OIL AND GAS PROPERTIES, BUILDINGS AND EQUIPMENT

12 Months Ended

Dec. 31, 2016

Extractive Industries [Abstract]

OIL AND GAS PROPERTIES, BUILDINGS AND EQUIPMENT

Note 4 – Oil and Gas Properties, Buildings, and Equipment

Oil and natural gas properties, buildings and equipment consist of the following:

	2016			2015
Oil and Natural Gas:
Proved properties	$	3,751,401		$	1,734,223
Unproved properties		1,170,000			2,444,608
Facilities		1,443,060
		6,364,461			4,178,831
Less oil property impairment		(140,606	)		—
Less accumulated depreciation, depletion, and amortization		(14,309	)		(5,524	)
	$	6,209,546		$	4,173,307

Project Indian

Project Indian is located in the Bitterwater sub-basin of the Salinas Basin, north of the giant San Ardo Field. Citadel currently owns a 100% working interest at Project Indian. In July of 2014 Citadel ended its prior joint venture with Sojitz Energy Ventures. There is a 20% royalty on the property owned by Vintage Petroleum, a wholly owned subsidiary of Occidental Petroleum Inc. In November of 2014 Occidental Petroleum Inc. spun off its California assets into a new public company called California Resources Corporation, which is listed on the New York Stock Exchange under the ticker CRC. CRC is now the mineral owner at Project Indian. In January of 2014, Citadel drilled and completed the first well at Project Indian, the Indian #1-15, and conducted a successful steam cycle in June of 2014. The Indian #1-15 then produced 3 to 7 barrels per day over several weeks before production halted because the well was shut-in by an order of the Superior Court of the State of California-County of Monterey entitled Center for Biological Diversity v. San Benito County Case no. M123956 (hereinafter the “Case”). In the Case, the Center for Biological Diversity, a non-governmental entity, petitioned the Court over the approval of Project Indian by the County of San Benito on a unanimous, 5-0 vote. Specifically, it argued that Project Indian required an Environmental Impact Report and not a Mitigated Negative Declaration which was the standard of environmental due diligence required by the County before its unanimous approval of the Project. The Court approved the petition in a judgment entered on September 4, 2014, and ruled that Citadel was required to obtain an environmental impact report before commencing further at Project Indian. 

Then, on November 4, 2014 Measure J was passed by a majority of participating, registered voters in the County of San Benito. Measure J bans hydraulic fracturing and other stimulation techniques defined as “high intensity petroleum operations” by the Measure, including cyclic steam injection. Citadel believes the passing of Measure J constitutes a regulatory taking of property and is preempted by the State of California. At this time there is no certainty that we will be able to develop Project Indian.

Management has determined to shift capital resources to concentrate on drill ready projects that will immediately produce revenue. Consequently, the Company has suspended future capital expenditures related to Project Indian. Management impaired Project Indian in the fourth quarter of 2014 with a value of $1,420,574. The Company maintains its lease rights, takings claims, and no waiver of any right is intended by taking the foregoing impairment. Any action taken by the Company with respect to Project Indian in the near future, if any, will likely only be taken to preserve or advance the Company’s aforementioned legal rights and interests.

Yowlumne

In May 2013, we leased approximately 2,800 acres from AERA Energy, LLC (“Aera”). This acreage has been mapped using a combination of both 2D and 3D seismic, and is in close proximity to the Yowlumne oil field in Kern County, California. The Company is obligated to pay a 20% royalty to Aera. In August of 2013, the Company entered into an agreement to sell 55% of the interest in the Yowlumne lease, recouping approximately 85% of its cost, while retaining a 25% interest in the lease and operatorship. In July of 2014 the Company ended its joint venture with Sojitz Energy Ventures retaining Sojitz’s 55% interest in the Yowlumne lease, therefore increasing Citadel’s ownership to 75% in the Yowlumne lease. 

Additionally, as part of this transaction, the Company retained 100% interest in the Yowlumne #2-26 well, and the 160 acres surrounding the well bore. The Yowlumne #2-26 was first drilled in 2008 under supervision of Citadel CEO, Armen Nahabedian, during his previous tenure with his family’s oil company. Although the well tested oil at that time, the well was left idle for 5 years as lease issues prevented operations on the well until the appropriate curative measures could be taken. 

In December of 2014, Citadel began a work-over on the Yowlumne #2-26 well including installation of a new pump in February of 2015. The well has been producing approximately 20- 25 barrels per day (32 degree API quality) since the beginning of March. In June the well’s pump had a mechanical issue, the company performed well maintenance operations on the #2-26 well in August, which returned the well to production at approximately 20-25 barrels per day. Citadel anticipates returning the well to production in the second or third quarter of 2017. Citadel is in the final stages of the CEQA process to permit two additional exploration wells on the Yowlumne acreage. Recent regulatory changes, including SB4 the State of California’s bill on fracking have delayed the final approval of our CEQA application. As such we do not expect to have these prospects permitted until 2017, at which time we will determine when to drill. Both of these exploration wells will be targeting the Stephens Sands at a depth of 12,000 to 15,000 feet. Citadel currently has a 75% working interest in these exploration prospects and is the operator.

As an annual process, Citadel reviewed the field to determine if asset impairment is required. If the carrying amount of the asset exceeds the sum of the undiscounted estimated future net cash flows, the Company will recognize impairment expense equal to the difference between the carrying value and the fair value of the asset, which is estimated to be the expected present value of discounted future net cash flows from proved reserves, utilizing a risk-free rate of return. This process includes a projection of future oil and natural gas reserves that will be produced from a field, the timing of this future production, future costs to produce the oil and natural gas, and future inflation levels. Citadel cannot predict the amount of impairment charges that may be recorded in the future. During the year ended December 31, 2016, the Company reduced the asset value by $140,606 as a result of low oil prices.

Kern Bluff Oil Field

The following table summarizes the consideration paid to the sellers and the amounts of the assets acquired and liabilities assumed in the Kern Bluff Acquisitions:

Consideration paid to sellers:
Cash consideration	$	2,000,000
Stock consideration		480,000
		2,480,000
Recognized amounts of identifiable assets acquired and liabilities assumed:
Proved developed and undeveloped properties		2,370,000
Other assets acquired		110,000
Asset retirement obligation		146,720
Other liabilities assumed		—
Total identifiable net assets	$	2,626,720

In July of 2015, Citadel purchased approximately 1,100 acres encompassing the Kern Bluff Oil Field for $2,000,000 in cash and 6,000,000 shares of its common stock valued at $480,000, based on price per share on date of sale. The seller also retained a royalty that varies on a lease by lease basis; Citadel has 100% working interest in the field with an 80% net revenue interest. This field was discovered in 1944 by Gulf Oil. Gulf drilled approximately 169 wells in the field in the 1970’s and 1980’s recovering twelve million barrels of oil, primarily from the Santa Margarita formation located at depths in the 900 to 1,100 foot range. Analogous fields in the area have achieved recovery levels in the 40-90% range. Citadel believes it can recover 20-40% of the remaining OOIP, through down spacing, horizontal development, cyclic steam injection and exploitation of shallower by passed zones.

In December of 2015, Citadel shifted its CAPEX focus to remediation of the existing acquired facilities. At the time of purchase, the oil at Kern Bluff was being processed by temporary facilities installed by the previous owner. As production increased in September, it quickly became apparent that these facilities were not capable of processing the additional volumes of oil and water being produced. The existing permanent facilities were built in the 1970’s by Gulf Oil and require extensive remediation including new pipe, valves, flanges and tank repair. In order to facilitate the remediation, Citadel elected to shut down the eight producing wells in early January. Citadel completed facility remediation in July of 2016; the facilities are estimated to have production capability of 500 barrels per day of oil. Citadel returned existing wells to production and then drilled three new wells during the third quarter of 2016.