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Amid Continued Price Slump, Oil & Gas Industry Faces Tough Challenges, Hopeful About Future

A steep drop in crude oil prices has caused a major downturn in the oil and gas industry, forcing companies across the state and the country to pull back on capital expenditures, abandon oil rigs, cancel new drilling projects, enact pay cuts and in some cases lay off workers.

Local companies with a long history of surviving declines, however, have planned for such downturns by strategically diversifying assets. Company representatives in the Long Beach area said they remain hopeful about the future of the oil and gas industry despite the current low-price climate.

The more than 50 percent plunge in crude oil prices over the past year has been attributed to market fundamentals of supply exceeding demand in addition to some possible global geopolitical factors at play, according to industry representatives.

The drop in prices comes after a boom in oil production throughout the United States in the last decade. Oil companies have invested in new technology, such as hydraulic fracturing or “fracking,” an expensive process that involves using highly pressurized water, sand and chemicals to break up shale rock, to stimulate wells.

Kevin Tougas is oil operations manager for the Long Beach Gas & Oil Department (LBGO), which operates crude oil and natural gas wells in the Long Beach area, producing about 35,000 barrels of oil a day. (Photograph by the Business Journal’s Larry Duncan)

The new technology, which has come under fire by environmental groups, has enabled companies to tap new reserves locally and in states that previously never produced oil.

According to the United States Energy Information Administration (EIA), national crude oil production has soared from about 1.9 billion barrels in 2010 to 3.1 billion barrels in 2014. U.S. natural gas production has also increased, with gross withdrawals rising from about 26.8 million cubic feet in 2010 to 31.3 million cubic feet in 2014.

Crude oil production in California, on the other hand, has been on a steady decline as “mature” wells have depleted over the past two decades, dropping from a peak of 394 million barrels in 1985 to a low of 193 million barrels in 2011. Production has gradually risen in recent years, reaching 204 million barrels in 2014, according to the EIA.

The increase in domestic oil and gas production has helped the nation become more energy independent. However, it has also created a surplus, causing prices to plummet, experts said, adding that it might take at least a year before prices rebound as the market corrects itself and runs through built-up storage and oversupply.

“The petroleum industry is an industry that has experienced booms and busts in its history and we are in an era of relatively low prices,” said Tupper Hull, spokesperson for the Western States Petroleum Association (WSPA), a nonprofit trade association representing most oil producers and refiners in California and surrounding states.

As a result of slumping prices, oil production firms and related businesses in the state and the country have seen profits dive, and have had to make adjustments.

In the first half of this year, Texas, where large oil companies are headquartered and fracking has proliferated, had more job losses related to the oil price drop than any other state. Of the 88,589 job cuts announced by companies in the state this year, 66,252 were related to the drop in oil prices, according to statistics provided by global outplacement firm Challenger, Gray & Christmas, Inc.

Some companies in California announced layoffs this year but not nearly as many. For instance, Chevron Corporation, an integrated energy company that produces and refines oil, announced in July that it would lay off 500 employees in the Bay Area. At least two industrial goods companies attributed a few hundred job cuts to the oil price drop as well.

Weathering The Storm

In Southern California, the drop in oil prices has also heavily impacted oil and gas production companies, including those in the Long Beach area. However, local companies entrenched in the industry for decades are positioned to weather the storm better than those in other states, according to industry representatives.

“It’s something that we’ve seen many times before,” said Kevin Laney, vice president of rig operations for Signal Hill Petroleum (SHP), which operates about 450 wells in the Long Beach/Signal Hill Oil Field. “It’s a cyclical business, kind of like the real estate business, and we all know that . . . We’ve been through it many times, so we’ll get through it again.”

Kevin Laney is vice president of rig operations for Signal Hill Petroleum (SHP), a crude oil and natural gas production company and real estate developer that employs about 140 people in the local area. (Photograph by the Business Journal’s Larry Duncan)

SHP, which employs 140 people, hasn’t had to eliminate any jobs; however, the company did have to “significantly” cut capital expenses, including oil drilling and “workovers,” a process that prepares wells for production, he said.

“We’re very discretionary about that kind of work that we’re doing right now,” Laney said. “It has to be something that makes sense, or where there’s a need to do it right now.”

He said there have been many people in the industry locally who have lost their jobs because of the oil price decline, adding that the downturn has hurt independent contractors and suppliers the most.

“Their phone just quit ringing,” Laney said. “Most of them have downsized, and there’s been a lot of consolidation in the oil field contractor business going on.”

The Termo Company, an independent oil and gas producer since 1933 that operates 21 wells in Long Beach and Signal Hill, was forced to cut its capital expenditures by 50 percent this year, said Ralph Combs, the company’s manager of corporate development, in a statement.

He added that the company, which produces about 210 barrels of oil per day in the local area and 1,600 barrels of oil per day nationally, had to cut pay and benefits but hasn’t had to lay off any employees.

“It’s been painful and tough,” Combs said. “We’ve been aggressively managing costs and looking for efficiencies. We wanted to preserve salaries and benefits and managed to do so for the first part of the year, but we had to make cuts to both in the second half. But we have not laid off anyone. I am hopeful that the lessons the industry and Termo have learned in this downturn will carry forward.”

California Resources Corporation (CRC), a company spun off from Occidental Petroleum Corporation (Oxy) that operates the THUMS offshore oil islands along with onshore wells in the Wilmington Oil Field, canceled a drilling project earlier this year in Carson because of the drop in prices. The project once called for drilling more than 200 wells in the Dominguez Oil Field using directional drilling techniques.

CRC, which employs 1,800 people companywide and works as the contract operator on behalf of the City of Long Beach, has positioned itself to withstand the volatility of commodity prices, said William Blair, director of security and external relations for CRC, in a statement.

“Producers in California have some advantages over those in other states because of the world-class oil and natural resources that are readily accessible through conventional technology,” he said. “CRC has a high level of operational control, meaning that we effectively operate all of our assets, which allowed us to quickly reduce capital investments this year when prices declined, and favorably positions us to grow on a strengthening commodity market.”

Natural Gas Supply

With regard to natural gas, the U.S. is also experiencing low prices as a result of an abundant supply, said Craig Beck, business operations manager for Long Beach Gas & Oil Department (LBGO).

He said customers in Long Beach, which receives 7 percent of its natural gas from local production, 7 percent from market purchases and 86 percent from a contract with Merrill Lynch Commodities, Inc., should see rates remain low for the next year.

“The plentiful supply of U.S. natural gas continues to support lower rates in Long Beach,” Beck said. “LBGO works closely with a variety of natural gas marketing experts to continually refine its market pricing forecast. By all indications, natural gas is projected to remain relatively stable over the next year.”

Combs stated that, “depending on the volumes produced, natural gas is profitable right now.” He said The Termo Company produced enough natural gas last year for about 10,000 homes.

“I wish we produced more natural gas, especially as the state and the country continue transitioning to this clean burning fuel,” Combs said.

Diversifying Assets

Blair said that CRC “is committed to living within our means,” and plans to fund the company’s capital budget internally with operating cash flow.

“Our rich asset portfolio and capital allocation deliver high margin production and operational flexibility, meaning our diverse asset base allows us to focus our investments on assets that are profitable at lower prices and maintain production using less capital,” he said.

SHP has also positioned itself to pull through in down times by diversifying assets. While the company has cut drilling projects, it has kept employees working on existing equipment while taking contract work for other oil companies in the Los Angeles area, Laney said.

In addition, as a commercial and residential real estate developer in Signal Hill, SHP is now moving forward with projects in a favorable real estate development climate.

“The price of real estate is up, so we’re working on some pretty significant development projects right now,” Laney said. “When it’s time to put our real estate hat on, we do that, and when it’s time to put our hard hat on, we do that.”

Kevin Tougas, oil operations manager for LBGO, which operates wells in the Long Beach area producing about 35,000 barrels of oil a day, has cut drilling rigs from five to one and has reduced its capital investments.

“We’re really working on just keeping the wells that are currently on, pumping as efficiently as possible,” he said, adding that suppliers and vendors have been negatively impacted the most as the department has cut back on buying materials, such as casings for new wells.

Tougas said LBGO has received permits from the California State Division of Oil, Gas & Geothermal Resources (DOGGR) to move forward with 13 fracking projects on the offshore oil islands, but, given the low price of oil, the projects likely won’t be executed.

“Fracking is an expensive operation, so at this price it doesn’t justify the added investment,” he said. “I don’t know if we’ll even execute those permits . . . We were always hopeful that the trend would change, but it’s pretty obvious we’re in a new oil price environment.”

Some oil-related companies are somewhat insulated from the fluctuating commodity prices. Colorado-based Crimson Pipeline, LP, for instance, which has offices in Long Beach, recently announced that it has acquired Chevron Pipe Line Company’s (CPL) KLM Pipeline and ancillary assets along with Western San Joaquin Laterals (WSJ).

The acquisition is part of a continued growth strategy that has enabled Crimson Pipeline, which has 95 employees companywide, to expand its transportation capacity from approximately 160,000 to 250,000 barrels of oil per day.

Environmental Regulations

The oil and gas industry in California, meanwhile, continues to operate under some of the strictest environmental and safety regulations in the world, as the state has chosen to be a leader in efforts to reduce greenhouse gas emissions while also transitioning to cleaner burning fuels, according to industry representatives.

Distributors of transportation fuels in California have recently become subject to a cap-and-trade program under legislation known as Assembly Bill (AB) 32 that attempts to reduce greenhouse gas emissions contributing to climate change.

State analysts have indicated that the program, which is governed by the California Air Resources Board (CARB), has added 10 to 12 cents to the cost of a gallon of gasoline for California consumers, according to industry representatives, who call the costs a “hidden gas tax.”

Under the state law, oil refiners that make gasoline in California are required to purchase carbon allowances at auction in order to sell transportation fuel in the state, which ultimately increases costs to consumers at the pump, Hull said.

“One of the reasons that consumers in California historically pay more for their gasoline is these environmental programs that exist and that are unique in California,” he said.

Oil refining capacity has been decreasing over the years due to the closure of older and smaller refining operations that have found compliance with the state’s strict environmental regulations to be cost prohibitive, according to a recent study on the economic impact of the industry commissioned by WSPA.

This is also limiting the permitting of new facilities, and therefore “any potential increase in oil refining capacity in the future in California appears highly unlikely,” the study found.

Tesoro Corporation, which operates a 930-acre oil refinery straddling Carson and the City of Los Angeles that was previously owned by British Petroleum (BP), is investing $425 million into the refinery to integrate it with another refinery in Wilmington to make operations more efficient and to meet demands of the marketplace.

The project is currently undergoing an environmental review process with the South Coast Air Quality Management District. Kenneth Dami, spokesperson for Tesoro, said in an e-mail that an environmental impact report (EIR) on the project has yet to be made public.

How California legislators decide to continue to pursue effective climate change policies will categorically have a major impact on how the petroleum industry operates in the state, Hull added.

Senate Bill (SB) 350, which was signed into law by Gov. Jerry Brown earlier this month, doubles the rate of energy efficiency savings in California buildings and mandates that half of the state’s electricity be derived from renewable sources by 2030.

A provision that would have required a 50 percent reduction in petroleum use for transportation fuels, however, was ultimately taken out of the legislation. Opponents of the mandate said such a goal would have been “unrealistic.”

Companies in California, meanwhile, are required to operate under the most stringent regulations for oil and gas production in the country, particularly as new rules have been passed regulating fracking and well stimulations in the state.

While environmental groups have protested fracking projects in Long Beach because of potential for causing seismic activity and contaminating groundwater in a time of drought, Tougas has stated publically that the process conducted at oil islands does not involve using fresh water and poses no threat to the public or the environment.

Laney said it’s important for the industry to inform the public about its practices in order for policy makers to make the right decisions, adding that many groups have been spreading “misinformation” about oil drilling techniques.

“We try to be as transparent as possible,” he said. “We give tours, and we invite people on to our property. We want to keep the public, the city, the regulatory agencies and everybody as informed as possible to make the best decisions based on the facts.”

Additionally, WSPA and other industry representatives said they plan to continue working with policy makers to ensure that efforts to reduce carbon emissions are done in a way that’s not cost prohibitive and unrealistic for businesses and consumers alike.

Future Of Production

Industry representatives, who attributed the oil price drop to an oversupply of crude oil caused by the boom in production over the past decade, stated that ultimately the market isn’t expected to begin balancing out until next year.

“We’re sort of a victim of our own success,” Laney said. “There’s just more supply than there is demand.”

As companies shut down drilling rigs across the country, national production will begin to taper off, which will help prices rebound. However, the market also has to work through built-up barrels of oil in storage, he said.

California, however, is in a more unique situation than the rest of the country, as there are no pipelines coming from other states, industry representatives explained.

According to Hull, California produces only 38 percent of the oil needed in the state. He said Alaska produces about 14 percent of the state’s oil while the rest comes from foreign countries, mainly Saudi Arabia, Iraq and Ecuador.

“Over half of the oil we use every day comes here in ships from foreign countries and that fact is why we believe it’s so important to support and enhance our own domestic production,” Hull said. “Every barrel of oil that we use here is not a barrel that we need to import in a ship from a country like Saudi Arabia or Iraq where the supply can be unreliable.”

Blair said California is a “world-class oil and gas region with an exciting future,” adding that CRC operates 137 oil fields from recent discovers to 100-year-old, billion-barrel fields that continue to yield new recourses. Much of the state remains “underexplored and underdeveloped,” he said.

“Technology has been the key to unlocking California’s complex geology and expanding our capabilities to drill and produce wells more efficiently, while reducing surface use and environmental footprint,” Blair said.

Growing domestic oil and gas production in California, which has a “proven track record of safety and environmental responsibility,” he said, is better than importing oil that will only profit unregulated sources. He added that CRC remains a “constructive participant in the state’s development of legislation, regulation and energy policy.”

With regard to natural gas, Beck said that, even though there is significant U.S. supply, production is expected to continue to grow as new reserves are identified. However, with the low price of gas, it’s feasible that existing wells will be closed.

LBGO, which receives local production from CRC, SHP, Sampson Oil Company and Breitburn Energy Partners, anticipates local natural gas production to increase 2 to 3 percent in 2016, he said.

Beck added that, beginning next year, LBGO will supplement its supply by sourcing renewable natural gas (RNG) or biogas, a combustible gaseous fuel collected from the microbial degradation of organic matter in anaerobic conditions, including landfills, livestock operations and waste water treatment. He said biogas production is “carbon-neutral and doesn’t add to greenhouse-gas emissions.

In addition, Laney noted that oil production in Alaska has continued to decline significantly, making it even more vital for California to increase its own oil production, which provides local jobs and tax revenue.

“California is kind of an island,” he said. “What we don’t produce here comes in on a ship. We load the ship with our money. They leave their oil and away they go, with no taxes, no jobs and no regulation.”

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