PRODUCTION

Is Calif.'s Monterey Shale a major oil resource or over-hyped?

Correction appended.

In the fight over hydraulic fracturing in California, opponents of the drilling process frequently argue that restrictions are needed because of the potential for a massive oil boom in the state.

There could be rapid expansion, they warn, if oil companies find a way to extract petroleum trapped in the state's Monterey Shale formation.

Now a report says that the hype over the Monterey Shale may be overblown.

An analysis funded by the Post Carbon Institute (PCI) and Physicians, Scientists & Engineers for Healthy Energy (PSE Healthy Energy) questions the validity of a frequently cited number that there are 15.4 billion barrels of recoverable oil available in the Monterey Shale. That quantity is misleading, the report says, because actual production in the region is comparatively small.

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"If you look at the data, at least in this report, it seems that there may not be the potential to have as big of a boom as some groups might assert or what the state seems to be saying," said Seth Shonkoff, executive director at PSE. "It doesn't look like it will be the bonanza that it seemed when following assumptions from other shale plays over to California."

Oil groups quickly jumped on the study's conclusions.

"Oil and gas companies wouldn't be interested in developing the Monterey Shale if credible data showed that it was inconsequential," said Dave Quast, California director of Energy in Depth, an arm of the Independent Petroleum Association of America. "Companies will make those determinations on their own, but the idea that the industry would welcome inflated numbers is absurd -- it wouldn't be in anyone's economic interest to proceed with development based on anything but the best scientific information."

The study appears as California readies to restrict hydraulic fracturing and other unconventional drilling for oil and natural gas. The state Department of Conservation's Division of Oil, Gas and Geothermal Resources (DOGGR) last month released preliminary regulations in response to legislation, S.B. 4, that Gov. Jerry Brown (D) signed into law in October. Final rules would take effect Jan. 1, 2015.

The draft rules require companies when using well stimulation treatments to first obtain permits, give at least 72 hours' notice and identify where the work will occur. They need to reveal how much water would be used and the source of that fluid. Testing of the groundwater quality in most cases must happen in advance. There are rules on reporting earthquakes near drilling and chemicals used in fracking formulas.

Those preliminary rules have done little to quiet environmental groups opposed to fracking. They have been pushing Brown to impose a moratorium, and some have been picketing at events featuring the governor.

Backers of the analysis yesterday began working to translate it into political impact.

The groups behind the study began circulating it along with quotes from people connected to environmental groups and schools. Some of those cautioned Brown to reconsider his position on allowing unconventional drilling.

"This report should make Governor Brown rethink his 'all-in' position on unconventional oil extraction and redouble his efforts to lead us to meet our A.B. 32 climate change goals," said Bill Allayaud, California director of governmental affairs at the Environmental Working Group (EWG), referencing the state's landmark 2006 law addressing global warming.

Brown earlier this year, when asked about support for fracking, said that "it's about looking at what could be a fabulous opportunity" (EnergyWire, May 15).

Brown spokesman Evan Westrup yesterday declined to comment on the study. On fracking, Westrup said that "after great debate and deliberation, the Legislature enacted S.B. 4, which provides the regulatory framework the administration is now following."

"These regulations will be among the nation's toughest, and science and information will continue to guide the process," Westrup said.

Production less than envisioned

The PCI and PSE Health Energy analysis looked at current rates of production in the Monterey Shale and compared those to numbers for available oil stated in a 2011 report from Intek Inc. released by the U.S. Energy Information Administration (EIA). Actual production in the region is at about one-quarter of the amount that would be needed to reach numbers in the Intek report, said David Hughes, the geologist who did the report.

The Intek analysis, Hughes said, assumed that the entire 1,750 square miles of the Monterey Shale could be developed and that there would be 16 wells per square mile. Each well would be producing 550,000 barrels of oil, he said.

"I looked at every well that's been drilled," Hughes said, including the cumulative output of older wells "near the end of their life." Those produced about one-quarter of the 550,000 barrels of oil, he said.

That casts doubt on the validity of an analysis released in March by the University of Southern California Price School of Public Policy and USC Viterbi School of Engineering, Hughes and Shonkoff said. That USC study, funded in part by the Western States Petroleum Association (WSPA), projected a potential windfall in state revenue and personal wealth if the Monterey became productive. It said that "developing oil from the Monterey Shale could add from 512,000 to 2.8 million new jobs in California, depending upon the year."

Allayaud with EWG said the critical look at the reality of developing the Monterey Shale is important because some members of California's Legislature have been hesitant to limit fracking because of the potential for job creation. They have cited the USC numbers, he said.

"There was great need for a level-headed look at the Monterey Formation after the USC report made it sound like oil gushers were coming back along with hyper-inflated job projections," said Allayaud with EWG.

Kevin Hopkins, editor of the USC report, said it disclosed that more conclusive production data are needed to draw full conclusions about economic impacts.

Intek Vice President and Manager of Petroleum Engineering Hitesh Mohan declined to comment on the PCI and PSE Healthy Energy-funded analysis. He said in an email that "our estimates are potential and not forecast."

Others in the energy field said that the new analysis in general didn't offer much beyond what was already known about the Monterey Shale.

The 15.4 billion barrels in the 2011 Intek report referred to "technically recoverable" petroleum, said Michael Schaal, director of EIA's Office of Petroleum, Natural Gas and Biofuels Analysis.

"However, technically recoverable does not constitute commercially recoverable," Schaal said, adding, "it's not just how big the resource is; it's how profitable it is."

There are high costs for developing oil in the Monterey Shale, given the geology, he said. Additionally, Schaal added, the Intek report now is outdated. EIA in more recent releases has dropped the amount of technically recoverable oil to 13.7 billion barrels. It remains hard to extract.

"We don't see in any of our projections that there's a great future for the Monterey Shale," Schaal said.

New technologies could emerge

Oil companies, including Occidental Petroleum Corp., are working on new ways to pull the oil from the Monterey Shale. Advisers to petroleum companies have forecast that they are just a few years away from obtaining the key to extracting large volumes of resources from the Monterey Shale.

"We're just getting started, really," Stephen Harris, who has consulted with Occidental Petroleum, said previously. "Most of us project that in the next couple years ... you're going to see another giant boom" (EnergyWire, Dec. 5, 2012).

The PCI and PSE Health Energy analysis looked primarily at conventional drilling in the Monterey Shale. It also ignored that future technologies could make Monterey Shale development profitable, said Hopkins, editor of the USC report.

"They are absolutely correct that the Monterey Shale is geologically different from Bakken and Eagle Ford and the others," Hopkins said, referring to shale plays in the Montana-North Dakota-Canada region and in Texas. "This is a point that everybody in the industry and this part of the public policy debate acknowledges.

"We all agree that different technologies will be needed in the Monterey Shale," Hopkins said, adding, "To make an assertion about the productive capability of a given reservoir by discussing only the experience with conventional or existing technology does not in any way give you an accurate gauge of the future of production."

Hopkins said the focus on whether the 15.4 billion barrels of oil is accurate is a red herring. Typically, once development begins, more oil is found than what was expected. There are other cases where oil production is shut down because the cost of producing it exceeds its market value, he said.

"Almost all of the [numerical] inputs in these models are guesses," Hopkins said.

Allayaud with EWG said environmental groups aren't trying to have it both ways by warning about the Monterey Shale and also saying it's overhyped. There needs to be realism about whether it can be developed like other formations, he said.

"On the other hand, we better be prepared if [oil companies] in five years go, 'Guess what, we found a way to do it,'" Allayaud said. "Maybe they will find a key to it."

Correction: An earlier version of this story misstated the number of wells the 2011 report from Intek Inc. assumed would be in the Monterey Shale.

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