Texaco Caps 1,500 State Wells as Oil Prices Fall : No Longer Profitable, Firm Says of Shutdowns at Kern River Field; Others May Follow Suit
Texaco closed down about 1,500 oil wells in California’s huge Kern River field near Bakersfield last weekend because the collapse of oil prices has made them unprofitable, the company said Wednesday.
It was the first such action by a major oil company in California, but probably not the last. Even before the Texaco action, as many as 3,000 small, independently owned wells in the state have been closed since Jan. 1 because of falling oil prices, industry officials estimated.
In Orange County, oil companies are grappling with the dilemma of whether to shut down wells that may be expensive to restart, or to keep them going at a marginal profit or a loss.
Kern Action One of Largest
Similar industry cutbacks have begun in other parts of the country, especially oil-rich Texas, as the price of crude oil falls below the cost of production at many individual wells, particularly those that are older and less productive. But the action by Texaco in the Kern River area of Kern County is one of the largest such steps so far by a major producer in U.S. fields.
The number of jobs to be lost as a result of the well closings to date could not be determined. Texaco said none of its own employees will be affected, but other firms that maintain the wells and perform other services for Texaco presumably will have to cut back.
Economists at Bank of America have estimated that 7,000 oil field jobs in California could be lost due to the sharp falloff in the price of oil.
Downside of Good News
The effect on oil companies and workers and such oil-dependent areas as Kern County, 100 miles north of Los Angeles, represent the downside of what on balance will be good economic news in California and nationally.
Though California is No. 4 in U.S. oil production behind Texas, Alaska and Louisiana, its large and diverse economy makes the state far less dependent on the health of the oil industry than the other big oil states.
On employment alone, anywhere from 100,000 to 200,000 new jobs will be created in California traceable to lower oil prices and their contribution to economic growth, according to economists at Security Pacific National Bank and UCLA.
And while $100 million in state oil-production tax revenues could be lost this year as a result of actions such as Texaco’s, that will be more than offset by a $150-million increase in tax revenues generated from the higher-than-expected economic growth, according to Bank of America estimates.
The 1,500 wells being turned off are Texaco’s smallest producers, representing about one-third of the firm’s wells in the Kern River field and about 10,000 barrels of crude oil per day. That represents 10% of the company’s Kern River production and about 1% of the state’s production.
Decline Began in November
Until the sudden decline in prices that began in November, California had about 50,000 oil wells producing about 1.1 million barrels daily.
Texaco became one of the state’s biggest producers through its controversial acquisition of Getty Oil. The main reason it bought the firm, which was based in Los Angeles, was Getty’s two-thirds ownership of the Kern River field, the nation’s fifth-largest proven oil reserve.
However, as with many California oil fields, the Kern River “oil patch” has been yielding oil for more than 50 years, and its oil is considered “heavy” and expensive to refine. As a result, many of the wells produce fewer than 10 barrels daily and are less profitable than more prolific wells.
As the price of crude oil in world markets has plummeted from the $32 per barrel range in late November to as low as $12 today, the posted price for Kern River crude oil in recent days has hovered just above $11 per barrel.
‘An Uneconomic Situation’
“When you’ve got production costs of $12 a barrel and you’re getting $11, that’s an uneconomic situation,” said Robert B. Livesay, manager of operations for Texaco USA’s Los Angeles operations division.
Closing a well is a “real difficult decision” because there is no guarantee that the well can be brought back to production without re-drilling, said Steve Berg-Hansen, executive vice president of the Garden Grove-based California Independent Producers Assn. And re-drilling can “easily” cost $50,000, he said.
In Newport Beach, Seahawk Oil International Inc. said all its workers have taken a 25% pay cut, effective this month, and the company is looking for less expensive office space. Seahawk, with operations in California, Colorado, Texas, Kansas and Oklahoma, also is “looking aggressively” to acquire debt-laden oil companies, “which are dead in the water,” said Executive Vice President Dennis Hernreich. “It’s time to consolidate, put some small oil companies together and survive,” Hernreich said.
With operating costs at $8 to $10 per barrel, Seahawk probably can avoid halting production, Hernreich said. Still, current pricing in the oil industry is so chaotic that “it’s like dropping an atomic bomb on the industry,” he said.
As one indicator of the confusion, a spokeswoman at another Orange County oil company said, “Everyone is running around madly,” and hung up.
McFarland Energy Inc., which has wells in Orange, Los Angeles, Kern and Santa Barbara counties, said it is “examining all its properties.” Closing some wells is “better than operating at a loss,” said Lee McFarland, chairman and chief executive of the Santa Fe Springs company.
Stanton-based Petrominerals Corp., which has production in California, Oklahoma and Louisiana, said it is “looking extremely hard” at the possibility of shutting some of its wells, particularly those in the Santa Maria area, which produce a heavy crude used in asphalt. Petrominerals’ Orange County wells, which deliver a lighter crude, probably will be left in production, the company said.
Because of their negligible overhead and low debts, some very small oil companies said they can survive even lower crude prices. “I don’t panic,” said Jeanne Nevins, who operates a one-well oil company with her sister in the backyard of Nevins’ Huntington Beach home. Nevins’ company, the Hardly Able Oil Co., now receives $11.50 for each of the four barrels per day the well delivers. That price, a drop from $17.70 per barrel last month, nevertheless pays expenses, Nevins said.
Alfred & Elliott, a Costa Mesa oil company with wells in Kern County, also doesn’t plan to stop production. “It costs a lot to shut down a well,” a spokeswoman said.
Burning Own Oil
In addition to “shutting in” the 1,500 wells--industry parlance for capping wells and awaiting better prices--Texaco has been burning some of its own oil to generate the steam that is pumped into the Kern River field. That so-called “enhanced recovery” process uses steam to warm the heavy oil so it can more easily be pumped to the surface.
Normally, Texaco used only natural gas to generate steam. But the oil glut and low prices made it more economical to burn its oil to help get its own oil out of the ground. The combined effect of the well closures and the burning of its own oil will reduce the number of barrels per day that Texaco will sell from its Kern River field by as much as 20%, Livesay said.
“We’re now looking all over the state of California to see what we might do” to trim marginal production, Livesay said. But he said further declines in production will be more “gentle.”
Others Haven’t Shut Wells
Other major California producers including Shell, Chevron and Unocal said they have not closed down any California wells in response to the collapse in oil prices. But all said they are poised to do so if prices call for it.
Allan Martini, a Chevron USA senior vice president, said Chevron will probably keep operating most Kern River wells until prices hit the $6 to $7 per barrel level. He said no delay has been ordered in Chevron’s ambitious expansion plan in Kern County, but “we’re going very slow on new commitments.”
Most vulnerable to the oil price collapse are the state’s more than 700 independent oil producers and the various service firms that support them. The independents tend to operate a handful of slow-producing, high-cost wells that, in many cases, they borrowed money to buy.
Jeff Rowe, a free-lancer, contributed to this report from Orange County.
