California Changes Path on Energy

(Dow Jones) — A year after they broke up via text, California and Chevron finally reconnected by phone.

Gov. Gavin Newsom’s office made its first-ever call to Chevron’s refining chief last week, days before state lawmakers passed a bill meant to stop more oil companies from leaving California.

Nathan Barankin, Newsom’s chief of staff, extolled the virtues of that bill, which could boost drilling in oil-rich Kern County, and touted the state’s decision to delay putting a cap on refiners’ profits.

“I said, ‘Yeah, Nathan, all those are good, but we’ve got a long ways to go,'” Andy Walz, who runs Chevron’s refining, pipeline and chemical businesses, said in an interview.

California policymakers who had tried to spur a transition away from fossil fuels are now working to entice fuel-makers to stay open, while polls show voter frustration with rising living costs. Gasoline prices in the state averaged $4.66 a gallon Wednesday, among the highest in the nation, and about $1.45 higher than the national average, according to AAA.

Newsom, who is widely seen as a top potential Democratic presidential candidate, asked state regulators to work closely with oil refiners to avoid price spikes. They have discussed ways to keep the state’s dwindling number of refineries from shrinking further. Newsom has called the approach consistent with its past pursuit of an energy transition. Thus far, the industry says California isn’t doing enough.

The state passed a bill Saturday allowing Kern County, which encompasses Bakersfield and the heart of the state’s oil patch north of Los Angeles, to issue 2,000 drilling permits each year for the next decade. That could bring enough drillers back to the region to help feed the state’s refineries.

Niki Woodard, a spokeswoman for the California Energy Commission, said the commission is working to pursue an energy transition that is less costly for consumers and oil companies.

U.S. oil production surged over the past two decades, but California’s crude output dropped by more than 50%. Refiners have had to make up for dwindling in-state production by buying more expensive imported crude. In 2023, the state got more than 75% of its oil from Alaska and abroad, including Iraq, Saudi Arabia, Brazil and Ecuador.

The bill, which would become effective next year, is a welcome boost for California Resources, which is now the largest oil producer in the state after Chevron moved its main office from San Ramon to Houston last year. Its shares climbed 6.3% Monday after announcing a deal to buy a rival with neighboring Kern County oil fields.

Chief Executive Officer Francisco Leon applauded Newsom, saying the governor recognized the impact that two decades of growing dependence on foreign oil has had on the state’s energy infrastructure and consumers.

“These steps don’t solve everything, but they do represent meaningful progress,” he said in a statement.

Policymakers this year have also discussed ways to keep Valero from closing its 56-year-old Benicia refinery, which has about 10% of the state’s oil refining capacity, political advisers said. Valero cites the state’s 20-year push away from fossil fuels for its decision to close the plant next April.

Rich Walsh, Valero’s general counsel, told analysts on a recent conference call that the company hasn’t changed plans. “There’s no solutions that have materialized, at least not from our perspective,” he said.

Last year, Phillips 66 said it planned to close a Los Angeles refinery that produces almost as much fuel as the Benicia site. The prospect of more California-pumped oil hasn’t changed its plans either.

Phillips 66 is moving forward with the property’s redevelopment, CEO Mark Lashier said in an interview. Redevelopment plans for the larger of the two tracts that make up its Los Angeles operations include shops and restaurants, ballfields, offices and industrial space.

“Those assets sit right adjacent to the Port of L.A.,” he said. “Frankly, the land beneath those two locations is likely worth more than any refinery in North America.”

The changes in California’s energy policy follow a yearslong frosty relationship between Democratic leadership and the state’s fuel makers. California sued Chevron and other large oil companies in 2023, alleging climate-change deception, and Newsom has accused Big Oil of price-gouging consumers.

Chevron CEO Mike Wirth ultimately told Newsom about his plans to leave the state by text message after their relationship broke down.

“A year ago, we were kicking the oil companies around, and now we’re trying to put resources together to keep them here,” said Andrew Acosta, a California political consultant who has worked primarily with Democrats in state elections.

California has tried to steer consumers away from fossil fuels, going as far as to ban the sale of gasoline-powered cars by 2035 in the state. Congress blocked that plan earlier this year.

Electric vehicles account for more than a quarter of new car sales in California. But the state’s homemade supplies of gasoline and diesel are dwindling. According to the Energy Information Administration, the number of active refineries active in California has dwindled to 14 as of last year from 40 in 1983.

This year, the state energy commission put on hold implementing a cap on refiners’ margins, until 2030. It is also still mapping out how to implement a law passed last year that requires refineries to maintain a minimum level of inventory and work with regulators to schedule monthslong maintenance periods.

Chevron’s Walz, who led a company campaign that laid blame for high gasoline prices on state legislators, said California needs to do more if it wants to be considered a friendly investment environment. He suggests the state roll back regulations that affect oceangoing vessels docked at California ports, among other things.

Walz said he has had productive conversations with the energy commission’s leadership. “But they’ve got to reverse 25 years of trying to put us out of business,” Walz said.

More refinery closures could undermine the stability of California’s fuel supplies, particularly if there were a sudden market interruption, said Colin Murphy, co-director of the Energy Futures Research Program at the University of California, Davis.

“It’s too early in the transition to alternative energies,” Murphy said. “At some point, we can start thinking about deep cuts in petroleum, but not yet.”