ROYL
If you look at all of these articles trying to project what the energy situation in California is and what prices are going to do, they all seem to miss one important point.
California tried to do a major realignment of their energy situation, especially electric power and had the major decisions made by politicans and lawyers. A sure recipe for disaster.
One axiom in the power business is to get control of the fuel sources before building new power generation plants. Example, it is common to buy coal resources in the ground, do the exploration, prove the reserves and then build a power plant to use that fuel. You own the fuel and have fixed its price to a known cost for the life of the plant. Hopefully you have enough fuel to last the design life of the plant. It is the only way major expensive plants can be really done.
The people in California tried to shift to a major new use of NG but never attempted to actually buy or secure the resource in advance. Of course the other way is to contract very long term and get complete control of the resource at a fixed low price in that manner. They didn't do either. Even long contracts on the futures markets don't cut it, you need the fuel source totally locked up and dedicated to your project.
So they are stuck trying to fuel their plants at the market. A horrible choice that no engineer in charge would ever get into.
ROYL and companies like it are in the catbird seat. California is always going to have to pay a premium to attract the amounts of fuel it will need. This idea that California will probably return to fuel rates equal to the rest of the country is probably an illusion. They have put themselves at the mercy of the marketplace in a big way. The market always gets the highest price anyone is willing to pay. Large users demanding big discounts are at the end of the desired list of customers.
So I guess they could start buying up small companies like ROYL. In the end it is the best solution. Or the power companies could get in the gas finding business themselves. Become integrated producers.
Whatever they do, if they can't either own or secure the resources in the ground via long term contracts they will always be in trouble.
The energy business is like most others. The basic operating rules don't change much no matter what part of the world you are in.
ROYL is going to be in that pack of wolves that eats their lunch until the people in California put up the money to secure the fuel sources. It is high rates as far as the eye can see for some very basic reasons.
-California an Energy Basket Case -- The nation's most populous state currently imports a whopping 85% of its natural gas. As a result, there's an exploration frenzy underway in the state as a host of companies drill deeper and deeper exploratory wells
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Story Filed: Friday, June 01, 2001 6:05 PM EST
Vancouver, Jun 01, 2001 (Stockgroup.com via COMTEX) -- Whatever your take on the continuing California energy crisis - and there are plenty to choose from - one fact is glaringly apparent. The nation's most populous state is heavily dependent on imports to feed its seemingly insatiable appetite for power.
California currently imports about 20% of its electricity and a whopping 85% of its natural gas - 7 billion cubic feet a day - from out-of-state production facilities. And while it is the country's fourth-lowest user of energy on a per capita basis, the state's huge population and its dependence on the energy-guzzling electronics industry ensure that California's need for power will continue growing unabated well into the foreseeable future.
Compounding the problem, says Mike Schrampf, an analyst with J. Michael-Patrick, LLC, is the fact that traditional in-state sources of gas are rapidly being depleted.
"Occidental Petroleum (NYSE: OXY) produces about 49% of California's gas and 47% of that comes from Elk Hills," he says. "Those fields are in steep decline and the state has yet to determine where replacements will come from. Over the next couple of years they will either have to import it or find new sources within the state."
Add to that the fact that 20 new gas-fired power plants are scheduled to come on stream over the next two years - four of them this summer alone - and the situation becomes particularly urgent.
No wonder, then, that exploration activity in California has intensified rapidly over the past few years.
While the majors continue to dominate the state's oil industry, much of the new gas-related activity involves smaller players. And with California's inter-day trading price hovering in the $9.50 to $10.50/mcf range, compared with about $3.75 elsewhere in the country, the potential pay-off is huge.
"California's big play right now is East Lost Hills in the San Joaquin Valley near Bakersfield," says Ray Deacon, an energy analyst with Dain Rauscher Wessels in Houston. "A lot of companies are pinning their hopes on that field."
Those firms include Hilton Petroleum (CDNX: V.HTP), PYR Energy (AMEX: PYR), Elk Point Resources Inc. (TSE: T.ELK), Kookaburra Resources Ltd. (TSE: T.KOB), Paramount Resources Ltd. (TSE: T.POU), Richland Petroleum Corp. (TSE: T.RLP), Trimark Oil & Gas Ltd. (CDNX: V.TMK), and Westminster Resources Ltd. (TSE: T.WML).
Another small cap, Berkley Petroleum, was bought out by Anadarko Petroleum Corporation (NYSE: APC) this spring, making Anadarko the project's operator.
East Lost Hills is estimated to have at least 3 Tcf of gas in place. The site's #1 well has been producing more than 10 million cubic feet a day since February but mechanical problems with #2 prevented it from coming on stream as expected earlier this year.
"There's no problem with the reservoir," says Mike Schrampf. "The well flow tested at 3 million cubic feet a day before they re-perforated the lower zone. That created more incremental production and they've since perfed the upper zone which was blocked by a drill pipe."
According to Schrampf, #2 is now being flow tested in the hope it will produce at least 10 mmcf/day. "If not they will side-track it," he says.
Preparations are also under way to test Well # 3. "They found 800 feet of pay there. It's a completely separate structure to the west, which could double size of the field."
Well #4 is drilling now and should be finished within 30 days. "They're half way through the Temblor formation and they've already seen a lot of gas. If Wells #3 and #4 are successful Anadarko will probably move another rig into the play."
Anadarko's presence is hastening the East Lost Hills development, according to Schrampf. "Anadarko has plenty of experience and they're very efficient," he says. "As they get up to speed I expect the play to take off."
It's just a matter of time before the majors move in and start buying up the smaller firms involved in East Lost Hills, he adds. "They'll let the little guys spend the risk capital and after they prove up the basin they'll come in and buy them up."
While the Anadarko/Berkley project is attracting the lion's share of attention these days, it's far from the only promising gas play under way in California.
Ivanhoe Energy (NASDAQ: IVAN) (TSE: T.IE) recently announced that together with its partner, California-based Aera Energy LLC, it will spud an exploration well in the San Joaquin Basin in the third quarter of the year. The Ivanhoe-Aera well, which Aera will operate, will be located 3.5 miles northwest of the East Lost Hills No. 2 deep well.
Another California play in the Denverton Creek Field, Solano County, involves Questar Corporation (NYSE: STR) as the lead player with a handful of juniors - First Goldwater Resources (CDNX: V.FGD), Habanero Resources (CDNX: V.HAO) and Condor Gold Fields Inc. (CDNX: V.YGF).
In this case, the play is still in early stages - but the first significant wildcat well, Pale Rider 3-26, was recently tested at 5-6 mmcf per day, and subsequent tests confirmed that rate. It is expected to begin commercial production by the end of June.
Ray Deacon says Nuevo Energy (NYSE: NEV) has some acreage located near the Anadarko consortium, which it is developing in conjunction with Occidental Petroleum.
"It's deep Temblor, the same formation that worked at East Lost Hills," he says. "It could be a big driver for Nuevo's stock."
The only problem, according to Deacon, is these are deep fractured sands which often experience sharp production declines.
"There are often water encroachment problems," he explains. "A well could be producing at a huge rate and the next day it waters out. That's why you need six to nine months of production history to know how big the resource is."
Nevertheless, Deacon likes Nuevo's prospects.
"It has tremendous exposure to the California gas market and it's dirt cheap compared with the rest of its peer group," he says. "These companies are usually cheap because they have a short reserve life but Nuevo has a long reserve life and lots of coverage in terms of its asset value and debt ratio."
Occidental and Nuevo will drill nine to 12 exploratory wells in California this year, Deacon adds.
Alex Montano, an energy analyst with CK Cooper and Company, says it's difficult to find many legitimate pure gas plays in California. One he likes is Royale Energy (NASDAQ: ROYL), a company with virtually all of its production in the state.
Royale's California setting helped the company post first-quarter 2001 earnings of $3,030,505 or 74 cents (diluted) per share. That compared with $142,544 for first quarter of 2000.
"We were expecting 38 cents a share diluted in the first quarter, based on an average realized price of $6 per cubic foot," Montano says. "Instead, Royale averaged more than $10 per cubic foot in the first quarter."
While that price is likely to fall somewhat in the second quarter, an average price of about $9 per cubic foot is reasonable, he says, adding, "it could be even higher."
Other small cap players active in the state include Aspen Exploration and Tri-Valley Corp. (OTC BB: TRIL), the parent company of Tri-Valley Oil & Gas Co. (TVOG).
Tri-Valley recently announced that it may have found the state's largest natural gas field lying under and by the city of Delano in California's Great Central Valley. Company officials think their Sunrise Natural Gas Project may contain as much as 3 tcf of gas in place, which would make it the largest gas field in the Western U.S. today.
Tri-Valley also has some existing production from traditional zones, such as the Rio Vista gas field.
Despite the feverish pace of exploration activity onshore California, offshore development looks like a non-starter for the foreseeable future. President Bush said this week that he would keep a moratorium on new drilling leases for oil exploration off the California coast.
Nevertheless, says Montano, the political climate at all levels has become distinctly more cordial toward energy industry.
"There's clearly been a change in government philosophy," he says. "Permitting is being expedited and that's the key to attracting risk capital."
That change of heart, combined with sustained high commodity prices, means California is likely to remain a good prospecting target for some time to come.
By JoAnne Sommers
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