Head West for Best Look at U.S. Oil Drillers’ Pain

Little is going right for California’s oil industry. Turns out the state’s shale formation holds less promise than producers expected. Aging conventional wells are drying up. And a rebound in output that cost drillers as much as $3 billion annually to create has been overshadowed by shale oil gushing from wells in North Dakota and Texas. Then, of course, came the collapse in oil prices -- a seven-month, 57 percent drop that was exacerbated by OPEC’s refusal to cut output in order to squeeze the U.S. shale drillers. No state is feeling that pressure more than California. Drillers there have idled more rigs -- on a proportional basis -- than those in any other part of the country. “We spent a lot of money to go out and drill and use new technologies just to stop production from depleting in our mature fields,” Rock Zierman, chief executive officer of trade group California Independent Petroleum Association, said by phone. “It took us a lot of capital to basically run in place and now we’re looking at crude prices under $40 a barrel.” While U.S. benchmark West Texas Intermediate oil has fallen by more than half since June, California’s heavy Kern River crude has lost 66 percent of its value. The spot price of that oil slid $1.47 to $33.40 a barrel today, below Gulf Coast crudes, below Bakken in North Dakota and under Alaska North Slope oil. Gasoline Relief Falling prices haven’t been all bad for California. Governor Jerry Brown said in an interview with Bloomberg News Jan. 15 that while the decline in California’s oil drilling is “of concern,” drivers are benefiting. Gasoline is under $2.50 a gallon for the first time since 2009 in a state that’s usually home to some of the most expensive fuel in the country. Relief at the pump will save the average California household $675 this year, said Patrick DeHaan, a Chicago-based senior petroleum analyst at GasBuddy Organization Inc. “The oil price decline goes right into consumer spending,” Brown said at his Oakland office. “So there will be trade-offs.” Drillers have idled two-thirds of their rigs in the state in five weeks, dragging the total down to the lowest since 2003. Oil output, which had been creeping up since 2011, is now little changed and a slide will probably follow. West Texas Intermediate fell 72 cents to settle at $45.59 a barrel on the New York Mercantile Exchange. Brent, the global benchmark grade, rose 27 cents to $48.79. Drilling Drop Producers told the state that they planned to drill 28 wells in the seven days ended Jan. 10, a 66 percent decline from seven days earlier and 13 percent from a year ago. Up until 2012, California’s oil production had fallen for 14 straight years, the result of two price collapses that drillers never fully recovered from. In contrast, overall U.S. output has risen at the fastest pace in three decades, led by Texas, the largest producer, and North Dakota, the next biggest. California ranks third. Dreams of unlocking California’s Monterey formation, home to the largest U.S. deposits of shale oil, fizzled after the U.S. government said in May that only about 600 million barrels could actually be pulled from the rock, 96 percent less than previous estimates. Producers have been left using costly steam and water to push oil out of the older, conventional fields instead. “If there are wells shut in, it’ll be in California,” James Williams, president of energy consulting company WTRG Economics, said by telephone Jan. 16. Inching Up California’s output began inching up in 2012 after drillers invested in technologies to complete more wells and improve their yields, Zierman said. Production climbed 6,000 barrels a day in 2013, paling in comparison with the Bakken shale boom that more than doubled North Dakota’s production within two years. Now shale oil from other states is invading California’s market. A record 38,086 barrels a day arrived by rail in December 2013, from states including North Dakota and Wyoming. “All of a sudden, we’re no longer an energy island,” Zierman said. In December, drilling contractor Ensign Energy Services Inc. (ESI) told California regulators that it planned to dismiss as many as 700 workers. California Resources Corp. (CRC), the Occidental Petroleum Corp. (OXY) spinoff that became the state’s largest independent oil and gas producer, idled rigs and let go of contractors. Its cash operating costs are around $20 a barrel, said Todd Stevens, the Los Angeles company’s chief executive officer. “We’ll live within our means and our cash-flow,” he said by phone Jan. 12. “We’re just trying to be a prudent operator.” To contact the reporters on this story: Lynn Doan in San Francisco at ldoan6@bloomberg.net; Zain Shauk in Houston at zshauk@bloomberg.net To contact the editors responsible for this story: Dan Stets at dstets@bloomberg.net; David Marino at dmarino4@bloomberg.net Richard Stubbe

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