CRC To Halt Most Drilling If Ruling Stands

CRC To Halt Most Drilling If Ruling Stands
A stretch of pipeline belonging to California Resources Corporation..

A court ruling threatens to sharply limit the ability of Long Beach-based oil and natural gas production company California Resources Corp. to drill for new oil and natural gas in oil-rich Kern County for months or even years to come.

In the latest twist in a long-running legal battle, a state appellate court ruling issued earlier this month sets aside a 2015 ordinance by Kern County that aimed to fast-track the complex permitting process for drilling of new oil and natural gas wells in the county and would have allowed drilling near residences and schools.

A local farmer and several environmental groups had challenged the ordinance, saying it does not comply with existing state environmental laws. The judicial panel ruled that the county must ensure compliance before attempting to reenact the ordinance. 

The ruling temporarily halts the issuance of new drilling permits. Kern County now has the option of attempting to rewrite the ordinance in a way that satisfies the judicial ruling.

California Resources is one of three oil companies that combined comprise the lion’s share of oil and natural gas production in Kern County. The other two are San Ramon-based Chevron Corp. and Bakersfield-based Aera Energy.

California Resources last month agreed to acquire Aera Energy. The deal must still obtain various state and federal approvals before it can be finalized.

Shares of California Resources plunged 8% the day the appellate court decision was made public, but regained all of that ground and a bit more during the next five trading sessions. Shares closed March 14 at $54.02, up nearly 2% from the pre-decision close on March 6. 

Late on March 7, California Resources disclosed in a filing with the Securities and Exchange Commission that it is evaluating its next steps in light of the ruling. 

The company had previously disclosed in its most recent quarterly report that if it is not able to obtain new well permits for the remainder of this year it plans to run just one drilling rig program with a capital expenditure of up to $240 million, instead of the four drilling rigs it had in operation at the end of last year. 

A CRC technician works on equipment.

Tortured history of fast-track effort

The appellate court ruling is the latest twist on what is now a nearly decade-long legal saga that started in 2015 when Kern County passed its ordinance laying out a fast-track approval process for new oil and natural gas wells in the county. The ordinance also would have allowed drilling up to 210 feet from residences and 300 feet from schools.

As the latest appellate court ruling itself stated, “The ordinance’s basic purpose is the acceleration of oil and gas development and the economic benefits that might be achieved by that development.” 

A local farmer and several environmental groups, including the Sierra Club, the Center for Biological Diversity, the Natural Resources Defense Council and Earthjustice – filed suit to challenge the ordinance. They claimed the county did not adequately consider environmental impacts of additional drilling on wildlife, water and other natural resources. 

The farmer’s argument was that increased drilling activity has prompted farmers throughout the county to sell their landholdings, resulting in a significant decline in farming acreage.

In 2020, the same Fifth District Appellate Court ruled that the ordinance violated state environmental laws, halted the issuance of new drilling permits and ordered the county back to the drawing board to come up with an ordinance that would meet those laws.

The county came up with a revised ordinance the following year that it believed would meet the standards, and in 2022 a Superior Court judge upheld the ordinance, which allowed new drilling to resume.

But opponents again challenged both the ordinance and this judge’s ruling, sending the issue back to the state appellate court. In its latest ruling, the appellate panel said the revised ordinance still did not satisfy the standards of state environmental laws.

Now it’s up to Kern County to decide whether to make a third attempt to enact its fast-track ordinance.

CRC a major Kern County player

At issue is the future of oil drilling in Kern County, which as of 2022 accounted for roughly three-fourths of the state’s oil-producing wells. The county has two major oil fields: Kern River and Elk Hills. Chevron has most of the Kern River oil field, while nearly all of California Resources’ operations are in the Elk Hills oil field. 

California Resources inherited these Elk Hill operations from Occidental Petroleum Corp. when the latter company spun off its California operations and relocated its headquarters from Westwood to Houston a decade ago. Occidental had originally purchased its stake in the Elk Hills oil field in 1997 from the federal government for $3.7 billion.

According to California Resources’ 2023 annual report released last month, its Elk Hills operations produced an average of 35,000 barrels per day of oil and oil barrel-equivalent in natural gas. (The oil component was about 16,000 barrels per day.)

By comparison, Chevron, on its website, says it produces about 75,000 barrels of oil per day in Kern County, while Aera Energy claims to produce about 60,000 barrels of oil per day in the county.

If California Resources’ purchase of Aera goes through, then the combined company’s oil production in Kern County will be roughly tied with Chevron for the biggest producer in the county.

More importantly for the purposes of this ruling, California Resources said in its annual report filing that it had the net equivalent of four wells either in exploratory or final drilling phases in Kern County last year. That was down sharply from 114 net well equivalent in 2022 and 109 net well equivalent in 2021. The filing did not give a reason for this sharp drop or state whether it was the delayed result of the 2020 permitting halt in Kern County.

More recently, California Resources’ Elk Hills operations have become a focal point for the company’s rapidly growing carbon-sequestration initiative under the Carbon TerraVault banner. Carbon TerraVault is currently developing a facility at an existing cryogenic gas plant at Elk Hills that will capture carbon dioxide gas and then place 100,000 metric tons per year of carbon dioxide gas in an underground reservoir. The facility is slated to come online by the end of next year.

The company’s SEC filing on the impact of the court ruling made no reference to this effort, which would indicate that the company does not see an impact. The company is seeking a different set of permits for its carbon-sequestration projects from the Environmental Protection Agency.

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