As an exploration destination, California has languished in recent times in comparison to the Gulf Coast, due in large part to the perceived difficulties of extracting heavy oils from the series of proven fields scattered throughout the State.
On the bright side, the decreased level of interest and competition for acreage in California has resulted in an increase in the availability of regional exploration opportunities - an advantage that Perth-based Salinas Energy is well aware of.
Salinas staked a claim in California three years ago, acquiring a 100% working interest in the North San Ardo heavy oil field in the Salinas Basin, as well as leases in the southern San Joaquin Basin. The company is concentrating on oil field redevelopments and near-field exploration.
California offers juniors like Salinas a host of historically prolific oil and gas fields with a high probability of continued success that are too small to interest the bigger players.
This has attracted several Australian juniors, such as Nuenco, Solimar and Sunset Energy, as well as Orchard Petroleum, which was acquired for $175 million by Eskdale Petroleum, a subsidiary of a Hong Kong investment fund.
Since Orchard's takeover, Salinas has been the standout success among Australian juniors operating in the state. Now a newcomer, Perth-headquartered Incremental Petroleum, has entered California, seeking to replicate the success it has had in field redevelopments in Turkey.
"The state has been fundamentally underexplored over the last 100 years and largely ignored since the last of the majors abandoned the area 30 years ago," Incremental managing director Gerry McGann said.
Salinas agrees.
"California has a number of very proven discoveries but many of them are in heavy oil and that has not traditionally been a very sexy proposition for larger oil companies," newly appointed Salinas director David Bradley said.
"Those companies tend to chase the more hydrocarbon-intensive sites where one well can yield a much higher density of oil or gas - they can drill a few wells for minimal cost and know there will be a billion barrels of oil at their fingertips.
"Southern California has been known to have billion barrel oil fields but there are also many fields of 20, 50 and 100 million barrel reserves which the majors have delineated in years gone by, produced a little and then abandoned for larger targets elsewhere."
The North San Ardo oil field redevelopment project has begun providing Salinas with its first steady source of income, after a targeted 1000 barrels of oil a day from two vertical and three horizontal production wells was reached in December, generating more than $2.9 million in revenue to March 2008.
Work has now started on a four-well infield drilling program to further increase production and capitalise on the company's prime positioning over 160 square kilometres along the west coast, according to Bradley.
"There are many small exploration companies getting into the US but what distinguishes us is that we have achieved oil production and are now self-funding," Bradley said.
"We have encountered another two successful wells with this latest drilling program, both with high initial oil shows, which essentially means our incremental production will soon vault forward."
Salinas says it is identifying dozens of shallow targets within its acreage that will be cheap and quick to drill.
"A typical drilling program on a 3000 foot well in this region can be done in seven to 10 days for under $1 million," Bradley said.
Salinas is now working to bring its McCool Ranch oil field, close to the North San Ardo oil field production facilities, into commercial production with the impending start of a long-term production test.
Initial testing at McCool produced about 600 barrels of fluid a day after successfully intersecting the Lombardi oil reservoir, but also encountered a water-bearing zone.
While the company has considered workovers or a sidetrack to eliminate water from the well, it has now opted to place the well on production with temporary facilities and dispose of the water through re-injection.
McCool Ranch is expected to contain up to 1 million barrels (MMbbl) of recoverable oil and the company hopes to be able to book reserves from this field following the long-term production test.
Salinas is earning 100% in McCool Ranch.
The company has also received expressions of strong interest from several parties in its southern San Joaquin Basin leases and hopes to conclude a farm-out during the current quarter and start drilling in the third quarter of 2008.
The drilling program will target light oil prospects that have been matured for drilling by Salinas, with potential recoverable reserves of 10-25MMbbl of oil.
While California fields tend to deliver slow and steady production, the wells produce for a very long time which translates to revenue and funding for many years, according to Bradley.
"At a $US120 oil price, that is a lot of money and we are well-positioned with lots of acreage and projects to take advantage of that," he said.
Incremental Petroleum is optimistic it can follow in Salinas's footsteps. After achieving success in western Turkey, Incremental last month entered the US, making a binding agreement with a private local entity to acquire five projects across 76square kilometres in California's San Joaquin Basin.
Under the terms of the agreement, Incremental will make initial payments totalling $7.1 million to acquire between 10% and 50% in each project.
It will operate the larger equity-interest projects and will also fund work commitments in all projects of an estimated $11.2 million over two years through a share placement, share purchase plan and operating cash flows.
While Incremental's due diligence of the acquisition is slated for completion this month, managing director Gerry McGann said the opportunity has made for a "fantastic addition" to the company's global reach.
"We had been very keen to replicate the success we have had in Turkey but after evaluating 50 projects in the last two years, it became obvious that there was very little that country could offer us in terms of viable opportunities," he said.
The lack of suitable acquisition targets saw the company expand its search into North America last year with the help of a local consultant, who undertook a study of all significant hydrocarbon-bearing basins to identify regions where low-risk, onshore drilling with new technology could prove productive.
The San Joaquin basin emerged as the prime candidate.
"We discounted the Gulf of Mexico straight away because the costs involved in going offshore are extreme," McGann said. "It can, and has, killed many small companies."
Incremental identified California as a potential exploration destination very early on because of the much larger amounts of prospective acreage that could be acquired in comparison to places such as Texas, Louisiana and Oklahoma, according to McGann.
"The acreage we have secured in the San Joaquin Basin offers a combination of significant discovered, but not produced, hydrocarbons and helps spread our operational, project and geographical risk.
"We are in an extremely prospective and ‘overcharged' basin in terms of the huge volumes of oil and gas which have been produced there historically.
"That is not normal for most average hydrocarbon basins, whether you are in Texas or Saudi Arabia. So in that respect, San Joaquin is geologically quite unique."
Of its five US projects, Incremental's 2008 efforts will focus on the development of a shallow, low-cost regional anticline structure with "very large upside", in which it holds a 10% working interest.
A series of deep wells have been already drilled at the site and will be tested and completed by Incremental's operating partner this month before a joint decision is made on how to proceed.
"Although the anticline has previously been tested at more-than-commercial rates by today's standards, it has only ever produced around 8 million barrels," McGann said.
"The ultimate reserves will certainly be north of 100 million barrels and could easily be two or three times that amount.
"Knowing where the oil or gas might be located is not worth anything in the US until you put in the hard yards to pick up some decent acreage. Sometimes that can be a long-term project."
Unlike Incremental, Salinas seeks to have operatorship in all of its projects. Managing director John Begg decided from the outset that his company would call the shots in its operations.
"Many juniors are happy to take small percentages in projects and ride along indefinitely without any decision-making power," Bradley said.
"John [Begg] wants to control this company's destiny, so he made the decision to acquire projects where Salinas can hold a majority and controlling interest."
But this requires building a team of production and development experts from the ground up - hard work in today's tight job market.
"John spends a lot of time in California these days working hammer and tong to build a team of key, highly experienced oil and gas professionals so we can have the skills onboard to drive our projects," Bradley said.
"We have been fortunate in securing some of the best technical and surface experts in southern California, averaging about 25 years industry experience each."
Bradley says Salinas has the oil production, the people that know how to tackle the harder targets, a ready market on its doorstep, and with North San Ardo it now has a track record of delivering the goods.
"There are not a lot of surprises left here," he said.
"We really have had a dream run."
First published in the June issue of Petroleum magazine
