And why Kern County in specific?
Kern County is the most prolific oil producing county in the entire United States – more productive even than the famous Texas counties of the Permian and Eagleford basins — pumping out some 140,000,000 barrels in 2014, or about 75% of California’s total production. The reason is simple: No region in the entire world has a greater concentration of 100-million-barrel producing fields than the San Joaquin Basin – not Saudi Arabia, not the Bakken and not Texas. And, with five billion-barrel fields within its borders, Kern County covers the heart of the basin.
California E&Ps enjoy the high demand of a large population with an oil-thirsty car culture. Refiners in the Golden State simply cannot buy enough local oil. In fact, California produces just 600,000 barrels per day, but refiners have more than three-times that capacity — over 2 million barrels – a number that barely meets the demand of 33 million people, as evidenced by a recent spike in gasoline process to nearly $5 a gallon, despite the oil price plunge. So, even with thousands of oil wells pumping away within an hour’s drive of most refineries, the majority of California gasoline is refined from oil imported from overseas or other states. The balance comes from Alaska (22%), Saudi Arabia (14%), Ecuador (10%), Iraq (5%) and Mexico (3%).
That’s why California oil often attracts a premium of 5-10% over West Texas Intermediate (WTI) pricing, depending on market fluctuations. In fact, California oil prices have more closely mirrored pricing for Brent crude, the standard world price deck for oil, in recent years.
Because of its key geological location, Kern County’s economy is dominated by the oil industry, along side the agriculture industry. As a result, the county features robust industry infrastructure and a deep bench of service providers supported by an extremely efficient regulatory system that safely and effectively permits new production in a matter of weeks. Perhaps more importantly, Kern County is an oasis of regulatory sanity. The County government is currently finalizing a County-wide Environmental Impact Report (EIR) for the entire industry. This will further streamline the local government’s approach to permitting production and greatly reduce paperwork for exploratory drilling, the only County in the State to take such an industry-friendly approach.
This does not in any way mean that Kern County standards are unsafe or overly permissive. In addition to being the heart of the State’s oil industry, the County is also the heart of the San Joaquin Valley, one of the most productive agriculture regions in the world. In fact, oil production is often located inside agricultural operations, and the two are mutually supportive. Produced water from oil operations is cleaned and sold to farmers, while walnut shells and other agriculture by-products play a role in oil production. Kern County’s forward-thinking, realistic approach to oil industry regulation ensures that both opportunities are safely and effectively maximized.
Technical innovations are de-risking inaccessible oil and revealing hidden prospects. Older fields and field extensions represent low hanging fruit as technology and higher commodity prices allow the industry to unlock previously uneconomic zones. Reprocessing of vintage seismic data combined with new, high-resolution 3-D seismic, is highlighting previously unnoticed oil – often adjacent to or under legacy wells. The comingling of multiple hydrocarbon bearing zones is making wells more economical, as are horizontal drilling techniques being applied to conventional targets. And, most impactful to COIL, advances in thermal recovery coupled with record low natural gas prices are making it economically feasible to recover significant quantities of oil untouched by previous production.
Major oil companies like Chevron, Exxon and Shell never left their California operations while others, like Occidental Petroleum’s California Resource Corporation spin-off are refocusing in the region That means there are few “ground floor” opportunities in small-cap E&P space – and zero with four generations of experience in California Oil.
These opportunities will bear fruit in the near future via robust oil production. As this trend is identified by both investors and independent E&P companies, an eventual exit strategy should present itself. And Kern County will be at the heart of the action.