Oil producers ready to drill amid relatively high, stable prices

BY JOHN COX jcox@bakersfield.com Mar 25, 2019 1

Optimism is strong among local oil producers that recently healthy barrel price levels will hold steady enough to justify new investment through the end of this year, even as market-related conditions remain in flux and state regulatory complications threaten to sideline proposed drilling and other oilfield projects.

Kern County oil companies large and small are expressing confidence that local crude prices, ranging lately in the $60 to $70 range, are high enough for them to at least maintain their current levels of production. Some say they plan to ramp up production in 2019, which would help the local economy even if it doesn’t necessarily translate to expanded payrolls.

“I see this range we’re in maintaining for the rest of the year,” said local independent producer Ken Hunter, who expressed encouragement about what he said appear to be new oil discoveries in the area of Old River Road and Highway 166. “I think the price is sufficient to support more drilling going forward.”

The local industry’s positive outlook is tempered by factors outside its control, such as worries prices could fall as a result of a slowing global economy. There is also growing frustration with permitting delays caused in part by dual project reviews by two separate state agencies.

“Money is timid,” said local independent producer Chad Hathaway, referring to lenders’ hesitance to fund drilling in a state where regulatory processes offer no clear path to project approval. “They’d rather go somewhere they feel safe.”

Stability and uncertainty

Relatively stable prices have lifted the outlook. Although prices dropped near the end of last year, leading to a decline in the number of onshore drilling rigs active in California, both measures quickly picked back up again.

On Friday, the industry benchmark Baker Hughes rig count showed 15 active rigs in the state, up from January’s average of eight. All last year the monthly average dropped no lower than 14 rigs.

Price volatility remains a threat as Venezuela, a major oil producer, continues to suffer through a shaky political situation. Also, it remains unclear whether the Trump administration will continue to waive certain restrictions on Iranian oil exports.

Despite all that, supply and demand appear to be balanced and the industry looks healthy, said veteran Bakersfield oilman Gene Voiland.

“I just don’t see any real movement, pending some crazy stuff in the world,” he said. “I would say the industry is healthy.”

Fred Holmes, the dean of local oil production agreed the current pricing environment looks positive, adding, “We’re holding our own.”

One of the largest local producers of oil and gas, Chatsworth-based California Resources Corp., said it expects to spend between $300 million and $385 million this year, much of it in local oilfields. It said that should be enough to maintain existing activity levels while offering operational flexibility in case market conditions change.

Regulatory concerns

Several smaller producers voiced impatience with the pace of oilfield project reviews by the state Division of Oil, Gas and Geothermal Resources — historically the primary regulator of petroleum production in California — and the Central Valley Regional Water Quality Control Board, which in recent years has seen its oversight of oil projects expand.

Such complaints are not new but their persistence in the face of industry and political pressure from Kern County has become a source of growing frustration.

Hunter said conventional oil project proposals tend to win approval in a straightforward and timely manner these days. But those involving wastewater injection or enhanced recovery technologies, such as those using steam, take a painfully long time lately, he said.

DOGGR issued a statement saying it has approved 601 oilfield permits so far this month and that 299 applications remain to be processed, 141 of them for drilling projects. The agency said it has processed 7,408 permits since May.

Steve Layton, president of E&B Natural Resources Management, a medium-size oil producer based in Bakersfield, said it’s not so much a question of whether project applications will be approved but when. He said the reason appears to be the dual-agency review process.

He said the resulting uncertainty deters investment that would otherwise bring about a significant increase in local economic activity.

But it’s unclear whether such investment would lead to a boom in conventional employment.

Employment link

Hiring in local oilfields has been constrained since prices plummeted in mid-2014, and many companies now rely heavily on contract workers, an arrangement that gives them greater flexibility than bringing on full-time employees.

“It’s just the nature of the business,” Layton said. “Those (contract) jobs are just as important as the jobs of the people working for the oil companies. We can’t forget that. They are all jobs and they’re good jobs.”

Layton said he remains positive about the year ahead.

“I do see a solid year ahead of the industry,” he said. “There are a lot of projects that are on the books that our companies have that are being reviewed by the various agencies.”

“Assuming the permits come through,” he added, “I think you’ll see a good bit of activity.”

John Cox can be reached at 661-395-7404. Follow him on Twitter: @TheThirdGraf. Sign up at Bakersfield.com for free newsletters about local business.