Friday, September 25, 2009
The Politics of Energy #23 - Oxy oil discovery could spark new interest in California's energy potential
The biggest find in the state in 35 years, somewhere in Kern County, could herald new exploration in California and the U.S., experts say. But some worry it could lead to a false sense of security.
(Editor's Note: California still ranks fourth in the nation behind the combined federal offshore drilling sites and Texas and Alaska. But you have to ask the question, "What oil company would want to do business in California?")
By Ronald D. White
A few years ago, Occidental Petroleum Corp. executive Stephen I. Chazen sounded like a cryptologist out of a Dan Brown novel as he told investors that an oil bonanza awaited any outfit that could "crack the code" of California's seismically fractured underground.
Occidental's engineers may have done it.
The Westwood company revealed in July that it had found the equivalent of 150 million to 250 million barrels of oil and natural gas in an undisclosed part of Kern County using techniques that the oil company's executives would rather not talk about. It was California's biggest find in 35 years.
Some experts say it could herald a period of new exploration in California and the U.S.
"Certainly this kind of success will send other people back to California to rethink the geology and rethink the theories of the area," said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates and author of the Pulitzer Prize-winning history of the oil industry "The Prize: The Epic Quest for Oil, Money and Power."
Joe Hahn knows firsthand the significance of finding that much crude in California.
A former oil reservoir engineer for Arco, now owned by oil giant BP, Hahn said that exploration in the state has been rife with failures and false leads.
"We had considerable acreage that turned out to be good as goat pasture," said Hahn, now a professor at Pepperdine University's Graziadio School of Business and Management. "It's very rare to have a find of this size" this late in California's oil-production history.
Despite steady declines in petroleum output to about 214.5 million barrels last year from about 394 million barrels at the 1985 peak, California still ranks fourth in the nation behind the combined federal offshore drilling sites and Texas and Alaska.
Bruce Bullock, executive director of the Maguire Energy Institute at Southern Methodist University in Dallas, said there has been renewed interest in many old oil regions long believed to have given up most or all of their crude.
"We're seeing quite a bit of activity," Bullock said. "A: They think they can find more oil; B: They think they can get it out of the ground."
Over the last decade, Occidental has been actively acquiring leases and drilling rights in California as most other big oil companies have been selling out. But Occidental executives weren't the only people who thought that California might have a surprising amount of oil left to exploit.
The U.S. Geological Survey travels the country to assess petroleum reserves and the potential for new discoveries. In 2003 and again in 2007, its geologists said that it was likely that an additional 4 billion barrels "may be added to reserves in existing oil fields."
As Occidental's Chazen put it, "We had a small amount of production in California, historically, but we made a commitment to explore in the state. Even so, it has taken us the better part of 10 years to get where we are now."
Occidental executives have kept secret both the location of the discovery and the methods used to find the new oil and natural gas field.
"The way we found it is obviously proprietary," said Chazen, the company president, who was a vice president when he tantalized investors about code cracking in 2001. "Other people might own acreage nearby that we will want to acquire."
Chazen wasn't above dropping hints about the holdings, which were painstakingly amassed over several years.
"Most of the land was not held by individuals. Most was held by some kind of corporation or institution, some by the federal government. This wasn't a redwood forest. If you had the water for it, you might be raising cotton, at best, on it. Some of it we owned. We have the oil rights to 1 million acres there," Chazen said.
In the company's latest earnings call with analysts and investors, Chazen said that the oil find "is most similar to deep-water discovery," later adding, "There is no good analogy that we can come up with that looks like this field anywhere in the Lower 48" states.
As soon as the discovery was announced, the race was on to figure out the location of Occidental's find. A few real estate agents turned into amateur sleuths, worried about the possibility that the oil might be next to some new client's home.
Residents were asked whether they had seen or heard any unusual activity. Analysts pored over geologist reports for what was formerly known as the Elk Hills Naval Petroleum Reserve and another naval preserve east of that site. Every drilling permit Occidental obtained since 2008 was reviewed. Taft City Council officials were even surprised to find people reading the minutes of their meetings, because the town (population 7,626) sits in an area virtually surrounded by established oil fields.
Doug Leggate, an oil analyst with investment firm Howard Weil Inc., thinks he may have figured it out.
Occidental has mainly been drilling in Elk Hills, where it owns an 80% stake, and two nearby oil fields -- Asphalto and Buena Vista -- where it had acquired drilling rights, Leggate said. The most intriguing possibility, he said, was that Occidental found a rare instance in which seismic activity had shoved oil-rich strata a mile or two deeper than in nearby fields, which hid the oil from previous drillers.
"In our view, Oxy's declared discovery may only scratch the surface of the ultimate potential of its acreage in the San Joaquin basin," Leggate said. "We suggest the resource potential could reasonably exceed 1 billion barrels."
In 1998, the company paid nearly $3.7 billion for its stake in the Elk Hills field, a patch of low and dusty hills that gently rise above the surrounding farmland. The only things keeping the oil pumps company are scrubby plants, anthills and the occasional tarantula and rattlesnake. The consensus among analysts was that Occidental had spent a huge sum for a field past its prime.
"We analysts were laughing at them, and right after they bought it, oil prices crashed," recalled Fadel Gheit, senior energy analyst for Oppenheimer & Co. But Occidental wound up increasing output. "That oil field is printing money for Occidental," he said. Not everyone sees Occidental's discovery as positive.
Some worry that the find and a more recent discovery by BP of a giant oil field deep beneath the Gulf of Mexico will provide a false sense of security. Christopher Steiner, author of the book "$20 per Gallon," said that complacency set in after the Alaskan and North Sea discoveries flooded the market with oil, slowing the momentum toward better fuel efficiency and alternative energy development.
Others view Occidental's discovery as a sign that the U.S. is far from running out of new sources of oil. Every time people start to think that things are over," Yergin said, "technology opens up new horizons and new ways of understanding what is underground."
Copyright © 2009, The Los Angeles Times
Posted by Richard Wottrich at 6:18 AM