Business Context and Reporting Period
Company: California Resources Corporation (CRC)
Filing Type: Form 8-K (Current Report)
Date of Report: August 31, 2022
Context: The filing addresses the passage of two California state bills (Senate Bill No. 905 and Senate Bill No. 1137) and their anticipated impact on the Company's carbon capture and sequestration (CCS) projects and oil and gas production operations.
Key Financial Metrics
The filing does not provide specific revenue, profit, cash flow, margin, debt, or liquidity figures for the reporting period. It focuses on regulatory impacts and reserve estimates.
- Proved Undeveloped Reserves Impact: Estimated reduction of less than 25% due to Senate Bill No. 1137.
- Overall Proved Reserves Impact: Estimated reduction of less than 10%.
- Production Rates: No expected change to existing proved developed producing reserves or current production rates.
- Plugging and Abandonment Liabilities: No material change expected to the timing of these liabilities.
Material Changes and Regulatory Impacts
Senate Bill No. 905 (Carbon Capture and Sequestration)
- Regulatory Framework: Establishes unitization, permitting, and pipeline safety regulations for CCS projects over a multi-year period.
- Project Timeline: Initial Carbon TerraVault projects (with EPA permits filed) are not reliant on these new regulations and are expected to proceed on initial timelines.
- Enhanced Oil Recovery (EOR) Prohibition: The bill prohibits CCS projects utilizing permanent sequestration in connection with EOR. CRC is assessing if Inflation Reduction Act incentives offer an alternative pathway for its CalCapture project.
- Current Operations: CRC has no existing oil and gas production or proved reserves associated with EOR projects relying on CO2 floods; thus, no impact on current production or proved reserves is expected from this prohibition.
Senate Bill No. 1137 (Well Setbacks and Emissions)
- Setback Requirement: Establishes a 3,200-foot minimum distance between new oil and gas wells and sensitive receptors (homes, schools, parks).
- Operational Controls: Imposes health, safety, and environmental controls (noise, light, dust, air emissions) on wells within the setback distance, including potential immediate suspension of non-compliant facilities.
- Asset Impact: Majority of production in rural San Joaquin basin is unlikely to be affected. Specific evaluation is underway for Wilmington and Huntington Beach fields in the LA Basin.
- Development Plans: Development plans will change, but the overall pace of development is not expected to be materially affected.
Guidance, Outlook, and Risks
Guidance Reaffirmation
CRC is reaffirming its 2022 full-year guidance previously issued on August 3, 2022.
Management Commentary
Management believes the Company has a long history of operating under stringent California regulations. While development plans will adjust to comply with new setbacks, the Company does not anticipate material changes to current production rates or the timing of abandonment liabilities.
Risks and Contingencies
- Regulatory Delays: Delays in developing federal CO2 pipeline safety regulations could delay projects requiring pipeline transportation.
- Future Standards: Senate Bill No. 905 contemplates a new regulatory program with undefined standards that could affect future CCS project timing.
- Forward-Looking Uncertainties: Risks include commodity price fluctuations, inflation, permit availability, reserve estimation accuracy, and the ability to finance CCS projects.
Investor Verification Checklist
- Verify the specific impact of Senate Bill No. 1137 on the Wilmington and Huntington Beach fields in the LA Basin.
- Confirm the timeline for the development of federal CO2 pipeline safety regulations by PHMSA and their potential effect on CCS projects.
- Review the Company's assessment of Inflation Reduction Act incentives as an alternative to the prohibited EOR component of the CalCapture project.
- Monitor the Company's capital plan adjustments regarding the estimated reduction in proved undeveloped reserves.
- Check for updates on the signing of Senate Bills 905 and 1137 by Governor Newsom and any subsequent regulatory guidance.