Oil discovery in California: Will Golden State go back to black gold economy?

Could an oil discovery in Kern County, California presage a return of the Golden State to national oil prominence?

In June 2009 Occidental Petroleum (OXY) announced it had tapped into an oil field that comprised upwards of 150 to 250 million barrels of black gold and natural gas. That discovery could be the first of many, believes Occidental CEO Ray R. Irani. "We believe this to be the largest new oil and gas discovery made in California in more than 35 years," said Irani.

Should a slew of similarly sized discoveries emerge, California could become a new oil patch for the U.S. That would be a boon to the economy of the cash-strapped state, but also provide powerful counter-incentives to the nascent green industry. California is among the national leaders in development of green technologies.

The history of California's oil industry is rich and filled with larger-than-life characters. A failed gold prospector named Edward Doheny and his partner Charles A. Canfield drilled the first well in the state in 1892 on what is now the site of Dodger Stadium. They used the sharpened end of a eucalyptus tree as a drill bit to create a 460-foot deep well that easily produced oil. Within 20 years, California was pumping 77 million barrels of oil per year and vied with Texas for the crown of largest oil-producing state.

Even today, California still produces 500,000 barrels of oil per day, primarily from wells off the coast of Santa Barbara. And California ranks third in the nation among all oil producers, behind Texas and Alaska, according to the Los Angeles Times. But California has not produced a significant new oil find in thirty years -- until this summer. The new Occidental find has sparked a mad dash for California oil real estate, the likes of which has not been seen since Doheny and his contemporaries struck oil in the Los Angeles Basin.

Realtors, oil analysts, and speculators have all be poring over maps to locate exactly where Occidental has been drilling. The company has played its cards very close to the vest, refusing to disclose exact locations, the depth of the finds, or the specific technology it has used to locate the oil. In an earnings call in July, company management did concede that much of the drilling was underway in the Elk Hills Oil Fields near Bakersfield, California, in the Central Valley.

The new discovery is unlike anything else in the lower 49 states, according to Occidental's management. This implies that Occidental was able to use newer technologies to access the field and, by extension, that many other similar finds could still be lying far below the dusty soils of California's primarily desert-like terrain. Back of the envelope calculations would suggest that it's entirely possible Occidental could add another one to two billion barrels of proven oil reserves to the U.S.

That estimate could well be conservative, say oil industry analysts. They point out that California's subterranean geography has been highly resistant to oil prospecting, but that new imaging tools and drilling technologies could well provide access to previously buried reserves. Bust out your old "Beverley Hillbillies" soundtracks, Californians. Black gold is apparently back.

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