressing the issue with legislation. The Orphan Well Prevention Act (OWPA), previously Assembly Bill 1167, was signed into law in October to create “a process requiring the State Oil and Gas Supervisor to approve transfers of marginal oil and gas wells only once the full cost of well plugging and abandonment and site restoration is covered by a bond or other financial assurance mechanisms.”
Requirements exist for companies to post a bond for well cleanup, but in the past they have been able to buy a “blanket bond” that allows them to get away with covering only part of the full cost. Under that requirement, California holds a $3-million bond from Aera Energy, which would be enough to cover about $100 per well for cleanup if Aera goes out of business. Now OWPA will require oil company bonding to cover the full cleanup costs of abandoned wells during their a merger or a transfer to another company, explains Consumer Watchdog.
The planned CRC-Aera merger would be the first test of the new rule, and so far, California’s Geologic Energy Management Division (CalGEM)—which would oversee its enforcement—has not clarified how it intends to apply the rule to the new companies. But if it did, the required $1.2-billion bond would be a heavy lift for CRC, which reported net income of $564 million and about $468 million of free cash flow last year, says DeSmog.
When asked whether CPP Investments had any concerns about the potential application of the OWPA to the merger, the spokesperson declined to comment on what they declared a speculative question.
A new bill introduced this January, Assembly Bill 1866, would impose further financial requirements on the merged company’s idle wells. It would get rid of an option for companies to pay an idle well fee instead of closing them down, and would strengthen requirements around the decommissioning process. Operators would have to file a plan for managing and eliminating idle wells and penalized if they failed to plug a significant number of them. California’s top five operators—among which is CRC/Aera—would need to collectively plug more than 4,200 idle wells in just the first year of the law’s implementation, the U.S. Center for Biological Diversity (CBD) estimates.
A Flawed Environmental Review
A recent court ruling on the permitting process for oil and gas wells in California’s Kern County, where Aera and CRC own idle and operating wells, will also affect the financial viability of the merger. Judges ruled that the county violated the law with a flawed environmental review under the California Environmental Quality Act “by failing to adequately assess and mitigate the harms of oil and gas activities to air, water, health and farmland,” the CBD reports.
The “ruling sends a clear signal that cutting corners to drill won’t be tolerated at the expense of Kern’s air, water, and soil,” said Mercedes Macias, a Kern County organizer with the Sierra Club.
The court directed Kern County to set aside its permitting ordinance, a change that will affect the plans of the new merged entity. CRC did not reply to The Mix’s request for comment, but has informed its investors that the ruling could have an impact on anticipated operations if the company is unable to obtain new well permits in 2024.
Citing ongoing legal issues with the Aera-CRC merger, CPP declined to comment about how it might handle its investment in light of the Kern County decision. But between that and the OWPA, its stake in the merger presents a liability.
It’s hard to understand why CPP Investments would expose its fund to California’s largest oil and gas producer when the state is implementing “some of the toughest climate policies in the world,” DeRochie said.
“Even if California oil and gas producers weren’t facing massive cleanup liabilities and escalating regulatory, legal, financial and political, headwinds, the oil industry is facing inevitable, terminal, structural decline,” he said.
“Climate-smart investors won’t touch these companies with a 10-foot pole, so CPP Investments is really bucking the trend here.”
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