California intensifies fossil fuel fight with new drilling ban

HOUSTON (Bloomberg) - California intensified its battle against fossil fuels by seeking independent reviews of all pending hydraulic fracturing permits and halting approvals of a key production technique in an area that has pumped crude for more than a century.

Governor Gavin Newsom ordered regulators to assess the safety of high-pressure steamflooding, a production process that has been linked to recent oil leaks in Kern County, the state’s Department of Conservation said in a statement Tuesday. The state is also requesting third-party scientific reviews of any pending applications for fracking, as well as looking for ways to toughen regulations to protect residents near oil and natural gas well sites.

It’s the latest in a series of actions or threats against unconventional oil and gas production. Democratic presidential contenders Elizabeth Warren and Bernie Sanders have promised to ban fracking if elected. The UK government halted new fracking wells in England earlier this month on concerns about earthquakes.

Newsom, a San Francisco Democrat in his first term as governor, has been stepping up pressure on oil and natural gas producers through a series of initiatives such as denying permits and drilling leases on land that is or once was protected by federal authorities.

California Resources Corp., the state’s largest oil producer, tumbled as much as 32% on the news and its bonds dropped to just 25 cents on the dollar, the lowest since 2016. The company predicted no “significant effect” on its output because the type of steamflooding it employs is exempt from the ban, according to an email.

Berry Petroleum Corp., a driller based in California’s de facto oil capital, Bakersfield, slumped as much as 25%. The new rules won’t affect Berry’s 2019 financial performance but “potentially impacts” certain wells that will be drilled in the future, the company said in a statement. KeyBanc Capital Markets analysts Leo Mariani and Steven Dechert downgraded their recommendation for the stock to the equivalent of sell, from the equivalent of hold.

“This moratorium is not the most effective way to manage the industry,” Berry said. It will benefit “countries that export oil to California such as OPEC countries, which have poor social justice and environmental records, pay no California taxes and don’t employ our citizens.”

Phase Out. California is the sixth-biggest oil-producing state in the nation, ahead of former powerhouses like Alaska. Although in-state output has plunged by 60% since the mid-1980s, explorers rely on so-called enhanced recovery techniques like steamflooding to keep fields first drilled in the 1800s in active production.

“These are necessary steps to strengthen oversight of oil and gas extraction as we phase out our dependence on fossil fuels and focus on clean energy sources,” Newsom said. “This transition cannot happen overnight; it must advance in a deliberate way to protect people, our environment, and our economy.”

The state fined Chevron Corp. $2.7 million last month after several “surface expressions” of water and oil were found at the Cymric field near Bakersfield. The Department of Conservation attributed the leaks to steamflooding and said they created a “significant threat of harm to human health and the environment.”

Chevron said it will comply with the new regulations while protecting people and the environment. Western States Petroleum Association said the state’s moves are “disappointing” given that “multiple state agencies already validate our protection of health, safety and the environment during production.”

Steamflooding in California was introduced in the Yorba Linda Field in 1960 and then the massive Kern field a year later.

Explorers such as California Resources tout it as a low-cost method for creating steady, long-term crude flows from fields that otherwise would contribute little in terms of output or profits. The technique is also used in West Texas, Colombia and the Persian Gulf region.

“Governor Newsom’s historic action protects Californians from some of the most dangerous and destructive oil-extraction techniques,” said Kassie Siegel, senior counsel and director of the Center for Biological Diversity’s Climate Law Institute. “This marks the turning of the tide against the oil industry, which has been allowed to drill at will in our state for more than 150 years.”