CRC Faces a Fracking Fallout

Following a slew of restrictions placed on the oil and gas producers by Gov. Gavin Newsom, major players in the industry such as California Resources Corp. have said that they don’t expect the rules to greatly affect overall operations. The stock market, however, tells a different story. Shares of the Chatsworth company dropped 27 percent after Newsom’s announcement on Nov. 19, going from $8.48 to $6.20. The stock bounced back somewhat the following day, closing up 43 cents or 7 percent to $6.63. Shares closed Dec. 4 at $7.68. The stock started out the year at $20.15, jumping up to $25.71 in March before dropping back down to single digits in July. Analyst Pavel Molchanov with Raymond James & Associates Inc. mentioned the “past summer’s regulatory fears … proved unfounded,” with his forecast for oil prices to reach six-year highs next year. As for the restrictions, Newsom placed a moratorium on underground oil-extraction wells that use high-pressure steaming processes. Also, the law requires that new permits for wells drilled with hydraulic fracturing, or fracking, must be reviewed by environmental experts and audited by the state Department of Finance. The governor’s actions are in direct response to the Kern County oil spills that began in May, with Chevron Corp. wells releasing an uncontrolled 900,000 gallons of oil and brine. The leak still continues, according to a report from NPR. The moratorium and added permit processes are part of AB 1057, which Newsom signed into law in October. The law also renames the state Department of Conservation’s Division of Oil, Gas and Geothermal Resources to the Geologic Energy Management Division, or CalGEM. Referring to regulations within Newsom’s bill, CRC told the Business Journal that the company “is not dependent on any single field, drive mechanism or completion method,” and that less than 10 percent of its wells in the past several years were completed using the types of well stimulation cited in Newsom’s statement. None of CRC’s eight rigs that are currently drilling require well stimulation, the company added. Regulatory strategy In his statement, Newsom said that the restrictions are a way to “phase out our dependence on fossil fuels and focus on clean energy sources.” “This transition cannot happen overnight; it must advance in a deliberate way to protect people, our environment and our economy,” Newsom added. In a prepared statement from Catherine Reheis-Boyd, president of the Western States Petroleum Association, the organization warned that extra regulations may affect the bottom dollar for consumers. “Every barrel delayed or not produced in this state will only increase imports from more costly foreign sources that do not share our environmental and safety standards,” she said in the statement. “It is disappointing that the state would pursue additional studies when multiple state agencies already validate our protection of health, safety and the environment during production.” CRC echoed those arguments in its own statement on the matter, referencing “local utility power outages” and “Middle East turmoil” to highlight the need for the state to maintain a diverse energy supply that is reliable and local. “I think it’s going to be an expensive process,” said Hilary Silvia, assistant professor of business and real estate law at the David Nazarian College of Business and Economics at California State University – Northridge, in reference to Newsom’s regulations. “I’m sure if it would make the process more expensive, then that is passed on to the consumer, forcing the consumer to use a different type of energy.” For Silvia, the governor is trying to reframe public perception when it comes to the state’s relationship with oil and gas production. “They’re renaming the division from Oil and Gas and Geothermal Resources, which is supposed to be increasing production of oil and natural gas, to CalGEM. That in itself is a huge shift,” continued Silvia. “Also, we’ve given it a different mission. We’re not increasing the production of oil and natural gas, we’ve stopped doing that. It’s almost akin to eliminating that division because it’s completely reframed. Now, it’s supposed to be protecting public health and safety and environmental quality.” Another bill, AB 345, requires new oil and gas developments or enhancements not on federal land to be located at least 2,500 feet from a residence, school, childcare facility, playground, hospital or health clinic. CRC analyst Muhammed Kassim Ghulam with Raymond James & Associates questioned the company’s management about the bill’s possible renewal next year during a conference call on Nov. 4. “I think if it got to be more than vague language, it might be something that even the industry could get behind in support,” Todd Stevens, chief executive of CRC, said during the call. “I think every year there’s legislation that’s brought up. … There is always the irresponsible legislation push for political purposes.” Silvia suggested companies such as CRC should maintain a proactive approach in the face of Newsom’s regulations, going to groups like the Western States Petroleum Association to ensure they’re doing everything they can as an industry leader to stay ahead of government strategy. “Right now, you have all these companies that are entrenched – they have employees, people relying on that income stream. It’s not like we’re all walking either, or riding bikes,” she added. “It’s a huge tension point, but at the same time I’d be hiring environmental experts and consulting with them, trying to get ahead of the issue. What is this going to entail? Line up all of the experts that you may or may not need to advance you in the administrative process.”