The South Bay oil business--which has been big business for more than half a century--is hanging tough in spite of the drastic drop in crude oil prices, which have fallen from $28 to $12 a barrel in less than three months.
All producers are being squeezed, but smaller operators--because they have a limited number of wells and do not do their own refining or marketing--are feeling the pinch more than the majors. So far, no South Bay wells have been shut down, nor have there been substantial layoffs.
"We're not standing, we're lying down," said John W. Parkin, vice president and operations manager of Del Amo Energy Co., which has 47 wells operating in the vicinity of Del Amo Fashion Center in Torrance. At current prices, the company is making only $2 on each of the 830 barrels it pumps per day.
Parkin said that if oil prices drop another $2, "we'll be out of business. . . . We're at the mercy of the price of crude."
Major producers with South Bay wells, such as Mobil Oil Corp. and Exxon Co., play by different rules than Del Amo because they refine their own oil, or trade with other producers, and sell their own products.
"An integrated company such as ours has an advantage because we include exploration, producing, refining and marketing," said Missy Smith, a spokeswoman for Denver-based Mobil. Even though the profit margin on crude oil has narrowed since the price plunge started in January, she said the sale of gasoline and other petroleum products "is turning a profit."
Smith said, however, that not even the majors will keep pumping wells if it costs more to recover the oil than to sell it. That is not yet the case at its Torrance and Harbor City fields.
"We're still making a margin of profit," she said. Locally, Mobil pumps about 3,000 barrels a day from 214 wells.
The South Bay, where oil production began in the 1920s when much of the area was still farmland, has 13 producing oil fields. The Wilmington and Torrance fields, which are contiguous and stretch from offshore Long Beach to Hermosa Beach, rank No. 1 and 23, respectively, among California's 43 giant oil fields, based on total production.
The drop in oil prices has had no effect on the volume of operations at four South Bay refineries, according to Unocal Corp., Mobil, Texaco Inc., and Chevron Co.
"The refinery processes crude oil to meet sales demand, and it's still strong," said Mobil's Jim Carbonetti. "It has nothing to do with the crude oil price." The company's Torrance refinery operates at a capacity of 125,000 barrels a day--refining more than half of that into gasoline--and employs 850 people.
One refinery manager who asked not to be identified said that as buyers of oil, refineries are enjoying the same advantage as gasoline consumers, who have seen pump prices decline in recent weeks. "We can buy cheaper and cheaper," he said.
He said he hopes lower prices for refined gasoline and other petroleum products will stimulate more demand. "As long as the refiner can maintain a margin between what he buys and what he sells, he's all right."
Some officials said refineries are protected against fluctuating crude oil prices because of the lag time between the pumping of oil and its conversion into products, and because of inventories that take a month or more to deplete.
Because of the price drop, all oil companies, whether they are major or minor, are cutting back on operating and production expenses--from business travel to equipment and well improvements that enhance production.
"We postpone or delay any kind of maintenance we can," said Parkin of Del Amo Energy.
D. I. Bolding, spokesman for Exxon, which operates 380 wells in Wilmington producing 6,000 barrels a day, said maintenance and equipment outlays are aimed only at keeping the present level of production.
Bolding and spokesmen for some other major producers said that costly exploration for new oil is one area that is being curtailed, and this could affect future availability of oil because companies strive to find as much new oil as they produce each year.
Ironically, Del Amo's economizing could eventually decrease its production. To save on power and chemical bills, the company has cut back on the amount of water that it injects into its oil fields. However, injected water is what forces the oil to the surface.
Parkin said that the reduced injection will eventually result in a decline in the amount of oil pumped.
Santa Fe Energy Co., another small Torrance producer near the Del Amo center, spends half of its per-barrel production costs--about $5--on power for water injection.
"We're close to the break-even point," said Jerry Sampson, district production manager of Santa Fe.
Sampson said Santa Fe's financial safety net is its place as one of the 27 companies that make up Santa Fe Industries. The biggest of those is the Santa Fe Railroad. He said profits from the other companies, especially the railroad, make up for sagging oil profits.
"Transportation benefits from low (petroleum) prices," he said.
Oil officials agree on the cause of the price slump: the surplus of oil from the North Sea and from Saudi Arabia, and the failure of the Organization of Petroleum Exporting Countries (OPEC) to lower production levels.
But they don't see eye to eye on what will happen now.
Sampson thinks the market has bottomed out and that the price of crude will begin climbing again. Mobil's Smith thinks oil prices may drop even further, based on projections of prices for North Sea oil this summer. She said those projections could be indicators of general prices.
Parkin thinks things will be "lean for the next three years," but that prices will climb again.
"We'll survive," he said.