California May Drill Into Oxy Expansion

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Increasingly constrained overseas, Occidental Petroleum Corp. is planning to draw more oil from California even as the state Legislature is debating whether to slap a big tax on oil extraction.

The L.A. company hopes to use new extraction technology to get more oil out of older fields near Long Beach and Bakersfield, drilling 20 new wells this year alone.

“Occidental believes that California has long been underdeveloped since about 1970,” company spokesman Richard Kline said.

The surprising element in Occidental’s move is that it comes as California lawmakers are considering a 9.9 percent tax on oil extracted in the state. Backers said that could bring in up to $2 billion a year to state coffers and help balance a $24 billion budget deficit. California currently is the only major oil-producing state in the nation that does not have an extraction tax.

Occidental doesn’t seem overly concerned by the prospect. The company appears to be banking on history: An oil extraction tax has been debated for decades, and voters have turned down three specific proposals. The most recent was in 2006. Republican legislators have said they will oppose any tax, including one on oil extraction.

Kline acknowledges, however, that passage of the tax would cause the company to rethink its strategy in the state.

“It would make a significant difference and lessen our potential production in California,” he said.


Steadfast opposition

Rock Zierman, chief executive of the California Independent Producers Association, which is fighting the latest oil extraction proposal, said a 9.9 percent tax, added to existing levies, would make California the most expensive state for oil and gas production.

“Suddenly, other places in the country would be more attractive for oil companies to invest in,” Zierman said.

Any vote in the Legislature this year to impose an extraction tax would need a two-thirds majority; Republicans have so far been steadfast in their opposition and the tax would need the endorsement of at least two GOP legislators in the Assembly and the Senate to pass.

Analysts said that it’s pointless for Occidental to wait because the tax question has been asked for so long, and the company would be basically paralyzed in California while holding out for a resolution of the issue.

“You can’t plan your entire investment strategy off of what will or will not happen in the state Legislature,” said Cory Garcia, senior research associate with Raymond James & Associates in Houston.

Garcia and other oil industry analysts said the more pressing concern for Occidental is trying to find additional oil supplies at a time when companies are being shut out of several major oil-producing areas around the globe, either because of war, political unrest or a trend toward nationalizing oil production.

“There are fewer hospitable places now for oil companies to go,” said Fadel Gheit, senior oil analyst with Oppenheimer & Co. in New York. Gheit noted that:

Governments in Venezuela and Ecuador have nationalized some or all oil production within their borders.

In Nigeria, growing anarchy is threatening production.

In the former Soviet republics, corruption is making it increasingly difficult to do deals.

Occidental faces its own particular challenges abroad.

In 2005, it became the first major oil company to return to Libya after the United States lifted sanctions against the North African nation. That deal is showing less promise these days.

“The Libyan government has been very slow in working with Occidental,” Gheit said.

There is a major opportunity in Iraq, where dozens of oil companies including Occidental are bidding on contracts to service and revive major oil fields. Occidental Chief Executive Ray Irani and President Steve Chazen were not available for interviews early last week because of a bidding deadline for Iraq contracts. On June 30, a consortium led by BP plc was awarded the first big contract for rebuilding one of Iraq’s biggest oil fields after Exxon-Mobil Corp. failed to reach agreement with the Iraqi government.

For Occidental, getting a foothold in Iraq would be crucial.

“This is a much bigger prize than Libya,” Irani told Bloomberg late last month. “The potential from a production point of view is much bigger in Iraq.”

But even if Occidental does manage to win some bids in Iraq, the security risks would be considerable, and the political situation is far from stable.

All that makes increasing production in California and other states more attractive. The company is currently the biggest oil producer in Texas and the third largest in California; it’s also the largest producer of natural gas in California.

Occidental’s annual report shows that the company produced 128,000 barrels of oil and natural gas per day in California. It hopes that new production in the state could yield hundreds of millions of barrels of crude.

The company hasn’t said how much more oil it plans to produce in California. The plans involve exploration in addition to extraction, and company experts don’t know how much more oil they’ll be able to find.

Its 2008 oil and gas production in California is more than one-third of the company’s total national production of 361,000 barrels per day, and more than one-fifth of its total worldwide production of 601,000.


California gold

Most of Occidental’s 1.1 million acres in California holdings are in the oil fields of western Kern County the site of the early 20th century oil boom depicted in the 2007 film “There Will Be Blood.”

Occidental nearly doubled its California holdings in 1998 when it won the bid for the former U.S. naval oil reserve site in Elk Hills, just outside Bakersfield.

At that time, with oil prices near historic lows, it made little sense for Occidental to invest in technology to try to wring more production out of Elk Hills. But in recent years, as oil prices have soared, oil companies have been racing to install new slant drilling technology. The technology, which has become more precise, allows companies to expand the reach of old wells by drilling outward from old vertical shafts. Kline said Occidental is looking at more slant drilling at Elk Hills.

Occidental also owns offshore oil production facilities on small artificial islands off the Long Beach coast and is exploring slant drilling possibilities there, too.

Analysts said making improvements to these sites is a smart place for Occidental to place its money.

“Right now, they have more money to invest than at any time in the past 10 years and few places to invest it in. Looking back home definitely makes sense,” Oppenheimer’s Gheit said.