Kern oil producers put off expansion work despite strong prices

Jul. 10—When oil prices rise as high as they have lately, there's usually something of a lag before they prompt significant new activity in Kern County oilfields. But not like this.

Instead of ramping up drilling, hiring and contracting of local services — as happened in good times past — local oil producers say they're moderating their response to the strongest barrel prices in more than 2 1/2 years.

The reasons vary but generally they reflect oil companies' size or unique financial circumstances. For some the restraint has to do with recent regulatory uncertainty; others are holding back because they're still recovering from a horrendous 2020.

There's every expectation investment in local oilfields will eventually increase if prices remain strong. Small, independent oil producers, in particular, can typically react quickly by performing deferred maintenance on wells to increase flows and better capitalize on prices that lately are almost six times higher than they were at their lowest last year.

Industry veteran Les Clark said the oil producers he talks with, typically family-owned businesses with a few dozen wells or less, are pleased with recent prices but not convinced now's the time to expand their operations.

"They're just trying to stay in business and try to figure out what's going to happen in the near future here," he said.

FUEL PRICES

Fuel retailers are demonstrating less restraint. Motorists are paying sharply higher prices for gasoline as demand for fuel jumps along with an economic reawakening following pandemic-related closures.

Bakersfield's average price for a gallon of regular unleaded has risen more than 12 cents in the past month to hit $4.24 on Friday, an increase of about 40 percent during the past year. That day the state's average gas price stood just 36 cents below its all-time high of $4.67 in October 2012.

Crude oil prices run on a similar but different path. Local benchmark Midway-Sunset was selling Thursday for about $73 per barrel, which in a welcome indication of stability was up less than a dollar from its price a month earlier.

A year earlier Midway-Sunset was going for just $40.36 per barrel. That was nearly three times the price at which it bottomed out on April 20, 2020, when cratering demand for fuel combined with a lack of storage space to bring about some of the lowest oil prices in many years.

RIG ACTIVITY

Industry data on the deployment of drilling rigs in California illustrates how sluggishly oil producers have reacted to the high oil prices.

According to numbers reported by oilfield service company Baker Hughes, just six rigs were drilling in California at the start of this month. That's the same as June's average and May's, and one rig less than the monthly average in each of the four months prior. In June and July of last year California's average rig total settled at four.

Those figures are remarkably low when viewed in recent historical context: The state's monthly rig average in July 2019 was 18 — same as the month before — when Midway-Sunset was stuck in the low-$60 range.

A few large and mid-size oil producers active in Kern declined to comment on their response to recently strong prices, or did not respond to requests for comment. But others agreed to share their perspective.

CHEVRON'S TAKE

San Ramon-based Chevron Corp., which as a major oil company traditionally sticks to long-term plans rather than responding to monthly ups and downs, noted crude oil prices are determined by global market fundamentals like supply and demand, inventories and seasonality.

"Since the price of crude fluctuates continually," it said in an emailed statement, "Chevron needs to look through the economic cycles that drive oil prices as we plan our operations in any price environment."

Aera Energy LLC, a mid-size producer based in Bakersfield but co-owned by two much larger oil companies elsewhere, is considered more nimble than the majors and better equipped to respond to price jumps. But it said a lack of regulatory certainty and available permits in California has become a bigger driver of local industry activity now than prices.

The company said these days it is taking a long-term perspective — a term generally understood to mean steadiness rather than responsiveness — because of a range of factors including reservoir complexity, technological demands and the scale of required investments.

AFFORDABLE TECH

Looking forward, Aera said higher prices allow oil producers to bring advanced and more expensive technology to bear on increasingly complex reservoirs.

"The application of new technology is more 'affordable' during times when crude prices are higher, allowing us to safely and responsibly produce the oil this state depends on," company spokeswoman Cindy Pollard stated.

The decision-making process is different for small producers. They don't have entire bureaucracies to consult before ordering new drilling, for example. But without the financial resources necessary for a large expansion, reacting to high prices often means, for them, bringing on additional workers and contracting a rig to drill a new well or work over an existing one.

Independent Kern County oil producer Chris Hall emphasized he has no complaints about recent oil prices. The only thing holding him back from investing in his properties so as to take full benefit from them, he said, is the financial hit he suffered last year.

STILL RECOVERING

Small operators like him shut in their wells when prices dropped as low as they did, he noted, adding that he lost about a third of his workforce last year after having to cut wages by about a quarter. Before Hall can do what's necessary to maximize his production, he said he needs to save up enough money.

Jeff Smith, another local independent, finds himself in a similar position. Faced with high costs but drastically reduced income last year, he lost a lot of money in 2020 and must now save up before he can think about expanding his production.

His plan is to hire two new workers to help rework some of his existing wells, assuming the necessary permits arrive in a timely manner, he said.

If oil prices remain as strong as they have been — and he expects they will — then hopefully he'll be able to do even more substantial work, like drilling new wells.

"We enjoy drilling wells," he said. "I'm a geologist. That's what I love to do."