California producers face higher electric rates amid rolling blackouts

Sam Fletcher OGJ Online HOUSTON, Apr. 27 -- California oil and gas operators are facing a jump in electric rates and rolling blackouts this summer that threaten to curtail production in that energy-starved state. A rate hike proposed by the California Public Utilities Commission (CPUC) could add $2/bbl or more to oil production costs in that state, said officials of the California Independent Petroleum Association (CIPA). Members of the industry association are calling it "the largest energy tax on California consumers and businesses in state history." Dan Kramer, CEO of the association, said, "We face significant problems starting June 1 when the nominally adopted rates are supposed to go into effect." Depending on their current rates and the time of day in which they operate, he said, California producers face electric rate increases of at least 50% to as high as 545% during peak demand periods, he said. "Most producers will be somewhere between those two extremes," Kramer said. However, there are indications that the CPUC may not impose the rate hike until July 1, instead of early spring as planned, said Bob Fickes, president of the California Oil Producers Electric Cooperative, formed by CIPA members last year in an effort to reduce their own energy costs. The proposed permanent across-the-board rate increase of 4¢/kw-hr would result in a cost increase of 60-88% for most producers, while others will see a jump of 7¢/kw-hr, CIPA officials said. Because of the way the proposed rate increases are structured, independent producers face a disproportionate disadvantage compared to other large consumers of electricity. CIPA officials claim producers in the small industry category face an average rate increase of 87% although they represent only 8.5% of the electrical load. By comparison, residential customers who account for 33% of electricity sales, face an overall rate hike of 24%, while 45% of all residential customers are effectively exempted from any increase. However, Fickes still has hopes that electric rate increase won't be as harsh on producers by the time it goes into effect, probably around July 1. "These things tend to moderate because regulators usually asked for more than they think they're going to get," he said. Unlike other oil and gas producing areas, most California operators can't use natural gas to fuel their field operations. "Emissions regulations in this state have forced the electrification of virtually all of California's fields," Kramer said. The one exception is the heavy oil production around Bakersfield where "not all operators are required to be on the electric grid yet," he said. The industrial cogeneration power units that produce steam for injection into the heavy oil fields around Bakersfield are all gas fired. But little associated gas is produced with the heavy oil, and most of California's gas production is in the northern part of the state. So producers must compete for gas to fuel those steam generators. Tight supplies and higher prices for natural gas are shutting down those cogeneration plants and threatening heavy oil production, said Kramer. Rolling blackouts already have periodically shut down oil and gas production, its transportation through pipelines, and downstream processing and refining. California producers expect to face another "20-30 days of rolling blackouts in June-July," said Kramer. No one knows how much production already has been lost to electric power outages. While producers may be able to shut down operations with sufficient advance notice of power curtailments, coming back to full production after power is restored often takes a couple of hours, CIPA officials said in a recent filing with state regulators. Multiple curtailments within the same day would result in idle time for employees on the payrolls and can even damage a well's productivity, they said. CIPA officials have asked the PUC to allow limit curtailments to only once daily. CIPA members blame California government officials for the energy crisis. "The governor's approach has been to wait for a crisis mode before he would begin to deal with this state's energy problems, so we get the worst of possible worlds," Kramer said. However, he said, "We've known this day was coming for a long time and formed the Oil Producers Electric Cooperative to look at innovative ways to reduce electrical loads at peak times. We also signed commodity deals when they were available to reduce costs." Efforts to buy power from out-of-state marketers fell apart in mid-December as California moved into an energy crisis, Fickes said. Although most of the energy problems must be addressed at the state level, CIPA Chairman William Terry Smith provided a list of ways in which the federal government can help in a letter to Rep. Bill Thomas (R-Calif.), chairman of the US House Ways & Means Committee. Smith's suggestions included tax and other incentives for independent producers to build and enlarge electric generation facilities and for pipeline companies to expand gas distribution systems within the state. Meanwhile, Fickes is working to get funding passed through Pacific Gas & Electric for a government-sponsored demand program that would allow producers to shut in wells during peak periods and sell the unused power back to the utility. "I think we can get that funding set aside from the bankruptcy proceeding. It's not their money to start with," Fickes said. CIPA is asking its 400-plus members to contribute amounts equal to 5% of their annual dues, $50 minimum, to help fund its lobbying program on the energy crisis. Contact Sam Fletcher at Samf@OGJonline.com

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-- Martin Thompson (mthom1927@aol.com), April 27, 2001