Texaco closed down about 1,500 oil wells in California's huge Kern River field near Bakersfield last weekend because the collapse of oil prices has made them unprofitable, the company said Wednesday.
It was the first such action by a major oil company in California, but probably not the last. Even before the Texaco action, as many as 3,000 small, independently owned wells in the state have been closed since Jan. 1 because of falling oil prices, industry officials estimated.
In Orange County, oil companies are grappling with the dilemma of whether to shut down wells that may be expensive to restart, or to keep them going at a marginal profit or a loss.
Kern Action One of Largest
Similar industry cutbacks have begun in other parts of the country, especially oil-rich Texas, as the price of crude oil falls below the cost of production at many individual wells, particularly those that are older and less productive. But the action by Texaco in the Kern River area of Kern County is one of the largest such steps so far by a major producer in U.S. fields.
The number of jobs to be lost as a result of the well closings to date could not be determined. Texaco said none of its own employees will be affected, but other firms that maintain the wells and perform other services for Texaco presumably will have to cut back.
Economists at Bank of America have estimated that 7,000 oil field jobs in California could be lost due to the sharp falloff in the price of oil.
Downside of Good News
The effect on oil companies and workers and such oil-dependent areas as Kern County, 100 miles north of Los Angeles, represent the downside of what on balance will be good economic news in California and nationally.
Though California is No. 4 in U.S. oil production behind Texas, Alaska and Louisiana, its large and diverse economy makes the state far less dependent on the health of the oil industry than the other big oil states.
On employment alone, anywhere from 100,000 to 200,000 new jobs will be created in California traceable to lower oil prices and their contribution to economic growth, according to economists at Security Pacific National Bank and UCLA.
And while $100 million in state oil-production tax revenues could be lost this year as a result of actions such as Texaco's, that will be more than offset by a $150-million increase in tax revenues generated from the higher-than-expected economic growth, according to Bank of America estimates.
The 1,500 wells being turned off are Texaco's smallest producers, representing about one-third of the firm's wells in the Kern River field and about 10,000 barrels of crude oil per day. That represents 10% of the company's Kern River production and about 1% of the state's production.
Decline Began in November
Until the sudden decline in prices that began in November, California had about 50,000 oil wells producing about 1.1 million barrels daily.
Texaco became one of the state's biggest producers through its controversial acquisition of Getty Oil. The main reason it bought the firm, which was based in Los Angeles, was Getty's two-thirds ownership of the Kern River field, the nation's fifth-largest proven oil reserve.
However, as with many California oil fields, the Kern River "oil patch" has been yielding oil for more than 50 years, and its oil is considered "heavy" and expensive to refine. As a result, many of the wells produce fewer than 10 barrels daily and are less profitable than more prolific wells.
As the price of crude oil in world markets has plummeted from the $32 per barrel range in late November to as low as $12 today, the posted price for Kern River crude oil in recent days has hovered just above $11 per barrel.
'An Uneconomic Situation'
"When you've got production costs of $12 a barrel and you're getting $11, that's an uneconomic situation," said Robert B. Livesay, manager of operations for Texaco USA's Los Angeles operations division.
Closing a well is a "real difficult decision" because there is no guarantee that the well can be brought back to production without re-drilling, said Steve Berg-Hansen, executive vice president of the Garden Grove-based California Independent Producers Assn. And re-drilling can "easily" cost $50,000, he said.
In Newport Beach, Seahawk Oil International Inc. said all its workers have taken a 25% pay cut, effective this month, and the company is looking for less expensive office space. Seahawk, with operations in California, Colorado, Texas, Kansas and Oklahoma, also is "looking aggressively" to acquire debt-laden oil companies, "which are dead in the water," said Executive Vice President Dennis Hernreich. "It's time to consolidate, put some small oil companies together and survive," Hernreich said.
With operating costs at $8 to $10 per barrel, Seahawk probably can avoid halting production, Hernreich said. Still, current pricing in the oil industry is so chaotic that "it's like dropping an atomic bomb on the industry," he said.