(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Jan 14 (Reuters) - California’s oil industry is being hit harder than any other state by falling prices because of the comparatively poor quality of its crude and its aging fields.
The number of active drilling rigs in the state has more than halved since June 2014, from 48 to just 21, according to oilfield services company Baker Hughes (link.reuters.com/ruz73w).
The California rig count is the lowest since October 2009, when producers were struggling with low prices in the aftermath of the global financial crisis and deep recession that began a year earlier.
California’s high-cost and low-productivity oil industry has always been vulnerable to falling prices and exhibits deep especially cycles in activity rates.
It is still the third-largest oil producing state in the union, producing almost 560,000 barrels per day, according to the U.S. Energy Information Administration.
Oil fields in the Los Angeles Basin and around Bakersfield in Kern County were once among the largest and most productive in the United States.
But the state’s output has been steadily declining since 1986. Unlike other major producing states such as Texas, North Dakota and Oklahoma, the shale revolution has bypassed the state.
California’s very mature fields produced 3 billion barrels of water and just 200 million barrels of oil in 2012 - 15 barrels of water for every barrel of oil - according to state regulators.
Most of the oil is heavy and viscous. More than half of state production, including big fields like Kern River, Belridge and Midway-Sunset, has an API gravity of 20 degrees or less.
In 2009, California operators had to inject 500 million barrels of steam and almost 1.4 billion barrels of water into declining fields to maintain pressure and improve flow to produce just 230 million barrels of oil.
The state has around 35,000 stripper wells which produced on average just 3.4 barrels per day each in 2012. These highly marginal wells accounted for 116,000 barrels per day of the state’s total output, more than 20 percent of the total, according to the Interstate Oil and Gas Compact Commission.
Posted prices for Midway-Sunset, Belridge Heavy and Kern River crude have fallen to $38, $34 and $34 respectively, down almost two-thirds from an average of $100, $97 and $97 in June 2014, according to bulletins from Plains Marketing.
The result has been a huge drilling crunch, with rigs idled and crew layoffs.
Ensign Energy Services issued Worker Adjustment and Retraining Notification (WARN) letters about possible layoffs to 700 employees in Bakersfield in mid-December.
Ensign told the Calgary Herald newspaper subsequently: “We are not exiting California. Just looking at the low oil price environment we’re in, we’re anticipating there will be less demand for drilling services in the future, hopefully not, but we don’t know.”
“If there is a possibility (of layoffs), under California law, we have to put them on notice that a number of people could be affected,” the company said (“Ensign source confirms warning of possible layoffs in California” Jan 2).
The state’s fields are all conventional rather than shale plays and mostly very old so decline rates are slow. Production did not surge in 2010-2014 and for the same reason it is unlikely to collapse now even if drilling rates decline. The drilling slowdown will not contribute much to the rebalancing of the global oil market.
But the price collapse has killed off plans to frack in the state’s giant Monterey shale formation. It illustrates the intense financial squeeze on all high-cost low productivity producers across North America as prices tumble. (Editing by William Hardy)