Holmes Point-of-View

Oil & Gas Journal/February 28, 2005
by Bill Stephens

Two large, flapping signs outside Holmes Western Oil Corp's Taft, California office proclaim: NOW HIRING.

The signs reveal a shortage of oil field workers, just one of many challenges California independent producers face today, even as they celebrate sustained high oil prices.

Veteran California independent oil producer Fred Holmes says that despite strong oil prices, these are challenging times for California independents. Like mom and pop grocers, he says, traditional mom and pop oil producers are becoming extinct. To survive, small and medium sized independents need to be excellent operators--professional, resourceful, and modern.

Holmes is in a position to know. A third generation independent, Holmes grew up on an oil lease near Taft. In 1957, at age 13, he started working after school and summers as a rig hand, eventually doing all the oil field jobs. His family has worked the same Kern County fields for more than 80 years.

Holmes also wears three hats--producer, drilling contractor, and well service contractor. As a producer, he's grown from 90 to 1,500 barrels per day, with production in six fields stretching over three southern San Joaquin Valley counties. He's the 28th largest oil producer in California, drilling 30 wells per year, often reviving abandoned Bureau of Land Management (BLM) leases.

A self-described workaholic, Holmes evolved in recent years from a mom-and-pop company with three office employees (including his wife) to a large mom-and-pop with 19 office employees (including his wife). Overall, he has 160 employees. He's active in industry organizations.

Despite current challenges, Holmes believes independent producers have a key niche in California. "We're the low cost operators who keep mature fields going," he says. "We give personal attention to a few fields we know well. My family has been in the oil business in this area since the 1920s and we've worked these fields all our lives."

About thirteen percent of California oil production is from stripper wells, largely operated by independents. If you count Oxy as an independent, independent producers account for more than one-third of California oil production. The marginal leases independents operate provide tax revenue, jobs, and royalties. They reduce reliance on imports and help keep California production going.

Holmes is pleased that sustained high oil prices are stimulating his business and that new tools are helping him help squeeze more oil from old fields.

"But it's not a bed of roses for California independents these days," Holmes says.

California is a unique oil patch, with unique challenges for independents, Holmes says. The state has a lot more oil than gas, and that oil is in the southern part of the state where Holmes operates.
California oil is heavy, which commands a lower price than West Texas crude. Environmental regulations have long been strict.

Also, a handful of large oil firms produce a significant amount of the state's oil production. Holmes says that because there are no oil pipelines out of California, independents can only sell their crude to two or three large local companies. And while California is fourth in national oil production with about 719,000 barrels per day, its aging fields are declining about four percent per year.

Today, Holmes says challenges for California independent producers are growing. Currently, there's a shortage of experienced oil field workers. Oil price slumps over the last 20 years spelled layoffs. And Holmes says young people today see oil field jobs as unstable, hard, dirty, low paying work. They can make more money in the building trades or even in grocery stores. Holmes has two rigs idle because of a lack of experienced crews.

County, state, and federal environmental regulations are proliferating.

"It can take years to get a drilling permit for a sensitive area," he says. "New laws keep coming out, and it's time-consuming to interpret them."

Also, current high natural gas prices hurt California oil producers. Steam is used to help get heavy oil out of the ground. Natural gas is used to make steam.

Another challenge for California independents: Large oil firms aren't selling properties to independents as readily as they used to, Holmes says.

"Five or ten years ago we thought the majors were going to sell all their California properties to independents in their quest for bigger overseas targets," he says.

But he says the majors have been holding onto their California fields.

"The big firms own a large percentage of San Joaquin Valley acreage and are holding onto their fields because oil prices are good and because of 'cradle-to-grave' liability regulations. Majors don't want to sell old properties to small independents without deep pockets because later, when the time comes to abandon, liability could revert back."

In addition, he says, California crude prices have been lagging even more than usual lately behind West Texas crude prices.

Also, Holmes says independents have little ability to take advantage of higher oil prices by adding production through exploratory wildcatting.

"The state is pretty well drilled up for oil, and the easy stuff has been found."

To navigate today's challenging California business climate, Holmes says small and medium-sized independents must be excellent operators--resourceful, and as professional as the big boys.

"Some independents have nostalgia for the old days," Holmes says. "But you can't fly by the seat of your pants and run your business out of a shoe box. The days of the wild, wild west are over for independents.

"Mom and pop firms have had to adapt because government agencies expect professionalism. One person can't handle it. You have to do things right when it comes to the environment and safety or you will soon be in trouble."

Holmes has some suggestions for independents:

--Run your business like a professional business. "You need professional business people to help you run it."

--To help comply with burgeoning environmental regulations, hire enough staff. Mostly to deal with 140 different county/ state/federal government agencies, Holmes has grown his office staff significantly. "You need people to help you figure out environmental rules, which are coming faster than we can decipher them."

"When the government introduces a rule that goes too far, you have push for a realistic compromise. And you need to keep pushing for more streamlined processes. But you need to comply with regulations because that's what John Q. Public wants. If you don't operate responsibly, you won't be around."

Holmes is proud of the fact that his oil firm consistently wins outstanding lease maintenance awards from California's Division of Oil & Gas.

--Be a safe operator. "It's the way business has got to be done, and the industry has made impressive strides. As a good operator, you need to be on the leading edge. We do daily safety training."

--Actively recruit, train, and retain oil field workers. Not only does Holmes advertise for workers, but he runs a comprehensive in-house training program and serves on the board of two Taft-area oil field schools.

"Good operators don't put untrained people out in the oil field," Holmes says. "You need more formal training programs these days."

Holmes thinks that as job stability continues and wages eventually improve, more young people will seek oil field work.

--Be a resourceful operator. When Holmes' well pulling business slowed temporarily in the 1980s, he also began offering well drilling services. When oil prices sagged, he also became a producer by purchasing inexpensive BLM leases. The firm's versatility has helped it weather oil business ups and downs.

--Arm yourself with modern oil field tools. "We purchase dried-up, edge properties and use science to find missed spots," he says. "We use tools like horizontal drilling to squeeze out more oil."

--Participate in industry organizations. "For mom and pops, they are our eyes and ears in Sacramento and Washington, keeping us informed of new regulations. They also provide industry networking."

--Be an industry advocate. "Because we haven't done a good job of telling the public how much we've improved operations in the last 20 years, our industry's reputation still lags. A better reputation can mean more community acceptance, fewer regulatory restrictions, and more access to oil resources."

--Finally, hold onto what's good about being an independent. "Keep your intimate knowledge of local fields," he says. "Keep the family feeling in your company, even as it grows. We don't have executive bathrooms, and everyone has the same retirement plan. We are proud of the fact that some employees spend their careers with us."

"I still enjoy this business. And today I do a whole bunch of stuff I don't like (paperwork), so I can do a little bit I like (visiting the field)."

Despite current challenges for independents in California, Holmes doubts he'll ever retire. He'd even encourage his grandchildren to become independent California producers.

"All my life I've been hearing that California has only 10 more years of oil production," he says. "And while California's oil fields are declining, they're declining slowly. There are lots and lots of years left."

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