New Regulations in Diatomite Can Adversely Impact Berry’s Growth Plan

Wednesday 8 February 2012, Amsterdam

New Regulations in Diatomite Can Adversely Impact Berry’s Growth Plan; Still Bullish on Diatomite Asset Development

Berry’s Diatomite asset in California’s North Midway-Sunset field provides the company with a significant opportunity to grow its heavy oil resources and increase its profitability associated with crude oil. The asset is a major driver for Berry’s future growth. The company holds oil resources potential of 360 MMbbl in its Diatomite asset. It expects a recovery factor of 23–40% from its Diatomite asset. Berry began the pilot project of 13 wells in Diatomite in 2004. Based on the results of this pilot program, the company announced its plans to develop the field commercially in November 2006. In Q3 2008, Berry reported increased estimates of the reserve potential associated with its Diatomite assets. Since then, the company has been focusing on the heavy oil development in Diatomite and drilled 85 wells in 2008 and 51 wells in 2009 in this asset. Figure below shows the company’s operational map in its Diatomite asset.

See figure: Berry Petroleum Company, Diatomite, Operational Map, 2011

However, the development of Diatomite asset has been under the scope of strict regulatory environment since Q1 2010. California’s Division of Oil, Gas & Geothermal Resources (DOGGR) objected the development of the Diatomite asset on the ground of safety of operations. Recovery of oil from the Diatomite asset requires the use of a cyclic steam injections technique which can sometimes lead to unsafe operations. Steam injection and withdrawal can affect the functioning of well bore. This may lead to steam discharge from the reservoir and contaminate the groundwater resources. Based on the information about the operations throughout the basin, Berry reported that up to 10% of total well bores can be damaged due to the steam injection technique.

DOGGR’s regulations had no norms for this steam leakage as of 2010, so it announced plans to recommend new regulations for regulating this kind of operations. This led to a delay in new site permits, and the company drilled only two wells in Q1 2010 and no drilling could be carried out during Q2 or Q3 2010 in Berry’s Diatomite. This affected the company’s drilling plans and it could not work on its developmental drilling program as planned for 2010.

Berry received interim approval for the development of this field in September 2010, which permitted development in some areas of the asset. Drilling restarted in Diatomite in Q4 2010. In July 2011, Berry received the revised approval from DOGGR which granted permission for the development of the whole asset. However, with the revised approval, DOGGR enforced its requirements for the operators to prove mechanical integrity of the well bore so that there will be no steam leakage from the system. In line with this, Berry will conduct some tests and submit the data to DOGGR to receive a permit to restart steam injection procedure. The company expects to complete the required tests and facility modifications within one year, after which it can be granted the permit subject to DOGGR’s administrative procedures. Berry has not yet disclosed any defined timeframe by when it can receive the approval.

The company needs to shut down the steam injection and production within a specified surrounding area when the tests are being carried out. Of its total 250 wells in this asset, production from 100 wells was shut down to carry out the tests in November 2011. Berry needs to carry out these tests regularly to operate safely. Thus, the company’s production is expected to remain shut in to conduct the required tests. Suspended production and steam injection operations have slowed the drilling activities in this asset. Berry drilled 95 wells in Diatomite during H1 2011 and plans to reduce this to 35 for wells expected to be drilled in H2 2011. The company plans to drill only 60 wells during 2012 compared to the planned 130 wells in 2011. In order to compensate for the loss of production, the company plans to focus more on other assets until drilling resumes in the Diatomite asset.

The reduced level of drilling activity permitted and the offline production from the field, coupled with no defined timeline for the receipt of required approval affected the development plan of the company in its Diatomite asset. Berry planned to achieve production of 5,000bbl/d from this asset by the end of 2010. However, the company delayed the target timeline twice and had not achieved this level. Also, until August 2011, the company had plans to grow the production from this asset to 15,000 bbl/d by 2014. They expect that the full fledged development of the asset will come in mid 2016.

The series of delays in successful execution of the asset development is increasing the span of the full development of Diatomite. Slow development may also lead to cost overruns for the project, although the company has not disclosed any information about the intensity of this so far. If costs are increased, it may impact the operational performance of the company.