Exxon Mobil struggles with a $2.5 billion California offshore exit

Exxon Mobil is set to write down approximately $2.5 billion related to its troubled California properties, marking a move to cease offshore oil production in the state after five decades. The targeted exit from these assets, however, may not be an immediate process.

Sable Offshore, established in 2020, had agreed over a year ago to acquire Exxon’s Santa Ynez oil and gas operation for $643 million off the coast of Santa Barbara. This impending sale led to the write-down of the properties’ book value in Exxon’s fourth-quarter earnings.

As part of the 2022 agreement, Exxon will provide Sable with most of the funds for the purchase of three offshore oil production platforms, a pipeline, and an offshore processing facility. These facilities were idled in 2015 following a pipeline oil spill that resulted in environmental damage.

Despite the agreement, the deal has faced delays due to Sable’s parent company undergoing a merger, leading to an increase in the size of the write-down. The resumption of oil flow to refineries would necessitate repairs to the corroded pipeline, which caused the 2015 oil spill and subsequently received operating approvals.

Local landowners, whose properties are intersected by an offshore section of the pipeline, have voiced opposition to allowing repairs without new easements, potentially costing up to $250 million, according to a lawsuit. Negotiations between the landowners and Sable are ongoing for a potential resolution to end the litigation.

The agreement between Sable and Exxon stipulates that production must resume by early 2026, or the assets and their liabilities will revert to Exxon. Exxon, the leading U.S. oil producer, has borne annual costs of around $80 million to maintain the non-producing assets, attributing the decision to “continuing challenges in the state regulatory environment.”

The company highlighted this in a securities filing last week, noting that the $2.4 billion to $2.6 billion impairment charge primarily resulted from the California exit. A failed sale could significantly increase Exxon’s costs, especially considering a recent requirement approved by the U.S. in December 2023 mandating the removal of California’s offshore platforms upon retirement.

Chevron, another major player, also announced non-cash write-downs for securing abandoned wells and pipelines in the U.S. Gulf of Mexico, blaming regulatory constraints for reduced investment in the state.

Sable anticipates approval from the California Office of State Fire Marshall for its repair and restart plan this quarter, aiming to restart production in July 2024 at a rate of approximately 28,000 barrels of oil and gas per day, as indicated in a December 2023 investor presentation.