Oil

Monday, Feb 11 2013 09:00 PM

Reservoir output fell, says Oxy, seeking tax break

BY JOHN COX Californian staff writer jcox@bakersfield.com

Occidental Petroleum Corp. on Monday blamed an "underperforming old oil reservoir" for its efforts to knock more than a quarter off the taxable value of its prolific Elk Hills oil field in northwestern Kern.

Beyond that, Oxy shed little light on the situation. The Los Angeles-based oil giant declined to identify the reservoir but said it was among several that have experienced "higher than expected" drop-offs in petroleum production.

There was speculation in local oil circles that the real culprits behind Oxy's move may have been low natural gas prices and disappointing results at Gunslinger, the vaunted Elk Hills reservoir Oxy announced in July 2009.

"I think (Gunslinger) got trumped up and now it's being reduced again," said one local executive who asked not to be identified because he sometimes deals with Oxy.

Added Bakersfield geologist Phil Ryall: "Gunslinger, I've heard, is very disappointing in production in new development. ... It's just not a real good reservoir."

Oxy denied the "old reservoir" it referred to was Gunslinger, and it did not identify the other fields it said were declining faster than anticipated. The company would not elaborate.

Gunslinger, a two-thirds natural gas find on the northwest edge of Elk Hills, was originally thought to contain between 150 million and 250 million barrels of recoverable oil equivalent -- the state's biggest petroleum discovery since the 1970s.

California oil and gas consultant Dave Kilpatrick theorized that recently low natural gas prices may have been the biggest driver behind Oxy's write-down.

"It's probably a combination of the (company's) projections for the gas production rates and the price of (natural) gas," Kilpatrick said.

Other large natural gas producers have also recorded big losses on their natural gas assets amid a gas glut brought on by the use of technology such as hydraulic fracturing.

Australian mining company BHP Billiton blamed low U.S. natural gas prices when in August it wrote down $2.8 billion on the value of its U.S. shale gas assets. In October, Canada's Encana Corp. announced that it had just devalued its natural gas reserves by $1.2 billion.

Calculating an oil field's reserves can be a complex process, but basically it measures how much oil a company expects to pump out of the ground for a profit.

People in Kern oil industry said reserves can rise and fall according to available technology, the overall economy and fuel prices -- even when the amount of oil and gas in the subject reservoir remains unchanged.

Since 2008, gas production in Elk Hills has risen sharply, only to slip significantly last year and the year before.

The most recent state data available show that Elk Hills produced 222.7 million cubic feet of gas a day in September, a decline of more than 14 percent from a year before, and a 29 percent drop from September 2010.

Oil production at Elk Hills has fallen as well, but not so steeply. According to state data, 32,200 barrels of oil a day were pumped from the field in September, 14 percent less than a year before but only 15 percent less than September 2010 totals.

Some have attributed the recent slide in production to Oxy's efforts -- first acknowledged publicly last month -- to reduce its drilling costs this year by 15 percent, even as it hopes to increase its domestic production by as much as 10 percent.

Oxy is California's largest producer of natural gas, and Elk Hills is by far the state's most productive natural gas field.

Kilpatrick, the consultant, emphasized that Elk Hills, which Oxy bought from the federal government in 1997, has already produced a lot of oil since its discovery in 1911.

"I think (Oxy) has probably squeezed it for everything it's got," he said. "I mean, they've gotten a lot of oil out of this thing, and at some point it has to decline."

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