Matthew is a correspondent at Heatmap. Previously he was an economics reporter at Grid, where he covered macroeconomics and energy, and a business reporter at BuzzFeed News, where he covered finance. He has written for The New York Times, the Guardian, Barron's, and New York Magazine. Read MoreRead More
Big Oil Is Doing Great ... Except in California
For fossil fuels, it’s the Not-So-Golden State.
It was a good 2023 for Big Oil. In most places.
Both Exxon and Chevron reported substantial fourth quarter and full-year 2023 earnings Friday — $36 billion and $21 billion for 2023, respectively, their second highest annual profits ever. Both also called out California, however, once one of the cradles of the U.S. oil industry (see: There Will Be Blood) and now its biggest domestic political headache as a place where they’re enduring billions in losses.
While the two oil majors’ issues in California are specific to how they operate there, they are also perhaps a preview — or a warning — of what a full spectrum climate policy could mean for them.
While the Biden administration has done more legislating on climate than any previous administration, it has not done much of anything to impair the supply of hydrocarbons. Instead, the Inflation Reduction Act is largely devoted to subsidizing the supply of non-carbon-emitting forms of energy (and electric vehicles) and making it easier for people to electrify their homes. The upcoming Environmental Protection Agency power plant regulations, meanwhile, are designed essentially to force power plant operators to capture and store their emissions.
All of this would, if it works, increase demand for green energy and decrease demand for fossil energy. But much to the chagrin of many environmentalists, it would do little directly to limit fossil fuel extraction — nor, to the chagrin of more market-oriented environmentalists, would it set a tax on carbon emissions or establish a cap-and-trade system that would act as a tax. As Biden administration officials sometimes point out, oil and gas production has hit record highs under their watch.
California is different. It has a cap-and-trade system, it’s passed restrictions on where oil and gas drilling can occur (although they’re on hold pending a referendum that could overturn them), and permitting for new oil wells has slowed to near zero. Local governments there are often not particularly keen on hydrocarbon infrastructure or drilling, especially offshore.
In its earnings release, Exxon reported a $2 billion “impairment as a result of regulatory obstacles in California that have prevented production and distribution assets from coming back online.” This was a reference to its oil and gas operation off the Santa Barbara County coast, which started pumping in the early 1980s and stopped in 2015, when a pipeline rupture spilled more than 142,000 gallons of oil into the ocean. Exxon has been trying to get out of this business ever since, even lending money to another company to take the project off its hands. However, the deal has been continually delayed thanks to litigation surrounding pipeline repairs, as well as getting state and local approvals to operate again.
For Chevron, which is headquartered in California and maintains an active extraction and refining operation there, the troubles were “higher U.S. upstream impairment charges mainly in California” — emphasis mine.
In an earlier release this year, Chevron previewed losses from its California operations, saying that they were “due to continuing regulatory challenges in the state that have resulted in lower anticipated future investment levels in its business plans.” Combined with writedowns in the Gulf of Mexico, the company reported $3.7 billion worth of charges on its fourth quarter earnings.
Chevron — which operates refineries in both Northern and Southern California — has been in a public dispute with California policymakers over their energy policy proposals, especially around refining. The state plans to ban sales of internal combustion vehicles by 2035 and is working through a proposal to essentially cap profits on refining gasoline in the state. Chevron officials have said that a refining margin cap would make it “really challenging to want to put our money there,” the company’s refining chief Andy Walz told Bloomberg.
California has consistently higher gas prices than other states thanks to its lack of access to a national market (it’s not served by a pipeline network) and special requirements for its gasoline. Today, gas prices are $4.57 a gallon in California compared to $3.15 nationally, according to AAA. If Chevron is right about how California will treat refiners going forward, that gap could grow.