Major California Oil Producer Falls Victim to Collapse in Crude Prices Amid Pandemic

Oil pumping units in Kern County's Cymric Oil Field, November 2019. (Dan Brekke/KQED)

Facing a mountain of debt amid a historic coronavirus-driven crisis in the petroleum industry, one of California's biggest oil producers has filed for bankruptcy.

Industry analysts say the filing late Wednesday by Los Angeles County-based California Resources Corp. is a dramatic illustration of the challenges facing oil producers as pandemic-fighting measures across the globe have drastically reduced demand for petroleum products and contributed to a crash in crude prices.

Environmental activists say the crisis in the industry increases the risk that troubled oil-field operators will fail to meet their legal responsibility to safely shut down California's tens of thousands of idle wells. They're calling on Gov. Gavin Newsom's administration to intensify efforts to make sure that such wells — which can pose significant problems with water quality, air pollution and greenhouse gas emissions and are expensive to properly decommission — are not simply deserted.

Officials with the California Geologic Energy Management Division, or CalGEM, say they were prepared for CRC's filing, which had been telegraphed in a series of dire statements in recent Securities and Exchange Commission filings.

"CalGEM has taken steps to prepare for developments like this and will continue its oversight of CRC’s facilities and operations to ensure ongoing protection of public health, safety and the environment,” Uduak-Joe Ntuk, the state's oil and gas regulator, said in a statement.

The company, whose oil-field operations are centered in Kern County's Elk Hills oil field, sought federal bankruptcy protection after cash flow problems made it impossible to continue payments on about $5 billion in debt the company assumed when it was spun off from Occidental Petroleum in 2014.

CRC, which filed its Chapter 11 petition in federal Bankruptcy Court for the Southern District of Texas, said it has lined up $1 billion in "debtor in possession" financing to allow it to continue operations.

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Severin Borenstein, a professor and energy researcher at UC Berkeley's Haas School of Business, said CRC's filing was a direct result of the collapse in oil prices due to the pandemic and a global oil price war.

"The entire industry is going through a major financial crunch," Borenstein said. "The drop in oil prices starting in March really took them by surprise and they have been losing money — drastically — ever since."

Borenstein said that with petroleum demand bouncing back and crude oil prices rebounding to the $40 per barrel range, the financial pressure on the industry as a whole has eased somewhat.

"But for companies that were already not in great long-term shape, which includes California Resources, that means there's serious problems continuing operations in all of the areas they are," Borenstein said. He added that oil producers in the state face challenges beyond the oil price collapse and the pandemic.

"Production has been declining for years, and the demand and the need for California oil has been declining," Borenstein said. "That's because California has been getting more and more of its oil from other places, through the ports, and less and less demand for Central California oil."

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CalGEM records show that CRC's portfolio includes about 6,500 active and 5,000 idled oil wells in Kern County alone. Environmental activists say the sheer size of that portfolio — just a fraction of the roughly 106,000 active and idle wells in the state — raises the specter of the state having to take on the burden of paying future cleanup costs.

That's something they say must not be allowed to happen.

“Given the huge number of wells at stake, the Newsom administration has to intervene quickly to protect the public and our environment," said Kassie Siegel, an attorney at the Center for Biological Diversity, in a statement Thursday.

"As other companies flirt with insolvency, the governor should accelerate well remediation by solvent operators, increase bonding levels on existing wells, and stop digging the hole deeper by handing out new drilling permits. Forcing companies to clean up their wells would create jobs, keep the public safe from these unattended wells and make sure polluters are the ones paying for cleanup.”

A November 2018 report produced for the California Council on Science and Technology estimated the cost of properly abandoning all existing active and idle wells in the state at $9.1 billion. The state's available resources for well cleanup — bonds paid by well owners as a condition of operating in the state — totaled about $110 million, the report said.

State oil and gas regulators say they're tackling the problem through a variety of programs, including rules requiring oil operators to plug part of their idle well inventory each year, pay idle well fees the state can hold in reserve for future clean ups and requiring well owners to file detailed plans for managing idle wells.