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EIA Cuts Monterey Shale Estimates on Extraction Challenges

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.

Efforts to access the Monterey oil have drawn criticism from environmental groups and some communities, who challenge the use of hydraulic fracturing, or fracking, 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

A 2013 study by the University of Southern California’s Global Energy Network, funded in part by the 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.

“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.

Technical Challenges

A surge of drilling activity in the Bakken Shale in North Dakota has made the state the second-largest producer of oil in the U.S. after Texas. Production from the Bakken formation alone averaged 914,000 barrels a day in March, up from 43,000 barrels a day six years earlier, according to data compiled by Bloomberg.

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. “The Monterey’s going to go through that learning curve where, over time, technology should be able to overcome some of those specific constraints.”

Early Optimism

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

Occidental, based in Los Angeles, referred questions on the revised reserves estimate to the Western States Petroleum Association.

Bucking Convention

“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 association, 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.

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 2.2 percent to $97.59 at the close in New York.

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.”

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

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

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