How the global price slump is affecting Southern California's oil and gas production
Slumping global oil prices might slow oil production in Southern California, but they won’t stop it.
In the last two weeks, two companies have shelved plans for new or expanded drilling operations. California Resources Corporation pulled the plug on a proposal for 200 new wells in the City of Carson Earlier, Freeport McMoRan withdrew its application to drill one new well and redrill two others. Each company said falling oil prices made the projects uneconomical.
A barrel of oil on world markets is worth about half what it was since last fall. So you might think the hundreds of active oil facilities in Southern California would pull back on production. But that’s not likely, says Severin Borenstein, a researcher at UC Berkeley Haas School of Business.
Before sinking a well, oil producers sink a lot of money into upfront costs. Borenstein says oil companies must research where to drill, get the rights to drill, and then install equipment to extract the oil.
“Every time the make an investment they have to look at these high upfront costs – to find oil and drill the well, and of course the possibility that it will be a dry well and they won’t get oil out at all – against the long run return of being able to pump oil, generally at a pretty low costs once you’ve drilled the well,” Borenstein said.
Relatively lower operating costs keep pumps going even when the price of oil is low. As for new wells, Borenstein says you can hear the sound of those projects getting dropped all around the country - not just in Carson.