The Future of the Monterey Shale: Invest or Divest?

By Mohammed

With the recent Energy Information Administration’s (EIA) downward revision of the Monterey Shale reserves from 2011 estimates of 15.42 billion to 600 million (only 4% of the 2011 estimates) barrels of recoverable oil and California’s constant oil production decline since 1985, is the oil and gas industry in the nation’s third largest oil producing state doomed to fail?

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Spanning the same geographic area of Central Valley, the Monterey Shale was one of the most promising basins that would have helped not only in aiding the US shale revolution and path towards energy independence but also in minimizing California’s dependence on out-of-state energy supply, which represents 67% of the state’s energy consumption. Despite being 1,000 – 3,000 feet thick, the Monterey’s complex geology (folded and faulted structures) and high degree of variability across the basin make it one of the most complicated basins to drill and extract oil from.

As we’ve seen in the Woolf Farming case, the Central Valley is well known for its agriculture business and has been suffering from severe water shortages and droughts that caused the valley to rely mostly on groundwater for its irrigation needs. Therefore, given the water intensive nature of hydraulic fracturing and the public fear of groundwater contamination, the oil and gas operators faced immense pushback from environmentalists and farmers, including local vintners and growers. In addition to that, just as the agriculture industry faced criticism for endangering the delta smelt, the oil and gas industry also got its fair share of criticism for endangering the natural habitat of several endangered species, including “the San Joaquin kit fox, the California condor, the blunt-nosed leopard lizard, as well as the threatened South Central Coast steelhead.”

Now as the California Council on Science and Technology’s (CCST) recently issued independent report states that there is “limited environmental risks associated with well stimulation techniques in the State”, the Bureau of Land Management (BLM) plans to issue new leases for oil and gas exploration in 2015. Going back to the question posed at the beginning of the post: what’s the outlook for the oil and gas industry in the Monterey Shale?

Frankly, with California’s tightened environmental regulations, including few municipalities that have banned hydraulic fracturing and the state’s Department of Conservation’s Division of Oil, Gas, and Geothermal Resources (DOGGR) special permitting process, as well as the EIA’s downward revision of the reserves because of the basin’s geological complexity, I personally believe that the outlook for the oil and gas industry in the state is not positive. Comparing California’s declining production trends with the growing production trends of Oklahoma, New Mexico, and Colorado makes me skeptical of the state’s ability to hold onto its third ranking for long. Eventually as operators realize dwindling gains on their investments in the Monterey Shale, it is expected that they will start pursuing more profitable assets in other basins leaving behind what was once considered one of the nation’s most promising reserves. As Chevron’s spokesperson, Kurt Glaubitz, says, “We don’t believe it’s [Monterey Shale] going to compete for our investment. We have other opportunities that are more economical for us to develop” now the real question is: when will the other operators in the Monterey Shale follow suit?

References:

http://scholarship.claremont.edu/cgi/viewcontent.cgi?article=1110&context=pomona_theses

http://www.postcarbon.org/reports/Drilling-California_FINAL.pdf

http://articles.latimes.com/2012/dec/02/local/la-me-kern-oil-20121204

http://news.nationalgeographic.com/news/energy/2013/05/130528-monterey-shale-california-fracking/

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpca1&f=a

http://www.winespectator.com/webfeature/show/id/47844

http://www.reuters.com/article/2012/06/29/us-fracking-california-idUSBRE85S0WJ20120629

http://digital.uogreport.com/uogreport/20140708

http://www.mendocinobeacon.com/ci_26512754/new-oil-and-gas-leases-likely-following-fracking

http://www.sfgate.com/business/article/Fracking-may-endanger-groundwater-in-California-5719880.php

http://www.jdsupra.com/legalnews/california-oil-and-gas-update-in-depth-82300/

http://calwatchdog.com/2013/04/11/wall-street-doubts-ca-shale-hype-but-not-occidental/

http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_a.htm

http://landuselaw.jmbm.com/2014/09/california-oil-and-gas-update-in-depth-look-at-the-california-blms-fracking-decision.html

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About macomberjohnd

HBS Finance faculty interested in sustainability in the built environment including devices, structures, townships, and cities.

Trackbacks/Pingbacks

  1. Some model posts – first round | Innovation in Business, Energy, and Environment - November 3, 2014

    […] https://innovbusenergyenviro.wordpress.com/2014/09/29/the-future-of-the-monterey-shale-invest-or-dive… […]

  2. Is current shale production a decoy? | Innovation in Business, Energy, and Environment - November 16, 2014

    […] few weeks ago, Mohammed analyzed the Monterey shale [here], a project that is but the canary in the fracking well: an omen for the future of the increasingly […]

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