Bloomberg News

Occidental’s Crude Output May Fall on Scarce California Permits

October 19, 2011

Oct. 19 (Bloomberg) -- Occidental Petroleum Corp.’s oil and natural-gas output may fall this year for the first time since 2005 because it can’t get the permits it needs for new drilling projects in California.

Occidental, the biggest onshore oil producer in the continental U.S., is being hurt by a slowdown in approvals in the state, clouding an optimistic forecast from Chief Executive Officer Steve Chazen five months ago.

California’s Division of Oil, Gas and Geothermal Resources has granted 14 permits essential to new drilling projects this year out of 199 applications received, compared with 27 out of 100 in 2010 and 37 out of 52 the year before that, state figures show.

“The level of frustration is extremely high,” Catherine H. Reheis-Boyd, president of the Western States Petroleum Association, a Sacramento-based trade group, said in a telephone interview.

Permit delays in California, which has a 12.1 percent unemployment rate, have held up $1 billion in investment and more than 6,000 jobs, according to a report published earlier this year by the Los Angeles County Economic Development Corporation, a business group that supports more drilling.

Occidental owns about 1,367 square miles of land in the Monterey Shale, an area larger than the state’s Yosemite National Park and more than any other oil company. Occidental’s California holdings are worth an estimated $55 a share, Paul Sankey, a New York-based analyst with Deutsche Bank, said in a July 26 note.

Injecting Chemicals

The Los Angeles-based company’s oil and gas output this year may decline 2 percent to the equivalent of 730,000 barrels a day, the first time production has fallen since 2005, Thomas Driscoll, an analyst with Barclays Capital Inc., said in a note to clients July 27.

The U.S. Energy Information Administration in August estimated that the Monterey shale formation in Southern California holds more than 15 billion barrels of oil, or about two years’ worth of U.S. consumption.

A separate formation in Kern County near Bakersfield that Occidental discovered in 2009 may hold as much as 10 billion barrels of oil, Doug Leggate, an analyst at Bank of America Merrill Lynch, said in an April 29 note to clients.

The permits being sought would allow the injection of steam, water and chemicals underground, a first step in the process of coaxing crude from the state’s tar-like deposits, said Rock Zierman, executive director of the California Independent Petroleum Association in Sacramento.

Incomplete Applications

Reheis-Boyd and Zierman said the permit slowdown began with the appointment of Elena Miller, who took over as oil and gas supervisor of the Division of Oil, Gas and Geothermal Resources in September 2009.

Miller, a former lawyer for the California prison system appointed by Gov. Arnold Schwarzenegger as an adviser to the California Energy Commission, has skipped informal meetings with industry officials that were attended by her predecessors, Zierman and Reheis-Boyd said. Miller has said that California can’t legally grant the types of permits approved in the past, they said.

Miller declined to respond to those allegations. A major cause for permit delays is incomplete applications from companies, she said in an e-mail.

“There are inherent risks involved with underground injection,” Miller said. The state recognizes the importance of energy production to California’s economy, she said, and it is “working with oil and gas operators to permit projects.”

EPA Recommendations

New recommendations from the U.S. Environmental Protection Agency are part of the tussle. The EPA regional office reviewed California’s permit process in the spring of 2010 and suggested that several drilling rules be strengthened. The agency, which regulates drilling under the Safe Drinking Water Act and the Clean Water Act, delegates this authority to California.

The EPA recommended a stricter definition of freshwater in aquifers, better well construction, improved testing of the maximum pressure a formation can withstand and better monitoring of nearby wells to ensure injected fluids don’t migrate into drinking water, said David Albright, manager of the groundwater office in EPA’s Region 9 in San Francisco.

Industry criticism of the pace of approvals has been “more anecdotal and rhetorical than factual,” Alexis Strauss, director of the water division at EPA’s Region 9, which includes California, said in an interview.

“These regulations are designed to protect underground sources of drinking water while acknowledging that this very important economic activity is under way,” Strauss said. “We’re all very cognizant of what potential the Monterey shale has to offer.”

Rig Count

Melissa Schoeb, a spokeswoman for Occidental, declined to comment on the company’s dealings with California regulators and said operations in the state will be discussed in a conference call after earnings are released Oct. 27.

Occidental has 26 rigs operating in the state, double that of any other company. The next-highest rig count is 11, held by Aera Energy LLC, a jointly held subsidiary of Exxon Mobil Corp. and Royal Dutch Shell Plc, Phil McPherson, an analyst with Global Hunter Securities, said in a Sept. 9 note. Venoco Inc. has less than a fourth of the land in the resource-rich area, followed by Plains Exploration & Production Co., National Fuel Gas Co. and Berry Petroleum Co.

‘Just Takes Longer’

Occidental’s shares rose to an all-time high of $115.74 on May 2, days after Chazen said on a conference call that the company planned to increase drilling in California. Three months later, Chazen told analysts the state’s permit process had become “non-transparent,” and that he couldn’t forecast how many more rigs the company would install there in 2012.

“We’re making physical progress where we can, and I think the state will come around,” he said on a July 26 conference call. “It just takes longer, that’s all.”

Since May 2, Occidental’s shares have fallen 27 percent, underperforming peers.

North American production at Occidental is expected to grow in 2011, helped by California, where output rose to 78,000 barrels a day in the second quarter from 75,000 a year earlier, according to the company.

Those increases can’t make up for a decline in Occidental’s production in the Middle East and North Africa, which fell 12 percent to the equivalent of 258,700 barrels a day in the second quarter due in part to a war in Libya.

--Editors: Charles Siler, Susan Warren

-0- Oct/19/2011 19:48 GMT

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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