Two large, flapping signs outside Holmes Western Oil Corp.'s Taft, Calif., office proclaim: NOW HIRING.
The signs reveal a shortage of oil-field workers, just one of many challenges California independent producers face today, even with revenues fortified by high oil prices.
Veteran California independent oil producer Fred Holmes, president of Holmes Western, says that despite strong oil prices, these are challenging times for California independents. Like mom-and-pop grocers, he says, traditional mom-and-pop oil producers are becoming extinct. To survive, small and medium-sized independents need to be excellent operators¿professional, resourceful, and modern.
Holmes is in a position to know. A third-generation independent, Holmes grew up on an oil lease near Taft. In 1957, at age 13, he started working after school and summers as a rig hand, eventually doing all the oil-field jobs. His family has worked the same Kern County fields for more than 80 years.
Holmes also wears three hats: producer, drilling contractor, and well-service contractor. As a producer, he's grown from 90 b/d to 1,500 b/d, with production in six fields stretching over three southern San Joaquin Valley counties. He's the 28th largest oil producer in California, drilling 30 wells/year, often reviving abandoned Bureau of Land Management (BLM) leases.
A self-described workaholic, Holmes evolved in recent years from a mom-and-pop company with three office employees—including his wife—to a large mom-and-pop with 19 office employees—including his wife. Overall, he has 160 employees. And he's active in industry organizations.
Holmes believes independent producers have a key niche in California.
"We're the low-cost operators who keep mature fields going," he says. "We give personal attention to a few fields we know well. My family has been in the oil business in this area since the 1920s, and we've worked these fields all our lives."
About 13% of California oil production is from stripper wells, largely operated by independents. Independent producers, when Occidental Petroleum Corp. is included, account for more than one third of California's oil production.
Holmes is pleased that sustained high oil prices are stimulating his business and that new tools are helping him squeeze oil from old fields.
"But it's not a bed of roses for California independents these days," Holmes says.
California is a unique oil province, with unique challenges for independents, he points out. The state has much more oil than gas, and the oil is in the southern region, where Holmes operates.
Because California's oil is heavy, it trades at a discount to benchmark West Texas Intermediate (WTI) crude. And environmental regulations have long been strict.
Also, a few large oil companies account for most of the state's oil production. Holmes says that because there are no oil pipelines out of California, independents can sell their crude to only two or three large local companies. And while California ranks fourth among the states in oil production with about 719,000 b/d, its aging fields are declining at about 4%/year.
The shortage of experienced oil-field workers results from layoffs to which producers resorted to survive oil-price slumps over the last 20 years. Holmes says young people see oil-field jobs as unstable, hard, dirty, low-paying work. They can make more money in the building trades or grocery stores. Holmes has two rigs idle because of a lack of experienced crews.
County, state, and federal environmental regulations are proliferating.
"It can take years to get a drilling permit for a sensitive area," Holmes says. "New laws keep coming out, and it's time-consuming to interpret them."
Also, currently high natural gas prices hurt California's oil producers by raising the costs of generating steam needed to mobilize heavy oil.
Another challenge for California's independents: Large oil firms aren't selling properties to independents as readily as they used to, Holmes says.
"Five or 10 years ago we thought the majors were going to sell all their California properties to independents in their quest for bigger overseas targets," he says. That hasn't happened.
"The big firms own a large percentage of San Joaquin Valley acreage and are holding onto their fields because oil prices are good and because of 'cradle-to-grave' liability regulations," Holmes says. "Majors don't want to sell old properties to small independents without deep pockets because later, when the time comes to abandon, liability could revert back."
In addition, he says, California crude prices lately have been lagging even more than usual behind WTI.
And independents have little ability to take advantage of higher oil prices by adding production through exploratory drilling, Holmes says.
"The state is pretty well drilled up for oil, and the easy stuff has been found," he says.
To navigate the challenging business climate, Holmes says small and medium-sized independents must be excellent operators—resourceful and as professional as large companies.
"Some independents have nostalgia for the old days," Holmes says. "But you can't fly by the seat of your pants and run your business out of a shoebox. The days of the wild, wild West are over for independents.
"Mom-and-pop firms have had to adapt because government agencies expect professionalism. One person can't handle it. You have to do things right when it comes to the environment and safety or you will soon be in trouble."
Suggestions for independents
Holmes has some suggestions for independents:
--Run the company like a professional business. "You need professional business people to help you run it," he says.
--To help comply with burgeoning environmental regulations, hire enough staff. Mostly to deal with 140 different county, state, and federal agencies, Holmes has expanded his office staff greatly. "You need people to help you figure out environmental rules, which are coming faster than we can decipher them," he says.
"When the government introduces a rule that goes too far, you have to push for a realistic compromise. And you need to keep pushing for more-streamlined processes. But you need to comply with regulations because that's what John Q. Public wants. If you don't operate responsibly, you won't be around."
Holmes notes that his oil firm consistently wins lease-maintenance awards from California's Division of Oil & Gas.
—Be a safe operator. "It's the way business has got to be done, and the industry has made impressive strides. As a good operator, you need to be on the leading edge. We do daily safety training."
—Actively recruit, train, and retain oil field workers. Not only does Holmes advertise for workers, but he runs a comprehensive in-house training program and serves on the boards of two Taft-area oil-field schools.
"Good operators don't put untrained people out in the oil field," Holmes says. "You need more formal training programs these days."
Holmes thinks that as job stability continues and wages eventually improve, more young people will seek oil-field work.
—Be a resourceful operator. When Holmes's well-pulling business slowed in the 1980s, he also began offering drilling services. When oil prices sagged, he also became a producer by purchasing inexpensive BLM leases. The firm's versatility has helped it weather oil business cycles.
—Arm yourself with modern oil-field tools. "We purchase dried-up, edge properties and use science to find missed spots," he says. "We use tools like horizontal drilling to squeeze out more oil."
—Participate in industry organizations. "For mom-and-pops, they are our eyes and ears in Sacramento and Washington, keeping us informed of new regulations. They also provide industry networking."
—Be an industry advocate. "Because we haven't done a good job of telling the public how much we've improved operations in the last 20 years, our industry's reputation still lags. A better reputation can mean more community acceptance, fewer regulatory restrictions, and more access to oil resources."
—Hold on to what's good about being an independent.
"Keep your intimate knowledge of local fields," Holmes advises. "Keep the family feeling in your company, even as it grows. We don't have executive bathrooms, and everyone has the same retirement plan. We are proud of the fact that some employees spend their careers with us.
"I still enjoy this business. And today I do a whole bunch of stuff I don't like (paperwork), so I can do a little bit I like (visiting the field)."
Despite the challenges for independents in California, Holmes doubts he'll ever retire. He'd even encourage his grandchildren to become independent California producers.
"All my life I've been hearing that California has only 10 more years of oil production," he says. "And while California's oil fields are declining, they're declining slowly. There are lots and lots of years left."
Fred Holmes is president of Holmes Western Oil Corp., Western Drilling, and Western Well Service, all based in Taft, Calif.
Holmes started working part-time in the California oil fields in 1957 for Western Well Service. A third-generation independent oil producer, Holmes grew up on the family oil lease. Western Well Service was started in 1943 by his father. Both Western Drilling and Holmes Western Oil Corp. started up in the 1980s.
Holmes received training as a mechanic at Los Angeles Trade Tech.
Holmes has been active in the California Independent Producers Association, Independent Oil Producers Association, Association of Energy Service Companies , American Association of Drilling Engineers, and the West Kern Oil Museum.