LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE, 77th Regular Session May 10, 2001 TO: Honorable J.E. "Buster" Brown, Chair, Senate Committee on Natural Resources FROM: John Keel, Director, Legislative Budget Board IN RE: HB1317 by Farabee (Relating to financial security requirements for certain oil well operators.), As Engrossed ************************************************************************** * Estimated Two-year Net Impact to General Revenue Related Funds for * * HB1317, As Engrossed: positive impact of $0 through the biennium * * ending August 31, 2003. * * * * The bill would make no appropriation but could provide the legal * * basis for an appropriation of funds to implement the provisions of * * the bill. * ************************************************************************** General Revenue-Related Funds, Five-Year Impact: **************************************************** * Fiscal Year Probable Net Positive/(Negative) * * Impact to General Revenue Related * * Funds * * 2002 $0 * * 2003 0 * * 2004 0 * * 2005 0 * * 2006 0 * **************************************************** All Funds, Five-Year Impact: ************************************************************************** *Fiscal Probable Probable Revenue Change in Number of * * Year Savings/(Cost) from Gain/(Loss) from Oil State Employees from * * Oil Field Cleanup Field Cleanup FY 2001 * * Account/ Account/ * * GR-Dedicated GR-Dedicated * * 0145 0145 * * 2002 $(106,500) $(40,000) 1.0 * * 2003 (43,000) (25,000) 1.0 * * 2004 (427,000) (15,000) 1.0 * * 2005 (85,000) (4,000,000) 1.0 * * 2006 (63,000) (3,800,000) 1.0 * ************************************************************************** Technology Impact According to the Railroad Commission (RRC), the technological impact would be limited to programming. Costs are estimated to be $36,000 in FY 2002 to perform the programming changes concerning transfer of active and inactive wells from one operator to another. Programming in FY 2004 is estimated at $384,000 to implement changes resulting from universal bonding. This estimate includes 3 contract programmers (3200 hours). Fiscal Analysis The bill would replace current financial security requirements, which include various cash options for which operators may be eligible, with higher bond, letter of credit or cash deposit requirements. According to the RRC, the bill would simplify the financial security program for wells and would eliminate much of the administrative work associated with all of the current options. An inactive operator or an operator with land wells would be required to file a minimum financial security of $25,000 for 0-10 wells, $50,000 if the person operates at least 11 but not more than 100 wells; or $250,000 if the person operates more than 100 wells. In addition, operators would be required to file financial security in a reasonable amount established by Commission rule for bay or offshore wells. New language was added requiring an operator be bonded before transfer of ownership for active or inactive wells. Bond, letter or credit, or cash deposit amounts prescribed by this Section may be used only for actual well plugging and surface remediation. The bill also outlines the financial security requirements for commercial disposal facilities and reclamation plants. The changes in law made regarding financial security required for inactive operators, certain active operators and disposal site operators would require a person to file a bond or alternate financial security on or after September 1, 2004. The changes made regarding transfer of wells would require a person to file a bond, letter or credit or cash deposit on or after the effective date of this bill. Methodology In its methodology, the RRC assumed that all fiscal impacts will be to the Oil Field Cleanup Dedicated Account (OFCU). According to the RRC, in FY 2002-04, there would be a decrease in the amount of funds coming in with W-1X s associated with the transfer of inactive wells from one operator to another unbonded operator. RRC staff estimated the loss of revenue for W-1Xs filed for inactive well operator-change P-4 s to unbonded operators to be $40,000 in FY 2002 and $25,000 in FY 2003, and $15,000 in FY2004. In Field Operations, one Engineering Specialist I, (at a cost of approximately $43,000 per year, benefits included) a personal computer ( at a cost of $2,500), and a vehicle (at a cost of $25,000) would be required in FY 2002, FY 2003, and FY2004 to perform additional inspections associated with operator transfer of inactive wells that must be bonded as of September 1, 2001. In FY 2002, RRC staff estimated that $36,000 in programming costs would be necessary to make the revisions resulting from the bill on top of the currently underway 14(b)(2) rewrite to adapt the system for non-W-1X filings of individual bonds (as a result of recent rule amendments adopted by the commission). In FY 2004, additional programming, at an estimated cost of $384,000 (3 contract programmers at $120/hour for 3,200 hours), will be necessary to complete the program modifications to reflect the requirements of the bill. In FY 2005 and beyond, the RRC estimates that when the remaining financial security requirements become effective, the loss to the fund will be the full $4,000,000 as all wells will be required to have a bond, Letter of Credit or cash deposit. RRC staff assumed that no or very few operators would select the option of a cash deposit. Beginning in FY 2005, two (2) additional Engineering Specialist I s and one additional vehicle will be required to perform increased compliance inspections for inactive wells. However the agency would eliminate two administrative technicians positions as a result of the provisions of the bill for a net increase of approximately $20,000 each year. Local Government Impact According to the RRC, local government may see some negative fiscal impact in the way of a reduction in tax revenues from a decreased tax base as a result of decreased production and closure of other oil and gas facilities for which the operators cannot obtain the required financial security. There should be no administrative cost impact to local government. Source Agencies: 455 Railroad Commission of Texas LBB Staff: JK, CL, SD, SK