Hathaway LLC

As oil prices soar, Kern County enjoys resurgence
State's oil capital booming with crude's jump, after tough times
By Dale Kasler - dkasler@sacbee.com
Published 12:00 am PDT Saturday, July 12, 2008
Story appeared in MAIN NEWS section, Page A1
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BAKERSFIELD – Times were tough and crude was cheap, as low as $12 a barrel, when fourth-generation oilman Chad Hathaway started his drilling and production business seven years ago. He had six oil wells and a $5,000 bankroll.
Now prices are in the stratosphere, and fields that once sat idle are being drilled for all they're worth. Hathaway is spending $2.4 million on developing new wells this summer, an expansion that would have been unthinkable before prices soared.
"If it was 2001, no one would consider drilling these wells," he said while driving around his fields northeast of Bakersfield.
 
This is one of the few places where runaway oil prices are considered good news. Kern County is the oil capital of California and the West. Its vast reservoirs produce more crude each year than Oklahoma and Louisiana combined.
Oil executives here acknowledge that expensive crude is hurting the broader U.S. economy. But it's done wonders for a segment of Kern's economy, creating hundreds of jobs after years of decline and partially cushioning the region against the crash in the housing market. What's more, there's a sense that this is a sustained increase in prices, not a brief spike.
"People are feeling better about things," said David Kilpatrick, a longtime oil executive here and head of independent production company Core Energy LLC. "I remember laying off people in '94 and '95 in this town."
But there's a limit to this boom. Kern's oil fields are old, somewhat worn out and have been producing in decreasing amounts for decades. Price incentives and new technologies can extend the life of mature oil fields but can't stave off the irreversible effects of aging.
At best, Kilpatrick said the rate of decline can be slowed. The same is true with U.S. oil production, which peaked in 1972, he said.
So imports will continue to rise, on a state and national level. Though it's the third-largest oil-producing state, California produces less than 40 percent of the oil it consumes; it gets the rest from Alaska and foreign sources. Some 15 years ago, California produced more than half its oil.
To many here, the solution to the nation's energy shortage is simple: Keep drilling, in Kern and everywhere else. There is considerable support for President Bush's proposal to expand offshore drilling, even as top California officials say no.
Alternate fuels? They're fine, people here say, although they have some doubts about ethanol's worth. As a practical matter, the feeling around Kern is that alternate energy sources are years, if not decades, away from making serious contributions to supply.
"It'll be a long time before we're off oil," said Michael Starzer, president of independent producer Bonanza Creek Energy Operating Co. "It's going to be around for a long time, (and) it's our job to provide it."
Kern has been providing oil since the 1890s and is an industry workhorse. Most of what comes out of the ground here is "heavy" (meaning thick and syrupy) and "sour" (high in sulfur). That makes it less valuable than light, sweet crudes. Last week, Kern crude was selling in the $125 range, at least $15 less than the more glamorous varieties whose prices are routinely quoted on global markets.
The county's landscape is dotted with pump jacks, the gently bobbing machines that pull the crude out of the ground. Most are found in vast, desolate fields operated by major companies like Chevron Corp. But scores of small independents work here, too, operating in orange groves, parking lots and other places overlooked or abandoned by the majors.
"We squeeze for each drop," said Seth Hunter, operations manager at Vaquero Energy. The family-owned company east of Bakersfield produces about 1,100 barrels a day, or 0.2 percent of Kern's total output.
Along with natural gas production – another big business in Kern – energy accounts for about 4 percent of the county's work force. It seems like more.
"More than likely there's a couple of people in your neighborhood who work in the oil industry," said Wes Winkler, an electrical engineer who was pumping gas at $4.54 a gallon at a Bakersfield Mobil station the other day. Still, he said Bakersfield residents are as angry about high prices "as they are anywhere else."
The culture here oozes oil. The Bakersfield High School sports teams are the Drillers. The well-to-do gather at the Petroleum Club, a private dining club. A highlight on the social calendar is the Oil Baron's Ball, which raises money for scholarships.

"I always wanted to be like my father and grandfather and be an oilman," said Hathaway, whose great-grandfather was in the business, too. "It's kind of in my blood."

Since starting Hathaway LLC in 2001, he's been reactivating idle wells and drilling new ones. The expansion he's planning this year will double his production if the wells perform as expected.

 "It's the most I've ever spent," he said. "It's a risk."

At 32, equipped with a BlackBerry, a business degree from Fresno State and a toddler's car seat in the back seat of his Chevy pickup, Hathaway is part of a new wave of Kern oilmen.

The lean years drove hundreds of people out of the business, from engineers and entrepreneurs to the blue-collar roughnecks and roustabouts who work in the fields. Now oil is a popular profession again, and signs of revival are everywhere.

Some 800 new oil-industry jobs have been created since last year, a gain of 9 percent. Applications to drill new wells have jumped 30 percent this year, said Randy Adams of the state Department of Conservation, which regulates the industry.

Chevron expects to spend $2.3 billion on drilling and maintenance in Kern this year, about triple the level of five years ago, said spokesman Alex Yelland. High prices have enabled Aera Energy, a joint venture of Shell and ExxonMobil, to justify the use of expensive extraction technologies at its fields west of Bakersfield, said spokeswoman Susan Hersberger.

"The stuff's all around; it's now worthy of going after," said Gordon Isbell, general manager at drilling-services company Excalibur Well Services. "Anybody associated with this industry is going to be extremely busy the next five to 10 years."

During the late 1990s, Kern oil was barely $10 a barrel and layoffs were rampant, and the industry staged a "Rally 'Round the Rig" demonstration in downtown Bakersfield.

"We'd be sitting in a meeting and the smartest people in the room were making a long-range forecast for California crudes of $13 a barrel," said Tim Crawford, a vice president at independent Berry Petroleum Co. "It was going to be $13 forever."

Even four years ago, when crude surpassed $40, the industry seemed to be in retreat. Shell Oil announced it would close its aging Bakersfield refinery, a significant purchaser of oil produced in Kern. Part of the problem, Shell said, was that the gradual decline in production from the Kern oil fields made it harder to keep the refinery fed.

The refinery wound up being sold to Utah oil company Flying J Inc., just as oil and gas prices began taking off. In the latest sign of the industry's revival here, Flying J has proposed an expansion that would increase the refinery's output by 65 percent.

Out in the fields, increased drilling activity has doubled property tax payments by oil producers in five years, to nearly $75 million a year. That's helped the county withstand a significant economic downturn.

In 2005, the region had the nation's hottest housing market, as measured by price increases. Now the foreclosure rate is among the worst in the country, and unemployment has jumped nearly 2 points since last year, to 9.5 percent.

Kern County is facing a $47 million budget deficit, though it believes it can keep layoffs to a minimum.

"Thank goodness the county does have oil," said county spokesman Allan Krauter.

Executives here say the rise in prices the past few weeks is probably temporary, largely the result of market speculation and hysteria. But even if things subside, they say crude will stay relatively expensive as demand continues to grow in countries like China and India.

"We're not going back to $20 oil," said Bonanza Creek's Starzer.

Yet there's an element of caution, too, spawned by hard lessons.

"My whole life, I've watched my dad go through the ups and downs of this market – my grandpa, too," Hathaway said. "The people who've been around long enough know every boom has a bust."