California Field Report – March 2015

By Mike Flores & Olman Valverde, Esq., of Luna & Glushon

Split Decision on Local Oil Measures

Local voters in California gave oil a split decision on Election Day, March 3. Voters in La Habra Heights shot down an anti-fracking ballot measure, while voters in Hermosa Beach rejected a ballot measure that would have permitted E&B Natural Resources to construct 34 onshore wells in the city. In Redondo Beach, voters rejected a development plan that would have included razing the power plant that has long occupied a critical spot near the beach.

La Habra Heights voters rejected Measure A, the anti-fracking initiative, by 60%-40%. The initiative would have prohibited new oil drilling, halted reactivation of old wells, and prohibited fracking. It was placed on the ballot in large part to block plans by Matrix Oil to drill on an 18-acre site owned by the Southern California Gas Co. Californians for Energy Independence, a pro-oil PAC, spent $400,000 to defeat the measure in the city of 5,300 residents.

Meanwhile, in Hermosa Beach, E&B had proposed amending the general plan and approving a development agreement to approve the drilling of 34 wells. But the measure went down 79%-21%. Almost 5,000 voters turned out in the city of 19,000 – a large number for a Spring election run by the city, not the county elections office.

The defeat in Redondo Beach of the development plans of AES is the latest in a long series of battles over new development and the future of the power plant in the city. As an incentive to voters to support the development, AES promised to tear down the power plant. The project would have included 800 units of residential, a hotel, and a park. However, residents voted the development down by 52% – 48%.

Preemption Suit Filed in San Benito County

Oil company Citadel Exploration, Inc. has filed a lawsuit against San Benito County, arguing that the County’s voter-sponsored ban on various types of well stimulation, including hydraulic fracturing or “fracking,” is preempted by state law. Measure J, which was approved by San Benito County voters in November of last year, purports to create a county-wide ban on hydraulic fracturing and other types of secondary and tertiary oil recovery methods. Citadel had planned to develop up to 1,000 wells in San Benito County that would have employed cyclic steaming, one of the practices subject to the ban.

This fight has been a long time coming. As grass-roots efforts to ban fracking have increased over the last few years, industry representatives have consistently maintained that (1) regulation of “down-hole” activities is explicitly under the jurisdiction of the Department of Oil, Gas, and Geothermal Resources (DOGGR), and therefore cannot be regulated at the local level; and (2) local bans on fracking are preempted by the comprehensive state regulatory scheme prescribed by SB 4, passed in 2013.

Citadel’s complaint against the County contends that “regulation of down-hole operations is exclusively a State function and that the defendant lacks the power and authority to regulate down-hole operations.”

In November, Citadel filed a $1.2 billion administrative claim against the County, a prerequisite to filing a lawsuit.

New Oil and Gas Legislation

As the deadline for legislative bill introductions passed last week, California’s oil and gas industry will have their hands full addressing proposals that impact producer’s survival.

SB 13 (Fran Pavley, D-Agoura Hills) The bill specifies that the State Water Resources Control Board (SWRCB) is authorized to designate a high-priority or medium-priority basin as a probationary basin. SB 13 gives a local agency or groundwater sustainability agency 90 or 180 days, as prescribed, to remedy certain deficiencies that caused SWRCB to designate the basin as a probationary basin. The bill further authorizes the SWRCB to develop an interim plan for certain probationary basins one year after the designation of the basin as a probationary basin.

SB 20 (Fran Pavley, D-Agoura Hills) SB 20 seeks to make all information on wells public via a report

SB 32 (Fran Pavley, D-Agoura Hills) SB 32 proposes to reduce green house gases to the equivalent to 80% below 1990 levels. CARB will make further recommendations for future reductions beyond 2050.

SB 248 (Fran Pavley, D-Agoura Hills) Requires all operations of any form on or in the well to be systematically, completely, and accurately described and recorded in the well history.

AB 356 (Das Williams, D-Santa Barbara) Requires groundwater monitoring near Class II injection wells in order to protect underground sources of drinking water from oil and gas wastewater disposal and enhanced oil recovery (EOR) treatments.

AB 1490 (Anthony Rendon, D-Lakewood) Prohibits a well operator from conducting a well stimulation treatment following the occurrence of an earthquake magnitude of 2.0 or higher on a well that is within a radius of an unspecified distance from the epicenter of the earthquake until DOGGR completes a certain evaluation and is satisfied that the well stimulation treatment does not create a heightened risk of seismic activity.

AB 1501 (Anthony Rendon, D-Lakewood) Requires an air district to establish an emission standard for methane from a well stimulation treatment, and to issue a permit to an operator to enforce that standard. Operator would also be required to monitor the well stimulation treatment for methane leaks.

CRC Cancels Plan to Drill 200 New Wells in Carson

The California Resource Corp., formerly part of Occidental Petroleum Corp., announced that it is canceling plans to drill up to 200 new wells in Carson. “California Resources Corp. has concluded that our proposed Dominguez energy project is no longer practical in the current commodity price environment and we are asking the city to stop processing the project,” the company said in a statement.

In a related action, California Resources expects 2015 capital spending to drop about 75% from last year amid the drop of the price of oil. No one in the oil patch has been spared by the sharp petroleum price drop from 2014 highs above $100 a barrel to close to $50 a barrel at the end of last year.

FactSet Research Systems said that the world’s 24 largest energy companies collectively lost more than $260 billion in market value during the price plunge. That’s why energy companies from the smallest on up to Exxon Mobil Corp. have slashed capital spending plans and are cutting back on the number of wells they plan to operate.

California Resources is doing the same, according to Chief Executive Todd A. Stevens. “We plan our capital program in 2015 to be in the range of $400 million to $450 million, which represents an approximate 75% reduction from our 2014 capital investment of $2.1 billion,” Stevens recently told an investors conference.

Although the corporation is new, “we have a group of managers and employees who have been there and done that,” Stevens said, later adding “the operational responsiveness and the assets have already been tested a number of times over.”

Occidental named Stevens president and chief executive of the new company in July. Stevens had been with Occidental for 19 years, most recently as vice president of corporate development.

California Resources still occupies the old Oxy headquarters building in Westwood, which is due to be sold this year. The company recently announced plans to move to Chatsworth.

“We’re going to be staying in Los Angeles,” Stevens said in an interview. “When you are deciding on where you should place a corporate headquarters, you want a place where there is a lot of talent, and Mayor Garcetti has been very welcoming. This is a good place for us.”

The California company will remain the state’s biggest natural gas producer. California Resource’s assets are substantial. They include about 2.3 million acres in the state, including oil and natural gas basins in the Los Angeles area and the San Joaquin Valley.

San Diego Replacing Nuclear Power With Gas Plants

Two natural gas-fueled electric generating plants are being planned in San Diego to replace the generating capacity lost when the San Onofre Nuclear Generating Station was mothballed.

Construction is set to begin on March 9 for the gas-fueled Pio Pico Energy Center in Otay Mesa. It will supply the electricity needs of up to 200,000 homes.

San Diego Gas & Electric Co. is seeking approval for a second plant with twice the capacity, also fueled by natural gas, which it wants to build in Carlsbad.

In addition to filling the void left by the shutdown of the nuclear plant, the new project would allow the utility to proceed with the planned retirement of its gas-fueled Encina Power Station, which is about 60 years old.

The nuclear plant, which had provided 20% of San Diego’s electrical power, was retired because of widespread weaknesses in the pipes of its critical cooling system.

Environmentalist groups have objected to the two gas-fired plants, arguing that the utility should have used even cleaner forms of energy production. State regulators and the California Supreme Court rejected efforts by the groups to block the utility’s plans.