California producers urge greater exploitation of state’s resources

The Summerland oil field is the world’s first offshore production, established with the building of the first marine production pier in 1897. The longest pier extended 1,230 feet from shore. The onshore portion of the field was discovered in 1887 during water well drilling in coastal Santa Barbara County.

California has a rich history with regard to the oil industry. Production goes back to the late nineteenth century, and the first offshore wells in the world were drilled in the 1890s on piers that jutted hundreds of feet into the Pacific Ocean. Some of the fields, such as those in the Kern River Valley around Bakersfield, have been producing for more than 50 years.

Today, the state of California is synonymous with public opposition to drilling and oil exploration. Many residents have a fear of environmental disasters, oils spills, etc. that might spoil the state’s beaches and coastline. Even the election of a pro-development Republican governor, Arnold Schwarzenegger, has not convinced the state to budge from its intractable position.

Huge economy, major consumer

With a population of more than 36 million, California is a major consumer of petroleum products. Approximately one in eight Americans lives in California, which is known for its reliance on automobiles and the internal combustion engine for transportation. Its freeways and traffic are notorious, and cars and SUVs burn millions of gallons of gasoline during their drivers’ daily commutes from the suburbs to their jobs in the city.

Similarly, California’s economy is one of the world’s largest, ranking behind only the US, Japan, Germany, the United Kingdom, and China in economic output. The state’s industries use a lot of petroleum in order to be this productive, and many feel the state is not pulling its share of the load. Too many of its citizens have a “not-in-my-backyard,” or NIMBY, attitude toward the construction of needed refineries and LNG receiving terminals, and oil and gas drilling and production.

In 2004, California consumed more than 6,246 MMcfd of natural gas, most of which comes from sources outside the state. According to the California Energy Commission, the state gets 25 percent of its gas from Rocky Mountain states, 24 percent from Canada, and 39 percent from the southwestern states (mainly Texas, Oklahoma, and New Mexico).

CIPA formed to help producers

One group that has been fighting to improve the state’s petroleum infrastructure is the California Independent Petroleum Association (CIPA), a non-partisan, trade association that represents around 450 crude oil and natural gas producers, royalty owners, and service and supply companies operating in the state.

ABOVE: Storage tanks for hydrocarbon liquids (propane, butane, etc.) associated with natural gas production at Rio Vista. Photo courtesy of Calpine Corp.

Since 1976, when the Independent Oil & Gas Producers’ Association merged with the California Independent Producers & Royalty Owners Association to form CIPA, the association has kept the political, regulatory, and public policy interests of independent oil and gas producers at the forefront of its agenda.

CIPA members include independent petroleum producers, those that get crude and natural gas out of the ground. They are not involved with marketing, refining, or transportation.

Rock Zierman, director of public affairs for CIPA, describes the members as ranging “from small mom and pop outfits with a couple of wells” all the way to Occidental Petroleum Corp., the Los Angeles-based multinational that is one of the six or seven largest producers in the United States. Other notable members include Bakersfield-based Berry Petroleum, Houston-based Plains Exploration & Production Co., and Venoco Inc. and BreitBurn Energy LP, two smaller independents. Denver-based Venoco has regional headquarters in Carpinteria, Calif., and BreitBurn is the US-based subsidiary of Provident Energy Trust of Calgary, Alberta.

The focus of CIPA is not on technology and reserves, but legislative and regulatory affairs. CIPA represents the diverse interests of its membership before the California state legislature, the US Congress, and numerous federal, state, and local regulatory agencies. The association is an advocate of free market principles, eliminating duplicative regulation, stimulating recovery of domestic resources, and improving the industry’s public image.

BELOW: The Ventura Avenue field was discovered in 1919 with the drilling of a surface anticline. Many early wells blew out because of shallow high-pressure gas zones; the use of rotary rigs and drilling muds solved the problem. More than 1,500 wells have been drilled in the field and production has passed the one billion barrel mark. Photo courtesy of California Oil Museum.

While they are not all headquartered in California, all members have production interests in California. Rod Eson, president and CEO of Foothill Energy LLC, and 2005-2006 chairman of CIPA’s board of directors, indicates that “approximately 50 percent of our efforts are dedicated to California opportunities.” This closely resembles the California resources of Rosetta Resources Inc., whose executive vice president, Charlie Chambers, puts approximately 45 percent of the company’s assets in California.

Rosetta Resources expanding asset base

In July of this year, Texas-based Rosetta Resources purchased Calpine Corp.’s Sacramento basin assets. Calpine, a power company that supplies customers and communities with electricity from natural gas-fired and geothermal power plants, sold of all of its domestic oil and gas exploration and production assets to Rosetta.

Chambers explained, “Calpine sold these assets to Rosetta because they needed capital to service their debt. We purchased the assets because of the quality of the reserves and inherent upside. We will continue to expand our asset base in all areas through drilling and other development.”

Asked why companies based outside California would chose to operate in a state where the attitudes toward oil companies was so negative and the regulatory environment somewhat difficult, Eson responded, “California is a resource-rich state and it has an ever-growing appetite for energy. I have been active in the Gulf Coast of Texas and the San Joaquin and Sacramento Valleys of California.”

Chambers added, “Even though we are Houston-based, we have a big presence in California (Rio Vista) and our same management has operated these properties for more than seven years.”

Both felt the benefits of operating in California outweigh the downside.

Eson noted the pluses - “a large resource base, reasonable infrastructure, and growing need for energy.” Chambers added that, “The Sacramento basin of California is a reasonable area to operate in, plus our reserves are predominately natural gas with no adverse effect on the environment.”

But there are concerns. As with oil and gas operations in other areas, petroleum companies are having problems with a lack of drilling equipment and finding experienced personnel, although neither is a major issue at this time.

“Drilling rig availability and lack of qualified personnel is a problem in California, just as it is in all oil and natural gas basins today,” said Eson. This is echoed by Chambers who comments that “drilling and workover rigs are scarce nationally. However, we are able to access equipment to develop these reserves.”

There are, however, some differences when it comes to operating in California. One concern that is perhaps felt more deeply in California is the political climate.

“The political landscape can be fragile, increasing uncertainties,” noted Eson. As has been the case for decades in California, there are stumbling blocks to drilling potential offshore reserves. The state government, along with environmental groups and people of California has, thus far, prevented further exploration and drilling in parts of California.

One of the state’s two Democratic senators, Barbara Boxer, has drafted legislation to enlarge the boundaries of two national marine sanctuaries in Sonoma County, Northern California. “Our state is very clear: We don’t want any more drilling,” she said at a conference July 5 in San Francisco.

Another opposing group is the Natural Resources Defense Council (NRDC). Sharon Buccino, senior attorney with the NRDC, in a May 25 hearing on permitting of energy projects by the US Senate’s committee on environment and public works, made reference to Unocal’s 1969 oil spill.

“Ever since 1969, when a federal well released huge amounts of crude oil into the Pacific Ocean off Santa Barbara, citizens and local elected officials have joined together to protect the coast from offshore oil drilling,” commented Buccino.

Addressing that issue, Eson responded: “At the present several companies are drilling offshore California (from existing platforms). However, there remain many leases that could be developed utilizing existing platforms and infrastructure. These wells are and can continue to be drilled in an environmentally sound manner. The greatest obstacle is the influence a relatively few environmental organizations have over the elected officials. These groups make inflammatory accusations regarding the safety of offshore drilling. Everyone in California wants to maintain a clean environment, but people want cheap energy. NIMBYism is rampant in California. The resources exist off the California coast line to significantly reduce the cost to California residents. Furthermore, the state and local governments could reap significant revenues from the development of these resources. The citizens in California need to better understand the truth about California’s offshore opportunities and the ability to improve the lives of its residents.”

One thing that industry officials feel can alleviate problems is public education. Eson notes, “We need to educate the public and elected officials about the benefits to everyone the additional offshore development can bring. We need to let them know that it can be done safely and as good environmental stewards of our natural resources. If the public were properly informed then pressure could be put on the public officials to objectively look at the issue. Then the public officials must stand up and say it is important for all of California, then, and only then can we move ahead with additional development.”

While budgetary constraints keep CIPA from conducting a public education program, the organization feels it contributes by educating elected officials about industry interests.

“If it were not for CIPA’s efforts over the past decade I believe much of today’s offshore industry would not be in existence,” said Eson. “Much effort is required in California just to maintain what we have.”

Despite the political climate, business is good in California.

Eson noted, “Having worked with [agencies of the State of California] for nearly three decades, coping is not an issue for me. My business is doing very well. Current higher commodity prices allow us to invest larger capital amounts then previous years. However, the current standards certainly stifle the ability to grow.”

Eson is also optimistic about prospects for the future, but states that, “It is critical that the government does not heed the cries of the liberal legislators demanding price controls or windfall profits tax. These have been enacted in our (and other) industries before, and every time is has destroyed the markets and hurt the American consumer.”

Operating in resource-rich California has proven lucrative for many companies despite roadblocks not seen in other parts of the country. This may, in fact, be due in part to the continuing efforts of the California Independent Petroleum Association and its work representing the interests of these companies. OGFJ