Operating model of oil and gas companies is and will continue to be significantly impacted by changing environmental legislation. Many major and large independent oil and gas companies such as Shell and Exxon have mostly exited upstream operations in California as a result of increasingly stringent regulations. One of the majors that still operates in the state is Chevron, which is the second largest integrated energy company in the United States and an international leader in finding, producing and marketing oil. Within Chevron Corporation, San Joaquin Valley Business Unit (SJVBU) is responsible for most of Chevron’s production in California and is the largest net-oil producer in the state. SJVBU specializes in producing unconventional heavy oil reserves by utilizing steam injection technology. As a result, it has massive surface facility infrastructure requirements and high pace of new developments.
The process for drilling one oil well includes clearing and levelling the surface location to allow for rig and equipment movements, subsurface operations involving drilling and completion of the well, surface equipment installations and construction of pipelines. With 16,000 active wells in SJVBU and a large environmental imprint, the operation is heavily regulated by the Division of Oil, Gas and Geothermal Resources (DOGGR) of Californian government with respect to the industries impact on air quality, agricultural and biological resources, geology and soil, hydrology and water quality, land use, noise, etc. The biggest threat to the company’s operations can be portrayed on the example of introducing Measure Z in Monterey Country, CA. It was presented to voters as a ban on fracking and risky oil operations to protect the region’s water and was passed with 56 percent approval on November 8th 2013. It also prohibited drilling new oil and gas wells in the county. San Ardo field, located in Monterey county and operated by Chevron, produces 11,000 barrels of oil per day and is the 13th largest field in the state. The new legislation will reduce oil production by about 20 percent a year until oil production at the San Ardo oil field is no longer economically viable. Shutting down operations will not only impact the revenues of Chevron but also cost the county millions of dollars in tax revenues, hundreds of millions in damages, increase unemployment and remove a significant source of revenue for local businesses.
As a response to increased environmental regulations worldwide, the company invested in Chevron Technology Ventures with the goal to innovate, commercialize and integrate emerging technologies into Chevron. They look for pioneering startup companies whose technologies could enhance the way Chevron produces and delivers energy, including evaluation of economic viability of investments in renewable energy. When new legislations are introduced, it is traditionally believed that companies should adapt and make changes to their operating models. However, the disruptions caused by Measure Z is not fixable through any business model or technology innovations. Such changes kill operations and give incentive to developing and investing into less economically viable alternative sources of energy. As a result, one of the responses that Chevron could have to such regulations as Measure Z is following the example of other majors and completely divesting from California. At the same time, the company could consider strengthening its presence in Californian alternative energy scene and increasing investments in alternative energy R&D and startup acquisitions. The company has already demonstrated technical capability in executing alternative energy projects and have even run some of them in California. For instance, Project Brightfield had a goal to evaluate the emerging seven photovoltaic technologies in Bakerfield, CA. 7700 solar panels were installed on the 8-acre site to generate approximately 740kW of electricity that was directed to the local utility grid.
Source:
https://www.pillsburylaw.com/images/content/9/5/v2/952/UnitedStatesCalifornia.pdf
Very interesting portrait of an O&G company and the challenges they are already facing due to climate change. Although as stated, efforts have started to shift into alternative energy, the industry is not ready yet to complete the transformation and seems unable to deal with several paradigms related to green energy such as initial investment and total CO2 emissions. One thing is clear, following the industry for the following years is a must and the need for sustainable business models and solutions creates opportunity for all players who are now trapped in regulations and a source of energy that many would consider “doomed” for the future.
The introduction of Measure Z poses a strategic challenge for Chevron’s management. However it did not come as a surprise – fracking remains fairly unpopular and California is renowned for its forward-thinking government and populace. It is not surprising that other O&G majors had exited the market already, in effect anticipating this sort of legislation.
I think that Chevron Technology Ventures is an excellent strategic response from Chevron. I hope that they can identify and commercialise new technologies that improve upstream energy supply. An alternative, and lower risk, approach would be to increase investment in renewable technologies like solar, which will likely be a key source of energy in California for decades to come.
Changes in policy such as Measure Z are one of the many tools that will incentivize innovation in renewables. Chevron is well-positioned to respond to changing legislation in California and begin implementing more renewable energy projects, ahead of the other majors who have already exited the state.