Calfornia: EIA, USGS cut estimate of recoverable Monterey Shale oil by 96%

EIA Cuts Monterey Shale Estimates on Extraction Challenges by Zain Shauk and Naureen S. Malik, with assistance from Eliot Caroom in New York and Joe Carroll in Chicago, May 21, 2014, Washington Post
(Updates with comment from industry group in 10th paragraph.)
May 21 (Bloomberg) — The Energy Information Administration slashed its estimate of recoverable reserves from California’s Monterey Shale by 96 percent, saying oil from the largest U.S. formation will be harder to extract than previously anticipated. “Not all reserves are created equal,” EIA Administrator Adam Sieminski told reporters at the Financial Times and Energy Intelligence Oil & Gas Summit in New York today. “It just turned out it’s harder to frack that reserve and get it out of the ground.”

The Monterey Shale is now estimated to hold 600 million barrels of technically recoverable oil, down from a 2012 projection of 13.7 billion barrels, John Staub, a liquid fuels analyst for the EIA, said in a phone interview. The revision confirms what some in the oil industry had suspected: the bounty from California’s shale is out of reach for now, delaying an oil rush that was predicted to bring jobs and added tax revenue to the Golden State.

“This downgrade fundamentally changes the risk-reward calculation when it comes to unconventional oil development in our state,” Jayni Foley Hein, executive director of the Berkeley Center for Law, Energy and the Environment, said in a statement from the group CAFrackFacts. “Given that the industry’s promised economic benefits are not likely to materialize, the state should take a hard look at the impacts that oil development has on public health, safety and the environment.”

The revised figures, part of EIA’s annual assessment of technically recoverable reserves, were based on well production data and new information from a U.S. Geological Survey review of the shale formation, Jonathan Cogan, an agency spokesman, said in an e-mail. The data included “a lack of production growth relative to other shale plays like the Bakken and Eagle Ford,” Cogan wrote.

The geology of the Monterey isn’t as uniform as other formations and has presented technical challenges that have so far limited success for producers there, Erik Milito, director of upstream and industry operations for the American Petroleum Institute, said in a phone interview. “Early on, the estimates were very unreliable and then they’ve learned you can’t just take what’s happening in the Bakken and then say you’re going to have the same pace of production the Monterey,” Milito said.

Those constraints have been felt by companies that have invested in the Monterey. Occidental Petroleum Corp. controls 2.3 million acres in California — an area 12 times the size of New York City — including vast portions of the Monterey Shale that have so far frustrated attempts to extract commercial quantities of crude.

The company announced in February plans to spin California operations off into a separate publicly traded company, a move likely hastened by poor results in the Monterey, said Leo Mariani, an Austin, Texas-based analyst for RBC Capital Markets. “They’ve certainly made comments that it wasn’t working out like they thought and they weren’t getting the economics and returns that they had once hoped for,” said Mariani….

Occidental Chief Executive Officer Stephen Chazen’s early optimism about the Monterey’s potential bucked the conventional wisdom of industry stalwarts such as Chevron Corp.’s John Watson and Continental Resources Inc. founder Harold Hamm, who doubted the formation could be cracked.

The EIA has revised its Monterey estimate before, dropping it from 15.4 billion barrels to 13.7 billion in 2012. The formation was previously ranked as the largest source of recoverable shale oil reserves in the U.S., exceeding the Bakken.

The large revision for Monterey was somewhat predictable after the U.S. Geological Survey flagged it a year ago, Sieminski said. “The rock is there, the technology isn’t there.” [Emphasis added]

U.S. officials cut estimate of recoverable Monterey Shale oil by 96% by Louis Sahagun, May 20, 2014, Los Angeles Times
Federal energy authorities have slashed by 96% the estimated amount of recoverable oil buried in California’s vast Monterey Shale deposits, deflating its potential as a national “black gold mine” of petroleum. Just 600 million barrels of oil can be extracted with existing technology, far below the 13.7 billion barrels once thought recoverable from the jumbled layers of subterranean rock spread across much of Central California, the U.S. Energy Information Administration said. The new estimate, expected to be released publicly next month, is a blow to the nation’s oil future and to projections that an oil boom would bring as many as 2.8 million new jobs to California and boost tax revenue by $24.6 billion annually.

The Monterey Shale formation contains about two-thirds of the nation’s shale oil reserves. It had been seen as an enormous bonanza, reducing the nation’s need for foreign oil imports through the use of the latest in extraction techniques, including acid treatments, horizontal drilling and fracking. The energy agency said the earlier estimate of recoverable oil, issued in 2011 by an independent firm under contract with the government, broadly assumed that deposits in the Monterey Shale formation were as easily recoverable as those found in shale formations elsewhere. The estimate touched off a speculation boom among oil companies. The new findings seem certain to dampen that enthusiasm.

Kern County in particular has seen a flurry of oil activity since 2011, with most of the test wells drilled by independent exploratory companies. Major oil companies have expressed doubts for years about recovering much of the oil. The problem lies with the geology of the Monterey Shale, a 1,750-mile formation running down the center of California roughly from Sacramento to the Los Angeles basin and including some coastal regions. Unlike heavily fracked shale deposits in North Dakota and Texas, which are relatively even and layered like a cake, Monterey Shale has been folded and shattered by seismic activity, with the oil found at deeper strata. Geologists have long known that the rich deposits existed but they were not thought recoverable until the price of oil rose and the industry developed acidization, which eats away rocks, and fracking, the process of injecting millions of gallons of water laced with sand and chemicals deep underground to crack shale formations.

The new analysis from the Energy Information Administration was based, in part, on a review of the output from wells where the new techniques were used. “From the information we’ve been able to gather, we’ve not seen evidence that oil extraction in this area is very productive using techniques like fracking,” said John Staub, a petroleum exploration and production analyst who led the energy agency’s research. “Our oil production estimates combined with a dearth of knowledge about geological differences among the oil fields led to erroneous predictions and estimates,” [Mistake or intentional to lure speculators and investors?] Staub said.

Compared with oil production from the Bakken Shale in North Dakota and the Eagle Ford Shale in Texas, “the Monterey formation is stagnant,” Staub said. He added that the potential for recovering the oil could rise if new technology is developed. A spokesman for the oil industry expressed optimism that new techniques will eventually open up the Monterey formation. “We have a lot of confidence in the intelligence and skill of our engineers and geologists to find ways to adapt,” said Tupper Hull, spokesman for the Western States Petroleum Assn. “As the technologies change, the production rates could also change dramatically.”

Rock Zierman, chief executive of the trade group California Independent Petroleum Assn., which represents many independent exploration companies, also sounded hopeful. “The smart [??] money is still investing in California oil and gas,” Zierman said. “The oil is there,” Zierman said. “But this is a tough business.”

Environmental organizations welcomed the news as a turning point in what had been a rush to frack for oil in the Monterey formation. “The narrative of fracking in the Monterey Shale as necessary for energy independence just had a big hole blown in it,” said Seth B. Shonkoff, executive director of the nonprofit Physicians Scientists & Engineers for Healthy Energy.

J. David Hughes, a geoscientist and spokesman for the nonprofit Post Carbon Institute, said the Monterey formation “was always mythical mother lode puffed up by the oil industry – it never existed.” Hughes wrote in a report last year that “California should consider its economic and energy future in the absence of an oil production boom from the Monterey Shale.”

The 2011 estimate was done by the Virginia engineering firm Intek Inc. … For California, the analysis throws cold water on economic projections built upon Intek’s projections. [Emphasis added]

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