California Oil Dreams Fade as Beverly Hills Derrick Comes Down

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(Bloomberg) -- Draped in flower-covered panels, the iconic derrick that towers over Beverly Hills High School has pumped crude for decades. Now, it waits to be dismantled, its demise mirroring the fate of oil drilling in California.

As the Golden State tilts toward a low-carbon future, Los Angeles’ legacy drillers are being crowded out, leaving behind more recoverable crude than in all of Alaska.

Yet this shift away from drilling hasn’t quelled California’s appetite for oil: While the state pumps less, it’s importing more. Last year, the state’s refineries processed the second-highest annual volume of crude since 2008 -- with 57 percent of it coming from overseas. The trend runs counter to the story of the shale revolution, which has fueled record-high production and curbed U.S. reliance on foreign oil.

“California has one of the highest concentrations of oil in place in the world,” said Margita Thompson, vice president of communications for California Resources Corp., one of the state’s largest oil producers. “Yet the state is an energy island.”

Pipeline Desert

With no major pipelines connecting California to its neighbors, the state remains largely untouched by the shale boom. While refiners in the Midwest and Gulf Coast are awash in cheap, American crude, those in California are paying as much as $6 more per barrel for oil shipped from Saudi Arabia, Ecuador and Colombia. That’s taken a toll on California pump prices, which were 61 cents higher per gallon last year than the national average.

“California consumers are paying higher prices for gasoline in part because the cost of crude oil to California refineries is higher than much of the rest of the country,” David Hackett, president of energy consultancy Stillwater Associates in Irvine, California, said by phone. “There are currently no pipeline connections, because in the past, the connections weren’t needed.”

For decades California’s homegrown oil industry satisfied the state’s demand. But now output from the largest oil fields is falling. Twenty years ago, the Midway-Sunset field in the San Joaquin Valley was the largest in the state, pumping more than 160,000 barrels a day. Last September, it produced less than 60,000 barrels a day. The number of wells drilled sank to 759 in 2016 from more than 3,000 four years earlier.

Crude Politics

Efforts to revive the state’s oil industry have fallen flat amid local opposition and environmental regulations. Most recently, state politicians rejected a Trump administration plan to open offshore waters to new production, with California Lieutenant Governor Gavin Newsom vowing that “not a single drop” of oil would reach shore.

Further down the supply chain, California is preparing for a fight with the U.S. Environmental Protection Agency over emissions standards. The federal government wants to unravel them -- California wants to keep going. The state’s Air Resources Board will vote to strengthen its Low Carbon Fuel Standard Friday.

Meanwhile, existing offshore production remains curtailed by the 2015 closure of a Santa Barbara-area pipeline that spilled thousands of barrels of oil along California’s coast, a flashpoint that only inflamed opposition to oil production.

In densely populated areas like Los Angeles, it’s getting harder for companies to operate even decades-old wells. Recently, noise and odor complaints by neighbors of a well pad near the University of Southern California prompted the city to require Sentinel Peak Resources LLC to build a 45-foot wall enclosure around their site.

In February, the L.A. County Department of Public Health recommended expanding the setback between oil wells and urban areas beyond the current 300 feet.

“There is quite a lot of pressure now from people in the L.A. basin, who would sort of like to move on, shut off production,” said Don Gautier, a former U.S. Geological Survey geologist.

Still, with oil prices nearing $70, drilling could turn around in the state, slowing the decline in production, Stillwater’s Hackett said. But that won’t save many of the wells being shuttered today.

Back at Beverly Hills High School, the old oil derrick’s fate was sealed with the 2017 bankruptcy of the lease holder, Venoco LLC. When the wells were shut just over a year ago, production had dropped by 90 percent since the early 1980s annual peak of 850,000 barrels.

The oil earned the district half a million dollars a year before the tap was turned off, La Tanya Kirk-Carter, chief administrative officer of the district, said by phone. Now, the district and city are stuck footing the $8 million bill for plugging the wells with cement and dismantling the site.

With a few additional wells shuttered, more foreign imports may be needed, creating a drain on the state, according to Kevin Klowden, executive director for the Center for Regional Economics at the Milken Institute in Santa Monica, California. “Ultimately, the money is going out of California.”

©2018 Bloomberg L.P.

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