By Kris Rosemann
On October 23, 2015, Southern California Gas Company, an indirect subsidiary of Sempra Energy (SRE), discovered a leak at one of its injection and withdrawal wells at its Aliso Canyon natural gas storage facility, which is located in the northern part of the San Fernando Valley in Los Angeles County about 20 miles from downtown Los Angeles. The facility is the largest underground storage facility on the West Coast.
The well is more than one mile away and 1,200 feet above the nearest residences, and is one of more than 100 injection and withdrawal wells at the storage facility. Despite spewing copious amounts of dangerous gases–including methane–into the atmosphere, the company has stated that the leak has not inhibited its ability to provide adequate service to its customers.
Perhaps servicing customers should not be Sempra’s priority at this point, however. The Environmental Defense Fund (EDF), a non-profit group, has called the leak “one of the biggest leaks we’ve ever seen reported” and “absolutely uncontained.” The direct cause of the leak has yet to be determined, but Southern California Gas Company officials suggest an underground well casing may have failed, which allowed the pressurized gas to push through geological cracks to the earth’s surface.
Southern California Gas Company has made 7 attempts to stop the leak by pumping fluids down the well shaft; none of these efforts have been successful. The company has since given up such efforts and began drilling a relief well that is designed to stop the leak by plugging the well in question at its base on December 4. It is preparing to drill a back-up relief well as well as a precautionary measure should the primary relief well not fulfill its purpose. The primary relief well will not be completed until the end of February at the earliest and has the potential to take until the end of March to be completed.
As part of its efforts to reduce the natural gas emissions, the company continues to withdraw and has not injected natural gas into the facility in question since October 25. As of the end of 2015, ~33 billion cubic feet (Bcf) of natural gas has been delivered to customers or moved to other storage facilities, reducing the amount of gas in the storage facility to ~44 Bcf from the ~77 Bcf when the leak was discovered. Based on information from the California Air Resources Board (CARB), the leak rate appears to have declined significantly since CARB began providing estimates in early November. However, any estimate at this point is purely speculation, according to the company, and it will conduct an objective measurement of natural gas lost from the leak.
As a result of the leak, nearby residents have reported health symptoms that are directly tied to the high amount of gas in the air. Though it is not expected to cause any long-term effects, cases of eye, nose and throat irritation, coughing and nasal congestion, shortness of breath, nausea, stomach discomfort, dizziness and headaches all have been reported by nearby residents. As of January 3, approximately 2,500 households have been relocated at the expense of Southern California Gas Company, and another 1,460 households have requests for relocation pending. The company is also required to fund the additional labor hours the state has been forced to employ to regulate the situation.
Several government agencies, including the California Division of Oil, Gas and Geothermal Resources (DOGGR), the LA County DPH, the South Coast Air Quality Management District, the CARB, the California Public Utilities Commission (CPUC), the U.S. Environmental Protection Agency, the Los Angeles District Attorney’s Office and the California Attorney General’s Office, are investigating the situation, and are expected to levy fines or other penalties due to the incident.
In addition to the potential monetary punishment from government agencies, 25 legal complaints have been filed against both Southern California Gas Company and Sempra Energy. Many of these complaints are seeking class action status, as well as compensatory and punitive damages and attorneys’ fees. The Los Angeles City Attorney has also filed a complaint against Southern California Gas Company seeking to impose civil penalties. The cost of defending these lawsuits and the potential corresponding damages could be significant, according to the company.
As of the end of 2015, Southern California Gas Company had spent $50 million addressing the situation surrounding the leak. The company is not expecting the leak to be fixed for nearly two to three months, causing us to believe this figure will grow materially before the situation is resolved. This number is simply the amount it has already spent, and does not take into account the potential for material fines and legal costs and awards, which will be the largest monetary blow to the company.
Southern California Gas Company is not without a degree of protection against the current and expected claims, losses, and litigation. The firm has at least four types of insurance policies, and these policies have a total combined limit available in excess of $1 billion. The company does not expect the deductibles on these policies to be material.
Despite the fact that Southern California Gas Company does not expect its deductible payments to be material, there is material potential for the leak to put incremental pressure on the company and its peers. California Governor Edmund Brown declared a state of emergency in Los Angeles County due to the leak. The proclamation includes standard political talk of stopping the leak, protecting the public and ensuring accountability, but perhaps the most meaningful portion of the release is the portion demanding strengthened oversight. This will require companies that have natural gas storage facilities to materially ramp up its efforts to prevent future leaks. Additionally, the DOGGR, the CPUC, the CARB and the California Energy Commission will submit to the Governor’s Office a report that assesses the long-term viability of natural gas storage facilities in California.
Some have also called for a more direct tie between CEO compensation and a utility company’s environmental impact after Sempra Energy CEO Debra Reed collected a $13.1 million bonus–based on Sempra’s stock market performance–on January 4 despite a state of emergency being declared due to her company’s failing infrastructure just two days later. In 2014, the firm reported her collecting $16.9 million in total compensation despite Southern California Gas Company’s pipeline safety and distribution integrity system suggesting she should have received no more than $35,000. Perhaps if this capital was allocated more prudently, the firm could have avoided what has been called the worst environmental catastrophe in the US since the BP spill in the Gulf of Mexico in 2010.
Legal experts have stated that government agencies are likely to be much more lenient towards a utility like Southern California Gas Company that they deal with on a frequent basis, which may force residents to battle the company in court. Lawyers may end up targeting the company’s $1 billion insurance policies as a floor for damages instead of a ceiling, as the firm may be looking at it. Also, PG&E (PCG), another west coast utility, recently had a record $1.6 billion fine levied against it by California regulators related to a natural gas explosion that killed 8 people in 2010. Though there have been no human and physical property damages in the Aliso Canyon situation, there are unknown issues of health and safety, as well as a loss in property value.
All things considered, we aren’t making any predictions related to this case, but the situation is certainly worth keeping an eye on. The leak will not be fixed before the end of February or March, and there is no guarantee that it will be fixed in that timeframe, as the company’s efforts have proved to be futile thus far. This only increases the probability for material action to be taken by both state and local government and nearby residents. The increasing regulatory pressure might be the largest threat to the long-term health of Southern California Gas Company and Sempra Energy.
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