EIA Cuts Monterey Shale Estimates on Extraction Challenges

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 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. A 2013 study by the University of Southern California’s Global Energy Network, funded in part by industry group Western States Petroleum Association, found that developing the state’s oil resources may add as many as 2.8 million jobs and as much as $24.6 billion in tax revenues.

Environmental groups and some communities have challenged the use of hydraulic fracturing, or fracking, to access the oil because of concerns it may foul drinking water. They’ve called on Democratic Governor Jerry Brown to ban the practice, which involves injecting a mix of water, sand and chemicals underground to open fissures in the shale rock.

Risk-Reward

“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 come from new evidence accumulated by the EIA and the U.S. Geological Survey, Sieminski said. Occidental Petroleum Corp. (OXY), based in Los Angeles, 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.

Early Optimism

“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, who rates the company at the equivalent of a hold. “Certainly several years ago there was a lot of hope for these assets.”

Occidental referred questions on the revised reserves estimate to the Western States Petroleum Association.

“What is lost in the conversation, at times, is the fact that all the oil is still there and we always have believed and continue to believe that the members of our association possess all the necessary experience and knowledge to figure out how to unlock that,” Tupper Hull, a spokesman for the group, said in a phone interview. “When that happens, no one knows.”

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.

Previous Revision

As recently as May 2011, Occidental was trading at a record $115.74 on analysts’ predictions the company’s discovery held 10 billion barrels of oil. Since then, the stock has dropped by almost one-fifth. Occidental gained 1.4 percent to $96.76 at 12:24 p.m. in New York.

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

New production methods may eventually unlock the formation and make it possible to economically extract the resources, Sieminski said. “The rock is there, the technology isn’t there.”

To contact the reporters on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net; Zain Shauk in Houston at zshauk@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Tina Davis, Robin Saponar

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