Continuing a series of California and Texas comparisons, this piece examines the two most-populous states’ oil and natural gas policies and outcomes.
Policy matters. Even if a nation or state is endowed with significant natural resources, history shows that tax rates, regulatory burdens and rule of law largely determine whether those resources are harnessed or remain idle. Good policies and honest government are why resource-poor nations such as Japan and Singapore far outperform nations with vast natural resources.
Nowhere is the effect of government more apparent than in the recent history of oil and gas production in California and Texas.
For decades, California has been one of America’s top oil and gas states, producing much of what its residents use to propel their vehicles, light their businesses and heat their homes. But in recent years, the Golden State has become openly hostile to hydrocarbons and the companies that explore for them and pull them from the ground.
Both states produce a lot of oil and gas, with California having 53,000 oil and gas wells compared to 311,000 in Texas.
While Texas is first in the nation in crude oil production, California ranked third from 2012 through 2016, slipping to fourth behind Alaska in 2017 and sixth in recent monthly production reports. That’s because California’s regulatory and tax policies actively discourage new production in the Golden State, even though the state has the third-largest proved reserves in the nation.
As recently as 2002, oil production in California was a full 64% of production in Texas. But that fell two-thirds from its peak in 1985 and by 32% since 2002. By 2017, California’s crude oil production was only 14 percent of Texas’ total, 174,000 barrels to 1,272,575 barrels.
It’s not just production; it’s also exploration, which determines a region’s proved reserves (oil and gas that can be extracted). Since 1986, California’s proved crude oil reserves have declined 59% as state regulators and elected officials have discouraged the industry. In Texas, proved reserves increased 80% over the same 30 year period.
California’s anti-oil attitude has taken on aspects of a crusade, with the legislature considering a bill this year to ban the internal combustion engine.
Occidental Petroleum (NYSE: OXY), America’s fifth-largest oil and gas exploration company founded more than 100 years ago, saw the handwriting on the wall in 2014 when it announced that it was spinning off its California assets into a separate company and moving its corporate headquarters to Texas.
At the time, Occidental’s CEO said, “Creating two separate energy companies will result in more focused businesses that will be competitive industry leaders.” That talk was likely overoptimistic for the spun-off firm, California Resources Corp. (NYSE: CRC), which was estimated at the time to be worth about $14 billion with 8,000 employees.
Today, California Resources Corp. has a market capitalization of $1.5 billion and employs 1,450 people in California. Since the spin off in November 2014, California Resources Corp. has seen its share value plunge 65% while Occidental’s share price declined 19%. The price of the benchmark West Texas Intermediate (WTI) was down 7% since the spin off was finalized.
In an August interview with the Houston Chronicle, Occidental’s CEO Vicki Hollub was asked about how the firm she leads was able to prosper during the downturn in oil prices. She responded, “…we exited low-margin, low-return businesses… we spun off California.”
California wasn’t always a low-margin, low-return place to do business. But by 2011, it was becoming increasingly difficult to operate in the state as an oil company. Through October of that year, California’s oil drilling regulator had approved 14 drilling permits out of 199 applications received, a 7% approval rate. Only two years earlier, under the state’s last Republican governor, 71% of permits were granted. Occidental Petroleum’s CEO cited the slow rate of California’s permit approvals as the reason for the company’s oil and natural gas production decline. The permit slowdown got so pronounced that California’s oil companies warned Gov. Jerry Brown (D-CA) that more than $1 billion in investment and 6,000 jobs were at risk.
As California’s policies applied pressure to American-produced oil and gas production, the result was easily predictable: crude oil production declined 53% from 1982 to 2017 while dry natural gas production fell 46%. In the same 35-year period, Texas oil production increased 40% while dry gas production increased 3%, even with much of the latter restricted by lack of access to pipelines and liquefied natural gas export terminals.
Yes, California and Texas have geological differences. But those differences can be overcome with capital, technology and innovation. What’s far more difficult to overcome is government policy that actively discourages investment.
Californians may not be producing as much natural gas, but they’re certainly using it. While California’s natural gas production collapsed by almost half over the past 35 years, consumption has held steady, with 2.1 million cubic feet consumed in 2017, down less than 2% from 20 years earlier. In 1997, California produced about 13% of its domestic natural gas needs, slipping to 9% last year. About 28% of the natural gas California uses in state is used to produce electricity. But, California is America’s largest importer of electricity and this consumption number doesn’t account for natural gas used in out of state generating facilities.
Texas’ natural gas consumption dropped by almost 6% between 1997 and 2017 as the state’s industries became more efficient – even as the state’s population grew by 46%. At the same time, Texas produced about 47% more dry gas than it consumed in 1997 compared to a surplus of 62% in 2017, some of which was shipped via pipeline to California.
The net result of California’s policies is that it must import more of its energy, with much of the shortfall coming in by supertanker, a mode of transportation that carries greater risks to the environment than locally produced oil and gas. And, in the case of oil and natural gas imported from overseas, few if any of the exporting nations feature environmental protections approaching those enforced in California or the U.S. at large.