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California Resources aims to produce oil with a negative carbon footprint by injecting carbon dioxide into century-old oil fields.
by christopher hellmanForbes staff
BBelieve it or not, California was once an “oil country.” Its origins date back to the early 20th century when John D. Rockefeller’s Standard Oil Monopoly Company controlled national production. In fact, the Golden State’s oil production didn’t peak until 1985, when it hit 1 million barrels a day, but most of it was produced around Bakersfield, in the dusty San Joaquin Basin north of Los Angeles. It was gushing out of a huge oil field 100 years before his. But as fossil fuels become politically obsolete, California’s oil production has steadily declined, to just 340,000 barrels a day last year.
The 47,000-acre Elk Hills oil field is among the few San Joaquin mega-corporations to have dumped more than 1 billion barrels of oil in their lifetimes. Most of the area’s elk herds have been replaced by thousands of “nodding donkey” sucker pumps, sometimes placed just a few feet apart, slowly pumping oil. It’s a relic of the fossil fuel era and is still a common sight in West Texas and Oklahoma, but it’s quite a sight under the Golden State’s green guise.
Francisco León, CEO of publicly traded California Resources Corp., announced in early February that he is considering a $2 billion merger with Aera Energy Corp., another operator of a super-aging oil field near Bakersfield. He says that he has signed a contract and that he should look at his past. California’s aging oil fields, littered with squeaking pumps, currently produce some of the world’s “greenest” oil, precisely because California’s environmental regulations are so strict.
Francisco Leon became CRC’s CEO a year ago after serving as CFO. He began his career at energy investment bank Petrie Parkman.
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“We believe we need oil and gas, but it should be low carbon intensity oil, like ours, without flaring or fracking,” said Leon, 47. To tell. CRC operations director Chris Gould says he started paying attention to reducing emissions decades ago. , has made great strides in electrifying nearly all of its equipment, allowing the company to tap into California’s solar-heavy power grid.
According to the California Air Resources Board, California produces the least carbon-intense oil in the world, with Bakersfield and Kern County oil fields emitting about 8 grams of carbon dioxide per megajoule of energy produced. corresponds to Saudi Arabia has about 9 grams of oil, Russia 12 grams and Canada nearly 30 grams.
CRC is now aiming to produce oil that is not only low carbon, but carbon negative. If all EPA permits pass, CRC hopes to launch a multibillion-dollar project in Elk Hills called Carbon TerraVault to capture, compress and inject carbon dioxide 5,000 feet underground. . It’s a layer of thick, porous sandstone, and it’s supposed to remain trapped there forever.
Leon said: “Pore space is the most valuable asset class of the future.”
GRegionally, carbon capture and sequestration is a big issue, with about a dozen projects already in operation in countries such as Norway, Australia and Algeria. California has set a goal of injecting 65 million tons (15% of the state’s emissions) by 2045. The Department of Energy plans to sequester 250 million tons per year nationwide by 2035. CRC was an early mover, submitting plans to the EPA in 2021 seeking approval for a Class VI well to be used for deep injection of compressed carbon dioxide. Porous sandstone rock. “The capital is there, the appetite is there,” said Leon, who was appointed CEO last year after serving as CFO.
The CRC celebrated in December when EPA announced it was satisfied with the CRC’s application and would move to the next step, three rounds of public comment. The project would then go to the Kern County Board of Supervisors for a vote, possibly by mid-2024, if the application clears the final hurdles with the EPA.
The CRC already has a large following. Private equity giant Brookfield commits $500 million from the $15 billion Global Transition Fund to a joint venture with CRC called Carbon TerraVault that aims to ultimately sequester 200 million tons of CO2 did. Over time, the Brookfield and CRC joint venture hopes to build a “net-zero industrial park” with hydrogen and fertilizer production and machinery to remove carbon dioxide directly from the air.
Elk Hills was formerly owned by Occidental Petroleum, which acquired the company in 1998 for $3.6 billion from the federal government’s Strategic Petroleum Program. Oxy also operates vast oil fields in West Texas and is also involved in so-called secondary recovery techniques, injecting high-pressure water, steam or CO2 into tired, old oil fields to loosen them and push more oil out. I have become proficient.
Unwilling to overcome California’s regulatory hurdles, Oxy decided in 2014 to spin off all of its California assets and take on $6 billion in debt. Then the oil recession hit and CRC had to file for bankruptcy. In October 2020, the company exited Chapter 11 by exchanging $4.4 billion of this debt for new equity. Old stockholders, including Mr Leon, who joined CRC from Oxy before the bankruptcy, were wiped out.
UWith the debt it inherited from Occidental Petroleum, California Resources’ balance sheet looks pretty healthy. The company has about $500 million in cash against $1 billion in long-term debt, according to its latest SEC filings. For the nine months ending September 2023, it reported sales of $2 billion and net income of $376 million.
Assuming CRC’s newly announced merger with Aera Energy is completed, the combined company is expected to produce 160,000 barrels per day and generate approximately $700 million in annual free cash flow. The company says the deal doubles the amount of “premium pore space” in the San Joaquin Valley that is ready for CO2 injection.
CRC will need more capital to finance the construction of all the pipes, wells and processing plants for the CarbonTerraVault project without taking on debt again. John Viviano, a portfolio manager at Kimmeridge Energy Management, a $4.7 billion hedge fund that owns 5.1% of CRC, has an idea on how to do that. The company should monetize its vast Huntington Beach property. A century ago, Huntington Beach, like much of the Los Angeles Basin, was covered in hundreds of oil wells pumping from what was then part of the world’s largest oil field. The Huntington Beach field was discovered in 1920, and today most traces of industry are gone, but in its place was an upscale beach community called Surf City USA. Big Oil’s legacy lives on. The high school team’s name is the Oilers, their logo is Derrick, and their mascot is the Oil Man. The last vestige is a 90-acre waterfront property on Pacific Coast Highway north of the upscale enclave of Newport Beach, where CRC continues to operate a small oil field producing 3,000 barrels per day.
Within five years of its discovery in 1919, the Huntington Beach oil field had hundreds of derricks and could produce 30 million barrels a year.
Provided by: Orange County Archives
Given the CRC’s carbon sequestration opportunities, Viviano believes it’s time to consider a higher and better use for this 3.9 million square foot contiguous site with a mile of unobstructed ocean views. I am. Last year, Bank of America oil analyst Doug Leggate predicted that CRC could get $700 million for the land, not including cleanup costs. David McLeod, an agent with Coldwell Banker in Huntington Beach, says that’s too high. The 90 acres of land is zoned as commercial land (ideal for a resort/hotel), so it will probably sell for no more than $4 million per acre and about $350 million after all the wells are plugged. right. “Yes, they will have to remediate and get approval from the Coastal Commission,” said Viviano, who in recent years successfully pushed for asset sales for Ovintiv and Chesapeake Energy.
Leon is reluctant about the prospect of earning a multi-billion dollar salary in real estate. It’s for sale, he says, but “I don’t have a number on it.” “We’re still producing from a very profitable oil field.” He’s already put up for sale an acre of land just down the street so CRC can test the waters. Estimated asking price for the “clean” site: $25 million.
WCan hats go wrong? “You don’t want it to go out,” says Ted Borrego, an attorney who specializes in oil and gas leasing. Borrego, who also lectures at the University of Houston, said there have been several incidents, such as when Denbury Resources suffered a catastrophic leak in 2020 on a 24-inch pipeline carrying carbon dioxide in Mississippi. I’m referring to the worst case scenario. The gas is heavier than air, so it drifted downhill in a green, ground-hugging cloud that enveloped the town of Saltarcia, where 45 people were taken to hospitals complaining of difficulty breathing, according to a federal investigation. ExxonMobil acquired Denbury in November for $4.9 billion after signing a consent decree committing to improved safety features, and plans to use Denbury’s carbon assets to support its own sequestration efforts.
Other CO2 development companies are also plummeting. Occidental is pursuing its own quarantine plan in Texas’ Permian Basin. Summit Carbon Solutions, backed by billionaire Harold Hamm, has a consortium of ethanol plants in the Midwest that capture carbon emissions (from fermentation) and transport them via hundreds of miles of pipeline. It is intended to be sent to North Dakota and injected into the ground. Summit has been accused of using eminent domain law to detract and seize rights of way along the pipeline route.
Borrego said CRC’s goal with Elk Hills is to have total control over surface and mineral rights. In many oil regions with geological formations suitable for isolation, such as Texas and Louisiana, mineral ownership and surface rights are highly fragmented. Property owners cannot be forced to accept CO2 injection under their land. “This is not a slam dunk. It requires a lot of land and a pipeline to get it there, and once the plume is injected, it has to be monitored for years,” Borrego says. “Landowners are saying, ‘Wait a minute, is this going to happen to my grandchildren?'”
Discovered by Standard Oil, Elk Hills was at the center of the Teapot Dome scandal in 1922, then became a naval oil reserve and was sold to Occidental in 1997.
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Still, it’s impossible for developers to ignore the generous incentives on offer, including the Inflation Control Act’s promise of an $85 federal tax credit per ton of carbon dioxide sequestered. Borrego says: “Tax credits and deductions, that’s what makes the economy work.”
Leon agrees that the federal carbon sequestration tax credit should help make Carbon TerraVault a profitable business for CRC and partner Brookfield. But he insisted he would pursue this strategy even without the generous backing of anti-inflation laws. As EPA’s complex Class VI permit tracker shows, CRC’s Elk Hills Sequestration Project is the furthest along the permit path. The main reason for this is that they applied the earliest.
EPA is hosting three public comment sessions on CRC’s San Joaquin Valley Quarantine Plan over the next few months, and if approved by EPA and the Kern County Board of Supervisors, the project could begin by summer. be.
Fund manager Viviano wants carbon sequestration to revive other megafields in the San Joaquin Basin. He expects CRC to expand the planning and permitting work it started in Elk Hills to the Midway Sunset and Berridge fields through the merger with Aera. In the long run, carbon dioxide injection could push even more stubborn crude out of older oil fields, resulting in ultra-green, negative-carbon California premium oil.
“Saying you don’t want oil from California is like saying you want oil from Texas or the Middle East,” Viviano says. “We should have more assets managed by public companies with strict environmental regulations.”
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