Occidental Petroleum Projects California Shale Development May Become Its Largest Business Unit Within 10 Years

Occidental Petroleum, the fourth-largest US oil and gas company, based on equity market capitalization, says that within the next 10 years, its California shale development program—which currently delivers more than 25% of its California production—could become the company’s largest business unit.

Shale production here refers to oil and gas production via drilling from shale source rocks; not the mining of organic shale deposits and subsequent production of hydrocarbon liquids by heating the kerogen found in those deposits—i.e. “oil shale”. A 2010 draft report from the US National Energy Technology Laboratory noted that:

OSSR [Oil from Shale Source Rocks] is recovered from self-sourced, rich, mature source rocks that are oil-wet. A critical technical

problem for commercial success with OSSR plays is that of obtaining sufficient permeability to obtain flow at economic rates for what is essentially immobile oil. This must be achieved through one or a number of geologic mechanisms—faulting, tectonic fracturing, micro-fracturing from fluid expansion, or the employment of interbeds or immediately adjacent reservoir quality rocks to sustain flow. Advanced

technology, principally horizontal wells and advanced fracture stimulation, are also required.

Oxy projects at least 6 to 11% production growth over the next five years from its current US holdings to net production of between 512,000 and 632,000 barrels of oil equivalent per day (boepd) in 2014. The company’s inventory of domestic drilling projects spans more than 12,000 locations; most of these drilling projects are for oil. Oxy’s US business is 70% liquids, and this percentage is expected to be the same or higher in the future.

California continues to be a major driver of Oxy’s US production growth; Occidental is the No. 1 gas producer and No. 2 oil producer in the state. Oxy’s California operations encompass more than 3,700 drilling locations and 7,500 active wells in 90 producing fields, spanning more than 600 miles.

Oxy expects to increase its total California production from 151,000 boepd in 2010 to between 212,000 and 300,000 boepd in 2014, from existing assets on a risk adjusted basis.

Oxy believes there is significant upside potential in California, which is still largely unexplored despite its long history of oil and gas production. Oxy’s largest California operation is the Elk Hills field with 538 million boe of current proved reserves, 70% of Oxy’s total reserves in the state.

Oxy’s most recent growth in California comes from its 2009 major discovery in Kern County, which resulted from the company’s conventional exploration program. The company estimates that gross potential reserves identified in the area could total 500 million boe by the end of 2010. It is believed to be the biggest oil and gas discovery in the state in 35 years and Oxy continues its analysis of the areal extent of the discovery.

California shale. Occidental is the most active oil and gas company operating unconventional shale projects in California. Like the Bakken in North Dakota and Montana and the Eagle Ford in South Texas, shales in California have large amounts of hydrocarbons in place. Other parallels include similar reservoir parameters, and predominantly oil/liquids reserves. Oxy believes that the California shales may, in fact, be richer in hydrocarbon resources than many of the better-known shales.

Starting its shale development program at Elk Hills in 1998, Oxy is currently producing approximately 40,000 boe per day from what is regarded as shale assets. The company has maintained a low-profile in developing its California shale expertise over the past 10 years, while developing its production techniques and acquiring significant acreage holdings.

Within its assets, Oxy owns at least 870,000 acres in California with strong potential for shale projects, and the acreage encompasses a favorable thermal regime.

The company is currently undertaking a four-year development program for its shale production. Program elements include appraisal of more than 15 identified areas; 10 to 15 test wells per year on Oxy’s acreage, which encompasses California’s oil and gas basins; and the largest 3D seismic program in the history of California. The 3D seismic program is designed to identify sweet spots in the shale plays and Oxy plans to initially target one or two areas, including the Kern County discovery.

In addition, the Wilmington Field in Long Beach, where Oxy has increased its interests to over 80% of the producing properties, provides an additional California growth opportunity. The field is among the 10 largest oilfields in the US with an estimated 6-8 billion barrels of oil in place.

Overall, Occidental projects annual production growth of at least 5 to 8% through 2014. Oxy expects to spend a total of $27.5 billion on its capital program between 2010 and 2014, with 55% planned for US projects and 45% for international. Capital expenditure for 2010 is targeted at $4.5 billion.