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Fuel for Thought: California fracking ban a bigger boon to crude imports than bust for production

  • Featuring
  • Starr Spencer
  • Commodity
  • Oil

California's move to stop hydraulic fracturing permits by 2024 will likely do little to speed up the current decline in output, but any crackdown on production would boost the state's dependence on imported crude.

California was once the third-largest oil producer in the US behind Texas and Alaska, according to US Energy Information Administration data. In the early 1980s, crude output in the Golden State reached 1 million b/d, behind Texas' 2.5 million b/d and Alaska's 1.7 million b/d.

But as of January 2021, California ranks seventh among oil-producing states at 364,000 b/d, trailing Texas (4.66 million b/d), North Dakota (1.1 million b/d), New Mexico (1.09 million b/d), Alaska (464,000 b/d), Oklahoma (426,000 b/d), and Colorado (373,000 b/d).

An April 23 executive order issued by California Governor Gavin Newsom called for an end to oil production by 2045. But output was already expected to head in that direction "due to the higher cost of supply within the San Joaquin Valley and stricter and more burdensome regulation, along with continued political risk," said Parker Fawcett, North American supply analyst for S&P Global Platts Analytics.

Platts Analytics projects the state's oil output to drop below 300,000 b/d by early 2023 and fall below 200,000 b/d by the end of 2028. By the end of 2040, production should be below 130,000 b/d.

The April 23 order also would essentially end fracking in the state, but will have little impact to its faltering oil production, as only about 2% of the of oil extracted uses such a method, said Fawcett.

Many of California's older fields discovered 100 or more years ago are still producing thanks to cyclic steaming, a widely used and messy process that has given new life to old fields by allowing heavier, thick crude to flow more easily to the surface.

The process is used on many historic fields such as Midway-Sunset, discovered in 1894 and one of the largest oil onshore reservoirs ever found in the US, located in the state's central Kern County southwest of Bakersfield.

Cyclic steaming also accounts for over half (170,000 b/d) of oil output in the San Joaquin Valley, a key production area in the state, and in much of offshore production, Fawcett said.

A far-reaching bill put in front of lawmakers April 13, 10 days before Newsome's executive order, that would have banned fracking, cyclic steaming, and water and steam flooding by 2027 and ended permitting of those methods starting next year, was narrowly shot down by the Senate Natural Resources and Water Committee, which further opens the possibility of legal challenges against the governor's mandate.

"A ban on cyclic steam would be absolutely devastating, even if just on new sources of production via a permanent permit ban," Fawcett said, adding such a stoppage "would essentially end the California oil industry as we know it. It would cause rapid production declines and a sharp increase in foreign imported oil."

California refiners processing more imported oil

Import reliance to grow

The state's crude production has been on a decline, which has and will continue to drive increased reliance on imports, mainly from the Middle East, South America and Canada, for California's refineries, Fawcett said, especially as risks to oil output "only continue to grow."

California lacks the pipelines and other infrastructure to move domestically produced crude into the state and relies upon waterborne shipments from Alaska and foreign sources.

Use of foreign crude by state refineries has grown from just 5.7% of throughput in 1990 to 25.7% in 2000 and 47.7% in 2010, before taking over the majority of volumes at 50.7% in 2012 and staying above that 50% level until a pandemic-hit 2020, according to California Energy Commission data.

California Independent Petroleum Association CEO Rock Zierman called the executive order against fracking "disappointing," and said the state's 1.4 million b/d of oil demand won't change, which will lead to further dependence on crude from "foreign regimes who do not share our environmental standards and human rights values."

California oil output forecast

Production under pressure

With growing environmental pressures and measures such as Newsom's order, California's production has nowhere to go but down, Fawcett said.

Major producers in the state include Chevron and Aera Energy, and smaller operators Berry Petroleum, California Resources Corp. and Sentinel Peak, Fawcett said.

Chevron produces 104,000 b/d of oil equivalent in California, notably from the Kern River steam flood near Bakersfield, while Shell and ExxonMobil are partners in the Aera joint venture that produces around 100,000 boe/d, according to UBS analyst Lloyd Byrne