Janet Wilson and Mark Olalde – Desert Sun – California Resources Corp., the state’s largest oil and gas production company with more than 2 million acres of reserves spanning four major basins, filed for Chapter 11 bankruptcy protection on Wednesday evening, seeking relief from $5 billion in debt and looming interest payments.
The company’s announcement came just hours before the clock was about to run out at midnight Eastern Time on the last of several agreements with creditors.
Under a Chapter 11 restructuring filed in U.S. Bankruptcy Court for the Southern District in Texas, the company hopes to eliminate more than $5 billion of debt and equity interest and consolidate its ownership of its Elk Hills power plant and a gas plant in Kern County upon court approval.
Liquidity would be bolstered by $1.1 billion debtor-in-possession financings, which also would refinance in full CRC’s current revolving loan facility.
CRC will continue to operate its production facilities during the process, company executives said, although its operations are already sharply reduced due to the coronavirus and other issues.
The Santa Clarita-based company, created in late 2014 as a spin-off from Occidental Petroleum, was saddled with debt from its inception after transferring billions of dollars to Occidental. But it did well for part of its brief history, reporting average net daily production of 132,000 barrels of oil equivalent per day in 2018. By this week, though, nearly half of its 17,500 wells sat idle, from the tidelands of Long Beach and Huntington Beach to the sprawling Elk Hills oil field.
A global oil price war earlier this year and pandemic-related stay-at-home orders have caused steep drops in demand and caused huge losses to CRC’s market value. As of mid-July, its share prices had plunged 92% in the past 12 months.
“CRC will emerge from Chapter 11 as a strong, healthy company committed to providing Californians with safe, affordable, reliable and locally produced energy, good-paying jobs and millions of dollars in annual government revenues for vital public services for many years to come,” said Todd Stevens, CRC’s president and CEO. “We take this role very seriously, and our commitment to ensuring a safe, diverse, and resilient supply of energy from California resources will not change.”
“We have consistently operated within cash flow, significantly reducing the outsized debt burden we inherited from Occidental Petroleum at our December 2014 spin-off. However, today’s unprecedented market conditions, including oversupply and reduced demand due to COVID-19, require that we further reduce our debt through a Chapter 11 process,” said Stevens.
But one industry analyst said the company’s woes predated the pandemic, and it would be tough for CRC to recover.
“One sign that this is a particularly bad bankruptcy is that’s a lot of debt. $5 billion is not chump change for an oil and gas bankruptcy,” said Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis. “In today’s market, it’s very hard to see how CRC is going to emerge from bankruptcy as a healthy company,” he said.
The bankruptcy filing is another shock for the state’s already distressed economy. CRC employed about 1,250 Californians at the beginning of the year, according to U.S. Securities and Exchange Commission filings, and is one of Kern County’s top property taxpayers. As recently as 2018, it pumped $37 million into county coffers, second only to Chevron.
Kern County, however, is listed in the bankruptcy paperwork as an unsecured creditor and is owed more than $25 million by CRC. The company also owes $24 million to the State of California’s Geologic Energy Management Division, or CalGEM, by Aug. 15.
“CRC’s bankruptcy filing does not reduce its obligation to comply with California’s stringent oil and gas regulations and to pay its annual assessments,” said state Oil and Gas Supervisor Uduak-Joe Ntuk, who heads CalGEM. “CalGEM has taken steps to prepare for developments like this and will continue its oversight of CRC’s facilities and operations to ensure ongoing protection of public health, safety, and the environment.”
CRC spokeswoman Margita Thompson said CRC expects to pay the state assessment fee on time.
CRC has sharply reduced production in recent months as it sought to slash costs low enough just to maintain “mechanical integrity” of its field operations, according to SEC filings. No employees are currently furloughed, said Thompson.
WhileCRC has been hemorrhaging cash, The Desert Sun and the Ventura County Star also revealed that the petroleum company spent $825,000 in March Ventura County board of supervisors races in a jurisdiction where CRC drills. CRC’s efforts succeeded in one of two elections.
Oil and gas company bankruptcies have been rising in recent years, and the demand downturn caused by business closures and stay-at-home orders has only exacerbated the issue. According to law firm Haynes and Boone, LLP, which tracks the energy sector’s bankruptcy filings, 23 oil and gas companies went bankrupt in North America in the first half of this year alone.
“It is reasonable to expect that a substantial number of producers will continue to seek protection from creditors in bankruptcy even if oil prices recover over the next few months,” the law firm predicted in a late-June report. However, with a glut in oil reserves, still-low commodity prices and only minimal near-term demand growth predicted, the return of oil markets anytime soon appears unlikely.
Taxpayers left with the headache
Taxpayers could also be saddled with major cleanup costs for idle and orphan wells if CRC’s efforts to reorganize do not succeed or if other companies fail.
“Bankruptcy proceedings like these are a threat to California because oil companies like CRC try to weaponize them to dump their environmental cleanup costs on the public,” said Kassie Siegel, an attorney at the Center for Biological Diversity. “Given the huge number of wells at stake, the Newsom administration has to intervene quickly to protect the public and our environment.”
Two new California laws aimed at increasing state regulators’ ability to hold petroleum companies accountable for the costs of plugging and cleaning up their wells could get their first real test with the CRC restructuring. According to its own math, CRC has roughly $500 million in environmental cleanup costs. Based on the average cost of plugging wells as defined by the California Council on Science and Technology, the true number may be much higher.
State officials said they had been preparing for a CRC bankruptcy for months based on published reports of the company’s spiraling financials and high levels of debt and cleanup liabilities. If CRC is ultimately unable to pay for its own reclamation, California has the legal ability to seek payments from the immediate preceding owner. That would be Occidental, which is facing its own fiscal woes.
Although CRC has the second-most idled wells of any company operating in the state, all its wells and facilities are currently in full compliance with state laws, according to state oil regulators. The company made its required $3 million payment for idle well costs on time in May to the state.
CRC made a partial payment on interest owed to funders last month but had faced another $74 million in payments due in June 2021 to JPMorgan Chase, Bank of America and other lenders.
In addition to its thousands of unplugged onshore wells, CRC is also partly responsible for eventual cleanup costs of unique oil production facilities on state-owned tidal lands that are managed by the city of Long Beach.
A state trust fund for cleanup there holds about $300 million. However, it needed an estimated $900 million as of Jan. 1, leaving a $600 million gap. Legislation failed in recent years to require greater contributions to the fund. Long Beach has about $180 million in its own post-production fund.
There is extra urgency to maintain or properly close wells in the Long Beach tidelands because the city suffered subsidence as much as 2 feet per year until the 1950s due to fluid extraction. It was once known as the “Sinking City by the Sea.”
City and state officials said subsidence is closely monitored and is nearly nonexistent because proper pressures are maintained in the wells at all times, in essence keeping downtown properly afloat. If oil operations ceased, they said that the worst-case scenario could be avoided by continually injecting water into the idle wells.
State Lands Commission attorneys were also working with CRC this spring to try to structure payments into a trust for the eventual cleanup of Huntington Beach wells. Earlier this year, Thompson said CRC across all its subsidiaries had more than $80 million to pay for its cleanup around the state.
A full recovery or even fiscal stability for CRC will be difficult, with experts predicting it would take several years before oil markets recover from the coronavirus pandemic and continued tensions between domestic and international suppliers.
Williams-Derry, the energy finance analyst, has tracked the company’s downward trajectory since before the pandemic. “CRC is claiming that the COVID crisis is the reason for their bankruptcy filing, whereas in reality, this is a company that was in no position to pay off its massive debts, even before the coronavirus hit,” he said.
California oil on the way out?
CRC’s woes bring into sharp relief the decline since the mid-1980s of oil production in California and a pitched battle between energy companies and environmentalists over its future.
Environmentalists pushing to transition California off of all fossil fuels want to see CRC’s oil and gas extraction halt. They said largely low-income communities of color around its operations have suffered severe health effects for years, from being exposed to contaminants contained in oil and from dangerous soot and smog emitted as part of the extraction, refining, and transport processes.
Rosanna Esparza is a Bakersfield-based community activist who watchdogs CRC’s Elk Hills field and other oil and gas infrastructure around Kern County. “This is not a surprise that they filed for Chapter 11, not at all. What concerns me, though, is that we have been saying all along that these companies aren’t paying a high enough fee to cover when they default.”
Fossil fuel emissions, including billions of tons of carbon dioxide, are also causing global climate change. A national coalition of 700 environmental, consumer and public health groups dubbed the Last Chance Alliance, with dozens of members in California, is pushing Gov. Gavin Newsom’s administration to phase out all oil production. They argue a “just transition” can be achieved for energy workers by paying them to properly plug wells and otherwise close down the state’s legacy oil and gas fields.
But energy trade groups, lobbyists and the companies themselves say CRC and other oil and gas companies provide good, high paying jobs. They say California can meet aggressive emission reduction mandates in the coming years by achieving “net-zero” emissions from fossil fuel production rather than shutting it down completely. That would include burying or re-injecting carbon dioxide underground rather than sending it skyward.
CRC won some private and federal funding earlier this year to construct an early centerpiece of those efforts — a facility to capture carbon dioxide emissions from its Elk Hills natural gas plant and inject them back into the sprawling field to aid in extracting the last bits oil from mature reservoirs. The project is moving forward with a completely funded front-end study, company spokeswoman Margita Thompson said Wednesday.
And as more oil companies walk away from their environmental and labor liabilities, Democrats and some Republicans have begun pushing for a federal government-funded pool of money to address the pollution flowing from the country’s potentially millions of orphan wells.
According to CalGEM, there are about 5,500 deserted or orphaned wells scattered around the Golden State, many in Los Angeles County. These can pollute aquifers, emit climate-warming gases and carcinogens, and present an explosion hazard.
On July 1, the Democrat-controlled U.S. House of Representatives passed a $1.5 trillion bill that wrapped up COVID-19 relief and infrastructure spending, including $2 billion that would put unemployed oil workers back on the job plugging orphan wells.
“It’s a win for the environment, it’s a win for states, it’s a win for workers,” chair of the Subcommittee on Energy and Mineral Resources Rep. Alan Lowenthal (D-Calif.) said during a June 1 forum on the proposal. “And it simply accelerates the cleanup that American taxpayers are on the hook for sooner or later anyway.”
Sen. Mitch McConnell (R-Ky.), however, already made it clear that he had no intention of advancing Democratic stimulus bills in the Senate, making it unclear where the proposal would head next.
Esparza, the Kern County activist, is worried about what comes next for the industry.
“Everybody was waiting for this, waiting for the next shoe to drop,” she said. “So who’s going to be next? The small operators are struggling, and a lot of them have just walked away.”