Including regulations

When it Comes to Energy, Cal Has It All

For the oil and gas industry, California has always been a major energy-consuming state.

A heavy-oil state.

A highly innovative state.

And, maybe most of all, a highly regulated state.

Tim Kustic
Tim Kustic

“We’ve got everything out here. We’ve got hydroelectric. We have nuclear. We’ve got solar – solar has taken off like gangbusters out in the desert areas. We have wind farms,” said AAPG member Tim Kustic, state oil and gas supervisor for California’s Division of Oil, Gas and Geothermal Resources in Sacramento.

“But we’re still mostly a hydrocarbon state,” he added.

Not often considered part of the oil patch, California has ranked as the third largest oil-producing state in the United States, behind Texas and Alaska.

North Dakota may have eclipsed that spot now, but California’s hydrocarbon production remains prolific and impressive. In 2010 the state produced 200.8 million barrels of oil and 255.4 billion cubic feet of natural gas, and saw about 2,100 new wells drilled.

Even with California’s long history of field discoveries and well-developed production, the search for new hydrocarbon reserves in the state continues.

“We’re an old state when it comes to oil and gas production,” Kustic noted, “but there are still reserves out there, and the industry is pursuing them.”

Home of Innovations

The state’s energy demand and varied resources led California to become a production innovator, according to Kustic.

“With its heavy oil, California is a testing ground or R&D site for other recovery methods,” he said.

Both primary and enhanced production goes on in the San Joaquin Valley region, the state’s primary oil-producing area. Innovative approaches are being developed to tap more oil in the Santa Maria Basin, near California’s central coast, Kustic said.

In the Los Angeles Basin, “due to air emission restrictions, steaming is not the approach of preference. There’s more waterflooding there,” he said.

Occidental Petroleum Corp. holds a 78 percent interest in Kern County’s Elk Hills Field, one of the largest oil and gas fields in the United States, where the company announced a major discovery in 2009.

It recently began a significant unconventionals development program.

Oxy expected to drill about 140 wells in its California shale program in the first half of 2012, with about 60 of those inside Elk Hills. The 30-day initial production rates for drilled wells have been 300-400 barrels of oil equivalent per day, the company said.

With established and developing production, Kern County and the surrounding area have become investment hot spots for the industry.

Oxy is “still doing a lot of capital investment. They’re building a huge new gas plant. It’s boom time out there,” Kustic said.

“When it comes to where money is being spent on E&P in California, Elk Hills has to be close to the top of the list,” he added.

But the biggest energy success story in California in recent memory – and the one with the best nickname – involved The Geysers geothermal operation, Kustic said.

The Geysers Field, north of San Francisco, is the largest geothermal field in the world.

By the late 1980s it was badly in need of water for injection to produce steam. Meanwhile in northern California, Lake County and the city of Santa Rosa in Sonoma County were looking for ways to dispose of treated effluent from sewage plants.

A pair of pipelines was built to move the effluent to The Geysers, resulting in increased electricity production – and numerous environmental benefits.

“It was a real win-win story,” Kustic said. “‘Flush to Flash’ was the nickname it was given.”

Challenges Ahead

A growing worry in California is the amount of crude oil the state must import for its refineries.

According to a report in the San Francisco Chronicle newspaper in March, California now gets more oil from the Persian Gulf than from Alaska. In 2010, about 21 percent of California’s oil supplies passed through the Straits of Hormuz, the paper said.

California produces only 38 percent of the crude it refines. And that number would decline if local producers begin shipping their oil production out of state.

New regulations could put pressure on California producers, said Tupper Hull, vice president-strategic communications for the Western States Petroleum Association (WSPA) in Sacramento.

“The biggest issues that the industry faces in California now relate to state climate change initiatives,” Hull noted. “These are all taking different approaches that will have major impacts on the petroleum industry.”

He identified three major regulatory actions that will affect the oil and gas industry:

♦ Global Warming Solutions Act (AB32).

Under AB32, California will try to reduce its greenhouse gas emissions to 1990 levels by 2020. Plans include a cap-and-trade mechanism.

“Companies that both produce oil as well as refine oil are in a relatively small basket of companies that will have to buy credits,” Hull said.

He predicted the result will be equivalent to a “multi-hundreds of millions of dollars if not a billion-dollar tax” on the industry.

“There are a ton of details that have to be worked out about how you actually conduct these (emissions credit) auctions that are supposed to take place in California,” he said.

♦ Low Carbon Fuel Standard Program.

This program calls for a reduction of at least 10 percent in the carbon intensity of California’s transportation fuels by 2020.

“Relatively simple sounding, it’s proving to be exceptionally difficult to achieve,” Hull said.

An initial approach involved blending transportation fuels with other, lower-intensity fuels, like biofuels. But “you quickly run into the problem of having a biofuel with sufficiently low carbon intensity to bring down the carbon intensity of the original fuel,” he noted.

Hull said WSPA studied the likely effects of the fuel-standard program and found that it was not a workable regulation.

“If the Low Carbon Fuel Standard goes forward, it will have another profound effect on the petroleum industry,” he said.

♦ Clean Fuels Outlet Regulation.

According to the California Air Resources Board, the clean-fuels regulation is “designed to support the commercialization of zero-emission hydrogen fuel-cell vehicles planned by vehicle manufacturers by 2015, which will require increased numbers of hydrogen fueling stations.”

“It requires refiners in the state to build and then maintain and supply hydrogen fueling stations throughout the state,” Hull said.

The rule could require creation of 500 fueling stations at $200 million each and cost the industry up to $1.25 billion, according to Hull.

It sets a “very high target for the number of hydrogen-powered and hydrogen fuel-cell powered vehicles on the market in the state, the addition of several tens of thousands of alternative cars” he said.

Hull believes California could see “crude-shifting,” where some crude oil produced in the state is disadvantaged under the new regulations and goes to other places.

“This is a cascade of regulations,” Hull said. “Our members and I think most economists who have looked into this expect this to add enormous cost to providing transportation fuels in the state.

“We are in uncharted waters.”

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