California and oil producers such as Occidental Petroleum Corp. (OXY) may not be able to realize their dream of hydraulic fracturing generating billions in revenue from the Monterey shale deposit traversing the state.
Earthquakes in the most-populous U.S. state have left the 1,750-square-mile formation disjointed and too unpredictable to make drilling economic, even with improving fracking technology, said Jason Marshall, the California Conservation Department's chief deputy director. The agency regulates the industry.
“None of the companies that have tried it so far have had significant success, and it doesn’t appear to be widespread,” Marshall said by e-mail. “It may take an advancement in technology or methodology to unlock the oil production potential of the formation.”
A University of Southern California study released last month projected as many as 2.8 million jobs and $24.6 billion in state and local tax revenue by 2020 from development of the oil shale. The deposit extends southeast of San Francisco, from about Modesto to Bakersfield, at an average depth of 11,000 feet (3,350 meters). It is most concentrated in the Central Valley, particularly in Kern County.
“We stand by the results of our study as an exploratory endeavor with limited data and limited time,” Adam Rose, an energy and environmental economist at Los Angeles-based USC, who co-wrote the report, said by telephone. “What we’re confident of is we got some reasonable results to examine the economic impact.”
Economic Growth
The study said developing oil-shale deposits through central California using fracking and other techniques could boost the state’s economic activity by as much as 14 percent.
Industry efforts to develop the deposits have been uneven and some companies have lost interest.
“Based on our drilling results, our view is that the oil has migrated out of the formation and is now found in pockets outside of the Monterey shale,” said Kurt Glaubitz, a spokesman for San Ramon, California-based Chevron Corp. (CVX), the second-biggest U.S. oil producer. “We don’t believe it’s going to compete for our investment. We have other opportunities that are more economical for us to develop.”
While the Monterey shale has long been known to be a so- called source rock for oil, recent interest was spurred by a 2011 U.S. Energy Information Administration report that the shale holds an estimated 15.4 billion barrels, two-thirds of the nation’s shale-oil reserves, bolstered by the success of fracking in other regions.
More Expensive
The Monterey shale is more expensive to explore than the Bakken shale that’s yielded an oil boom in North Dakota and the Eagle Ford shale in Texas, said Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis.
“The Eagle Ford is like a pound cake,” Jaffe said in a telephone interview. “The Monterey shale is like a nine-layer chocolate cake and to get all the layers straightened up and put in all the frosting every place we wanted -- that’s going to be more complicated and it takes more skill.”
In California, the fourth-largest oil-producing state, it’s been more slow-going and only a small portion of the potential shale has been explored, she said.
“It’s at a pilot project, experimental basis right now,” Jaffe said. “It doesn’t mean that it wouldn’t be profitable to do it” some day.
Both the Bakken and Eagle Ford deposits owe their productivity to a combination of fracking, or hydraulic fracturing -- a drilling technique that forces millions of gallons of water, sand and chemicals deep into rock formations to release trapped oil and gas -- and horizontal drilling, which allows bores at an angle, to increase efficiency.
Under Fire
The technique has come under fire from environmentalists as a threat to water quality. The Conservation Department in December released an initial proposal to regulate the practice, including rules for storing and handling fracking fluids, well monitoring after fracking and preventing water contamination.
“The Monterey shale was supposed to be the greatest thing since sliced bread, but so far has not lived up to the hype,” Fadel Gheit, an oil and gas analyst at Oppenheimer & Co. in New York, said in a telephone interview. “It’s not conclusive that the emperor has no clothes. So far, it has not shown any big sign that this is going to be another Bakken or Eagle Ford.”
The oil is there and it’s just a matter of engineering to economically extract it, said Rock Zierman, chief executive officer of the California Independent Petroleum Association, a Sacramento-based trade group representing about 530 oil producers, including Los Angeles-based Occidental Petroleum.
‘Smart Money’
“Companies are drilling wells and they are testing technology,” Zierman said in a telephone interview. “The smart money is still looking at this resource very closely.”
California lawmakers have introduced legislation to block fracking until the state deals with public-health and environmental concerns. New York, North Carolina and New Jersey have established fracking moratoriums, and Vermont has banned the practice, according to a February report to California lawmakers.
“The industry has a long way to go before it’s going to declare victory in terms of producing oil in large enough quantities to pay for the drilling and completion,” Philip Budzik, a research analyst at the Energy Information Administration, said of the Monterey shale.
“Hope springs eternal,” Budzik said. “God bless us all, we all hope for a better future.”
To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net.
To contact the editor responsible for this story: Stephen Merelman in New York at smerelman@bloomberg.net.
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