Point of View: Tidelands Oil Production carries unusual pedigree in optimizing operations in a mature giant

Befitting that unusual pedigree, Tidelands' new president, UK native Mike Domanski, also comes to his role via an atypical route: After studying the "classics" at Edinburgh University and aiming for medical school, Domanski received a letter of invitation from the predecessor to BP PLC and soon found himself an oil trader.

Years later, finding himself at the helm of one of California's newest independents, Domanski leads an effort to sustain growth through continued exploitation of a declining oil field in the most hostile (to the oil industry, at least) environs of any state. Because the company's approach to production growth must be incremental in a mature giant field, the overriding emphasis is on containing costs. And yet there remain opportunities to leverage a position astride what would be a hefty chunk of production for any US independent: more than 6,500 b/d of oil.

Tidelands currently operates more than 600 active wells and produces-including oil-more than 200,000 b/d of total liquids and more than 1.5 MMcfd of natural gas while injecting more than 300,000 b/d of water. As the latter numbers attest, Tidelands operations serve as a giant field laboratory for all kinds of improved and enhanced oil recovery techniques, including carbon dioxide flooding, steamflooding and other steam stimulation, polymer flooding, and micellar-polymer flooding.

Tidelands origin

On Mar. 1, 1989, Tidelands took over the Long Beach tidelands leases, succeeding Long Beach Oil Development Co., which had operated the leases for 50 years.

When the Wilmington oil field contract had come up for bid, per state law, LBOD took a pass, surprising many who assumed its 50-year operatorship would continue, Domanski said. Tidelands offered a 95% net profits bid and won the contract. It retained most of the LBOD personnel and quickly began expanding operations as more of the field operators pulled out. In 1989-90, Tidelands became operator for then-Mobil Oil Corp. (now part of ExxonMobil Corp.) and Chanse Long Beach affiliate Chanse Energy Corp. in Wilmington and for Neste Oil in Pacoima and Newhall-Potrero oil fields. In 1993, it became field contractor for Union Pacific Resources Co. (UPRC, later acquired by Anadarko Petroleum Corp.), and in 1994 assumed the same role for the Long Beach Harbor Department.

Neste's motivation to help set up Tidelands was part of an initiative in Finland to diversify oil supply sources in the hydrocarbon-poor nation.

The Neste connection is expected to disappear soon, however. Neste Oil Services recently signed a letter of intent with Paramount Petroleum Corp., an independent refiner with a 54,000 b/d asphalt refinery at Paramount, Calif., to transfer its interest in Tidelands to Paramount for an undisclosed consideration, Domanski said. Paramount is the biggest asphalt refiner in the western US.

"For some time, they've (Paramount) been wanting to get their hands on a little physical oil," Domanski said. "It doesn't mean they will necessarily put our oil in their refinery, but it certainly gives them leverage."

One problem with the new ownership will be a need to develop a more transparent crude price regimen, in light of Paramount's need to take crude directly vs. an optimum price gained for the leaseholders. Domanksi expressed confidence in that outcome.

Wilmington crude is a particularly good grade for asphalt, he noted, comparable in quality to the Venezuelan heavy crudes that are so prized for this purpose-and that are coming from an increasingly shaky supplier.

"We're actually enjoying a rather nice differential with the main grades, like the North Sea (crudes), West Texas Intermediate, with our quality," Domanski noted.

Cutting costs

Tidelands in 2000-01 moved to cut costs by offering early retirement to Tidelands employees, with "quite a number of top managers" taking the offer. That led to Domanski being offered the president's job last year.

Domanski finds himself ramrodding a unique operation.While ostensibly a producer,

Tidelands has thought of itself from the outset as a service contractor, taking over the operation of producing leases under a variety of complex unit operating agreements covering a highly fractured, highly faulted reservoir in a difficult urban environment.

The company's operating philosophy, however, is that of any small independent, says Domanski, in the sense that "…we are running harder and harder just to stay still-this is an old, mature field that started in 1937, and we're trying to minimize the natural decline, which is 10-11%/(year)."

At the same time, the company has had to deal with a natural subsidence that has plagued Wilmington operations for decades-at one point causing a 29-ft drop in one area during the 1950s-60s-and that poses a continuing worry for the city of Long Beach and its residents.

"This takes a very large part of our operation…We inject something like 170-180% of the water (we produce)…and that makes for a very expensive operation," Domanski said.

During the industry downturn in 1998-99, Tidelands found that it had little leeway to cut operating costs short of shutting in wells, Domanski noted: "What we did was to revamp our personnel organization very extensively; so basically we ended up doing the same work with half the people." Staff was cut from almost 300 to about 129 today.

The company's troubles were exacerbated by the spike in energy costs during California's recent energy crisis, when it saw its energy costs soar by 75%. That kind of energy cost hike adds about $3/bbl to operating costs, said Domanski, adding, "So we're no longer talking about surviving at $12/bbl, but at $14-15/bbl."

Tidelands also produces a modest amount of gas, about 1.5 MMcfd, "much of it nonmerchantable" because it contains some inert gases. The company installed a molecular sieve to reduce the inert gas content and now sells about 500 Mcfd to the city of Long Beach. The rest is used in the field, with a tiny amount flared.

Institutional knowledge

Given its battle with cost containment, Tidelands has benefited from the inherited institutional knowledge of its employees. Much of the LBOD engineering personnel core remains intact, with many on staff boasting 20-year careers focused on one oil field. Coupled with new advances in slant-drilling technology, this retained knowledge of Wilmington field and how it reacts to different stimuli enables the company to maintain production "so long as oil prices remain decent," Domanski said.

That institutional knowledge also comes in handy in dealing with a welter of regulations governing movement and cleanup of fluids in a beachfront community in the strictest regime for environmental rules anywhere, Domanski said, adding, "The permit process is beyond belief."

Tidelands also relied on historical knowledge in undertaking a steamflood in Wilmington, following one attempted by UPRC during the 1980s in the field. UPRC was aggressive in its steamflood program, said Domanski, and the city became concerned about the steamflooding contributing to subsidence.

That effort was shut down. Tidelands tried a steamflood-converted eventually to hot water injection-of its own in a different part of the field, which while, "quite successful," also ran afoul of city concerns over subsidence. But the conversion to hot water made steam generator operations problematic, and the steamflood was shut down.

"The reservoir reacted very well (to the steamflood), and I believe that we can eventually convince the city that it can be done safely. Then perhaps we can open up some other areas to steamflooding," Domanski said.

Operating strategy

Developing an operating strategy for a company that is neither "fish nor fowl" can be a daunting experience, Domanski acknowledged.

"I can't think of another company that quite fits our description," he said. "Our ownership is responsible for disposing of the crude oil, and that is their primary concern…more so…than the financial results of these various contractual arrangements, which, quite frankly, are somewhat modest-particularly now as it's become increasingly difficult to manage as the water cut has gone up, production declines have set in, and the oil has become tougher and tougher to find.

"We've also been fortunate in that we've been allowed to operate as though we were just another California independent…Yes, we have to satisfy the bottom line, but probably even more important than that, it's to ensure that the bureaucrats are not going to come along and say, 'Hey, the life of this field is over'…There are people who think that way, because of the competition in the Port of Long Beach for container space."

Complicating that latter concern is that the Port of Long Beach is also an interest owner in Wilmington oil field.

Having Paramount as a majority owner in Tidelands will be a plus for the company, Domanski contends.

"They have a lot more reason to see us continue and to produce this oil than, say, a foreign…entity," he said, adding that Neste has had some concerns over the future of the industry in California and the regulatory climate in the state, especially with the possible exposure to liability over an oil spill.

Domanski doesn't think that the regulatory climate has gotten better in recent years: "We spend a lot of time trying to combat that climate that, in a way, is a waste of time."

Growth plans

Tidelands hopes to pick up the pace of drilling soon after a "rocky" period last winter, when oil prices slumped, noted Domanski.

"Now we can think about spending money again to enhance production," he said. "We've identified about 10 good drilling candidates; we'd like to drill 3 or 4 of these this year."

More upside potential has shown up in some deep structures identified by 3D seismic surveys conducted in the field during the mid-1990s-some so deep that they are below what used to be considered the basement in the area.

The prospect is likely to be oil-prone, according to Tidelands.

Plans call for a 13,000 ft wildcat to test these deeper horizons. While Tidelands would like to better define the prospect, Domanski said, "It's become almost impossible to do seismic in an area like Long Beach for fear of lawsuits."

Still, there are three attractive, definable prospects that, if tested successfully, could bolster Tidelands' production outlook significantly.

In the long run, however, operating a handful of leases for interest owners in a declining giant field has a limited future for company growth, he admits.

The close-to-the-bone approach to cost containment might serve Tidelands well in taking over production elsewhere, especially as the trend towards consolidation continues within the US industry.

"There have been opportunities, and still are, to do the same sort of thing for other people that we are doing here…to take over production elsewhere and utilize our expertise for that," Domanski said.

Ironically-perhaps a wild irony, considering California's well-known animosity towards the oil industry-Domanski sees some advantage being a local producer in the state.

"There's a bit of a shortage of importing facilities (in the Los Angeles Basin)…People are beginning to see the advantage of having production in their back yard."

Career highlights

Michael Domanski became president of Tidelands Oil Production Co., Long Beach, Calif., in 2001. Tidelands operates leases in Wilmington giant oil field for the City of Long Beach and other leaseholders. It is owned by Neste Oil Services Inc. and Chanse Long Beach Production Corp.

Employment

Domanski joined BP PLC forerunner British Petroleum Co. PLC in its supply department and worked for the company in that capacity for 15 years. He worked mainly in Europe for BP, including Scandinavia, Germany, France, and the UK.

He was the first member of BP's commercial trading operation to come to the US, selling crude oil in the Western Hemisphere from his base in New York City in the 1970s. He then was posted to Belgium.

Domanski left BP to start his own trading company in 1979. It was established as a US West Coast trading company that specialized in exporting products using some ARCO facilities to export products to Singapore, Japan, South Korea, and other Asian locales. His firm was taken over by a European group, which became Pilot Petroleum. Among other innovations, Pilot pioneered the blending of fuel oil onboard ships rather than in onshore tanks to save money. That attracted Japanese interests, which took over Pilot.

Domanski joined Neste Oy (forerunner to Fortum Oy) in 1991 to look after the company's oil field operations in the US, 2 years after Neste's oil services unit helped form Tidelands Oil Production Co.

Education

Domanski attended Edinburgh University, attaining a premedical undergraduate degree.