State’s Oil Drillers Hit a Dry Spell

Life here in the oil patch, as rich a part of California lore as gold mining, has taken a brutal turn.

The difficulties come from prolonged record-low crude prices that have made prospects for survival as dark as the bottom of a barrel of crude.

At current prices, oil drillers like Chris Hall lose a dollar on each barrel they “lift” out of the ground.

That’s a calculus of financial ruin. And unless it changes sometime soon, Hall and other oil drillers face the same fate as the forty-niners--extinction.

Hall has been forced to turn off seven of the 70 oil wells his firm operates a few miles south of here and says he’ll flip the switch on the rest if prices don’t bounce back soon. Hall isn’t the only oilman around here with his back to the wall.

If low prices persist for another year or more as many energy analysts predict, independent owners of the thousands of oil wells that sit amid the San Joaquin Valley almond groves and cotton fields soon will be out of business.

“How long we can survive is unknown,” said Hall, whose Drilling & Production Co. of Torrance recently imposed an across-the-board 20% salary cut. “It’s just a question of how long the bankroll holds out.”

Although the oil industry has been rocked by changes since the early 1970s, the plunge in prices over the last year is causing the most radical reordering yet. Big companies are frantically merging and cutting costs, oil well service firms are seeing business evaporate, and the ranks of California’s “oil farmers,” as independent oil producers are known, are thinning.

Expectations of persistently lower prices are causing a global shift, evidenced in last week’s historic merger agreement of Exxon with Mobil, a $75.3-billion deal. It followed an earlier merger plan of British Petroleum and Amoco. The companies say they will eliminate thousands of jobs to bring overhead in line with weaker prices.

Closer to home, the price plunge has forced Gary Drilling Co., a Bakersfield oil field services company that has sunk nearly half the onshore wells in California since 1950, to lay off 300 of 400 employees. Its business virtually disappeared when prices collapsed and oil companies cut back exploration.

Desperation is especially pervasive among independent producers--companies that pump oil and gas, but have no refining or marketing operations. They typically work oil fields that larger companies deem too small or unprofitable to bother with.

At the Mercy of a Global Market

Walking through a cotton field south of town where two of his company’s oil wells have sat forlorn and idle since spring, Kerry Zemp said he may soon take further steps--so far he’s closed four wells--including additional well closings and salary cuts at his independent company, Gotland Oil.

“Ever since I got out of college in the late 1970s, the industry has been through one series of contractions after another. But I don’t remember anything like this,” said Zemp, whose company operates 80 wells here and around the state.

Hall, Zemp and other well owners are slowly coming around to the strong probability that prices could remain depressed for months because of bulging worldwide supplies and flagging Asian demand. The current low oil price also owes a lot to an unseasonably warm fall this year that has cut U.S. demand for heating oil.

The feeling of helplessness in the face of global market forces was apparent at a state-sponsored seminar here on oil spill containment last week. At the break, conversation among well owners and their suppliers turned quickly to survival.

“This is bad, and we’ve been through every slump in the last 45 years,” said Terry Ellis, a manager at Gary Drilling.

The gloom that envelops Kern County’s oil industry comes as plans are being made for the centennial celebration next year of the discovery in Kern County of California’s largest oil field. In 1899, James Elwood and son Jonathan became this area’s original independent oilmen, digging 13 feet down with a metal rod on the banks of the Kern River to strike oil.

The anniversary will celebrate California’s preeminence in oil in the first half of the century, when the Elwoods’ find fueled the foundation of the richest state economy in the nation.

But the anniversary will be a somber occasion indeed if oil prices don’t pick up. Most companies have already slashed salaries and budgets or laid off workers. They are having a tough time competing in the global marketplace with cheaper imported crude, especially from the Middle East.

As a result, an estimated 10% of the 30,000 oil wells in Kern County area have been “shut in,” the industry phrase for a temporary closure, and more are going idle every day.

This has slowed oil production in Kern County, the heart of California’s oil industry, where almost two-thirds of the state’s daily average of 900,000 barrels of crude production is pumped.

“The future unfortunately doesn’t look too good,” said Jerry Hoffman, chairman of Berry Petroleum of Taft, one of the state’s largest independents. Hoffman recently laid off 11% of his firm’s workers. “There is too much oil in the world and not enough demand,” he said.

The thinning ranks of independents--down to 400 from 2,000 in 1985--is a bad sign for the local economy. The independents generate jobs, local taxes and other economic benefits that might not otherwise exist. And they pump a lot of oil, accounting for one of every five barrels of crude produced in the state.

But as with other businesses facing global competition, the oil patch is getting tougher for the little guys. They lack the financial wherewithal to ride out a prolonged slump. Unlike integrated companies such as Chevron or the soon-to-be Mobil Exxon, “oil farmers” can’t make up the loss in production with higher margins in refining or marketing.

The current price slump has proven especially nasty. Last week, prices of the heavy crude that most producers pump here dipped to $6.25 a barrel, the lowest in 24 years. That’s down from a high of $17 a barrel in October 1997. Producers say they need to fetch at least $11 a barrel to sustain profitable production, a price that enables them to invest in well improvements and ongoing additions to reserves.

Hall doesn’t expect much relief any time soon. In fact, one particularly pessimistic study by the U.S. Department of Energy that was circulating at a meeting of independents here last week warned that crude oil prices could remain depressed for the next seven to nine years. No wonder then that the collective mood is as dark as it’s ever been.

Kern County crude is so thick--so-called “gravity 13”--with sulfur and other wastes that it barely pours out of a jar at room temperature. To get it out of the ground, oil producers have to inject the subterranean reservoir with steam to heat and thin it. That’s why Kern County crude is worth about $5 per barrel less than benchmark West Texas Intermediate crude, which is lighter and cleaner and so costs less to refine and transport.

The rock-bottom prices forced Berry Petroleum to shut 100 of its 1,200 wells in the area. This despite the fact that Berry, like all other companies, is reluctant to close wells because of the high cost of restarting them.

“With this kind of heavy oil, you can’t just shut everything down because the cost of going in again and bringing it back on line is prohibitive. The tubing gets stuck, the casings fail, it just becomes too costly,” Hoffman of Berry Petroleum said.

Long Slump Surprised Drillers

Closing a well is so risky that independents will continue to produce oil even when they’re losing money, said Zemp. “There is no certainty that you can necessarily reopen a well, once the steam heat has been removed,” he said.

Besides, many producers lease oil fields from mineral rights owners who stipulate that the well must stay in production or the producer forfeits the lease, Zemp said.

The prolonged slump “came as a complete shock,” said Zemp. Strong crude prices up to a year ago led Gotland and others to invest heavily in improvements that may never pay off.

The troubles obviously extend beyond Kern County. In Long Beach, Tidelands Oil Production has laid off one-third of its 205 workers and shut 298 of its 800 oil wells in the Los Angeles Basin. Tidelands general manager Terry Smith says the slump is the worst he’s seen in 25 years.

“We’re trying to hold on, operating at a loss waiting for oil prices to come back up, hoping they will,” Smith said.

California’s oil wells pump half the 1.8 million barrels consumed in the state daily. Statewide crude production, which is concentrated in Kern County, the Los Angeles Basin and offshore wells from Santa Barbara to Long Beach, is down 5% this year.

Bakersfield Mayor Bob Price warned last week of an economic “domino effect” unless prices turn up soon. About one in 20 Kern County jobs is related to oil production.

When independents shut down a well, the impact is felt by a variety of other businesses that sell a broad range of well-head services and supplies, from seismic studies and drilling to metal tubing, mud and cement.

“We’re servicing less than half the wells we were a year ago. So we’ve laid off an employee, cut expenses and we’re still losing a little money,” said Bruce Hanna, president of Quality Mud Service in nearby Taft. Hanna’s mud is used as a lubricant and stabilizer in the drilling process.

Oil service firms Halliburton, BJ Services and Schlumberger have also cut back in Bakersfield.

“What worries me is how I’m going to get my people back when the up cycle comes. A lot of them have had it with this kind of cyclical work,” said Ellis of Gary Drilling.

State and local governments aren’t spared from the turmoil. Kern County, which gets one-third of its $150-million budget from oil, expects a $12-million shortfall next year and county administrator Scott Jones fears basic services might be cut. Companies are assessed according to a formula pegged partly to the price of oil.

“We are very concerned about the impact on next year’s budget” Jones said, adding that services ranging from parks to medical services might be cut.

But more directly in the line of fire are the small companies doing business in the oil patch whose managers fear that global economics is working against them.

Brad Dewitt, a Bakersfield-based petroleum engineer who owns five oil wells, said the prevailing mood among independent producers is “very poor. . . . People have come to realize that the hope for near-term recovery of prices is basically nil, that this is going to be a long-term storm and that not everybody will survive it.”