Big Energy Gusher in California for Occidental

Oxy's natural gas and oil discovery in the Central Valley may turn out to be California's biggest in 35 years

By Christopher Palmeri

Occidental Petroleum (OXY), the big Los Angeles-based oil and gas producer, announced on July 22 that it may have found a 250 million-barrel field in Kern County, Calif. It's the largest discovery in the state in more than 35 years, the company claims. In the oil and gas business, a 100 million-barrel field is considered sizable.

Oxy Chairman and Chief Executive Ray R. Irani is expected to say more about the discovery during the company's earnings conference call scheduled for July 23. The company says it has drilled six wells so far to delineate the discovery, in Southern California's Central Valley. Oxy believes about two-thirds of the production from the field will be natural gas. Irani also said in a press release that similar geological structures could be present in more of the company's 1.1 million-acre position in California.

Best known as the company that discovered giant oil fields in Libya in the 1960s under legendary former chairman Armand Hammer, Oxy started out in California's oil fields in 1920. Under Irani, who has been CEO since Hammer's death in 1990, Occidental has shed non-energy business and focused on acquiring large positions in mature fields in the U.S.—particularly Texas, where it is now the largest oil producer, and California, where it ranks third behind Chevron (CVX) and Aera Energy, a joint venture of ExxonMobil (XOM) and Royal Dutch Shell (RDSA).

Oxy Licensed Much of Kern County

Oxy has been methodically expanding its production in California since 1998, when it purchased a big stake in the Elk Hills field from the federal government for $3.6 billion. At the time, many in the energy industry thought Oxy had overpaid for the field. But natural gas prices subsequently spiked and the company was able to significantly increase production by utilizing the latest oil-field technology. At the company's field office near Bakersfield—the largest city in Kern County—Oxy operates a control room where technicians monitor and tweak output from its fields 24 hours a day.

In 2005, Oxy acquired Vintage Petroleum, another large California producer, for $3.8 billion. The company has also been snapping up much smaller producers. "Oxy's been buying everyone up left and right," says Alan Adler, founder of Aba Energy, a much smaller producer. "They've really got a license on most of the playground in Kern County."

Oxy now operates more than 7,500 wells in the state. Its reserves in California were 708 million barrels at the end of 2008, about 24% of the company's worldwide total.

Still, the size of Oxy's discovery surprised many in the California energy industry. "Wow," said Dana Christensen, vice-president for exploration at much-smaller Capitol Oil. "I'm taking notes."

California: Third in Oil Output

Most oil and gas producers have been slashing spending this year as energy prices fell from their dramatic highs of 2008. Natural gas in particular has tumbled, selling lately for $3.80 per thousand cubic feet, down from a high of $14 in June of last year. Although not as large as some of the new natural gas fields discovered in shale formations in Texas and Oklahoma, California's fields can be more profitable. Producer Venoco (VQ) says its California wells cost around $1.1 million to develop—as little as one-sixth the cost of the harder-to-drill shale wells.

Although more associated with solar panels and hybrid cars, California is actually one of the nation's biggest oil and gas producers. At 635,000 barrels per day, its oil output ranks third in the nation, behind only Alaska and Texas. The state's energy industry predates that of Texas, a point known to viewers of the 2007 film There Will Be Blood, which chronicled California's turn-of-the-century oil boom.

The oil industry plays a minor role in the state's current budget battle. It managed to defeat a movement to impose a 10% tax on oil production to help close the state's $26 billion budget gap. Instead, the state's energy industry got something it had been seeking for 40 years: more access to drilling off the coast of Santa Barbara. The area had been off-limits to new rigs since a controversial oil spill in 1969. Fresh drilling there could be worth as much as $2 billion in revenue to the state.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.

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