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The California Shale Bubble Just Burst

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The great hype surrounding the advent of a shale gas bonanza in California may turn out to be just that: hype. The U.S. Energy Information Administration (EIA) – the statistical arm of the Department of Energy – has downgraded its estimate of the total amount of recoverable oil in the Monterey Shale by a whopping 96 percent. Its previous estimate pegged the recoverable resource in California's shale formation at 13.7 billion barrels but it now only thinks that there are 600 million barrels available.

The estimate is expected to be made public in June.

The sharply downgraded numbers come amid a heated debate in California over whether or not the state should permit oil and gas companies to use hydraulic fracturing ("fracking") – the process in which a combination of water, chemicals and sand are injected underground at high pressure in order to break apart shale rock and access trapped natural gas.

Fracking involves enormous quantities of water; an average of 127,127 gallons of water were required to frack a single California well in 2013, according to the Western States Petroleum Association. That's equivalent to 87 percent of the water a family of four uses in an entire year.

California is home to an enormous agricultural industry, and with the Monterey Shale located beneath the fertile Central Valley, fracking is going to compete with agriculture, ranching and other commercial and residential users for water use. With 100 percent of California now in a state of "severe" drought, critics of fracking have gained traction in the debate over the extent to which the government should allow oil and gas companies to move in.

On March 20, Santa Cruz became the first county in California to ban fracking, the biggest win by environmental activists thus far in their campaign to rid the state of the practice. The move may have been symbolic though, since there isn't much of a presence by the industry in that locality; it was more aimed at putting pressure on Governor Jerry Brown to stop fracking in the water-starved state. That follows a unanimous February vote by the city of Los Angeles to ban the practice, the largest city to do so in the country.

Indeed, activists are pushing for a statewide ban on fracking, and a bill to do just that is working its way through the state senate. It passed a committee vote in April, but faces an uncertain future. Brown supports fracking and has trumpeted its potential for state revenues. The state has projected that fracking could bring up to 2.8 million new jobs and boost state coffers by $24.6 billion each year. He signed a bill last year that tightened regulations on the industry but also set up a permitting regime that could allow the industry to move forward.

Although the topic has been highly controversial, the ramifications may not be as significant as previously believed, now that the federal government believes only a small fraction of the Monterey Shale's reserves are accessible. The main reason for the downgrade was that the original 2011 estimate mistakenly assumed that California's shale oil and gas could be recovered with as much ease as it is elsewhere in the country.

But the geology of the Monterey Shale is much more complex than in the Marcellus, Bakken, or Eagle Ford Shales – the three formations principally responsible for the surge in oil and gas production in the United States. The layers of shale in the Monterey are folded in such a way that drilling is difficult, and test wells thus far have come up disappointing.

The Los Angeles Times quoted a downbeat assessment from an official with the EIA. "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 analyst with the EIA. "Our oil production estimates, combined with a dearth of knowledge about geological differences among the oil fields, led to erroneous predictions and estimates," he added.

The oil and gas industry was quick to point out that the calculation could change once again if drillers could improve technology to access the Monterey. After all, no one saw the shale revolution coming only a few short years ago. But as Staub, the EIA analyst noted, for now oil and gas production in "the Monterey formation is stagnant." And it could remain that way.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 24, 2014, at 8:39 PM, cdkeli wrote:

    How can CA possibly do any fracking when the entire state has been declared a disaster site due to the withering drought conditions? The west is little more than an open barbecue pit with the summer b arely just begun and these rabid pro-fracking nutjobs think nothing of irreparably destroying precious pristine freshwater!! And then of course they ship the toxic evidence out of state to be pumped underground in some rust-bucket state like Ohio whose republican governor is just too happy to turn his state into the nation's garbage dump.

  • Report this Comment On May 24, 2014, at 9:28 PM, tugboatamj wrote:

    Not only is CA in a severe drought, but there are huge fault lines there. Eastern sites have had complaints of small earthquakes. They don't have the instability of ground that CA has. That means that the odds of causing an earthquake from the pressure used to release oil from the shale will be that much greater. There are large cities along those fault lines. Don't forget the Oakland earthquake. If they did allow large-scale fracking, it would be like playing Russian roulette with earthquakes. A loss wouldn't be pretty.

  • Report this Comment On May 25, 2014, at 1:35 AM, peterwolf wrote:

    Everything in California eventually 'bursts'. Why do you think tens of thousands of people flee this state annually?? Even some high profile Democrats now openly admit that this stated is going down the drain. The states' Lieutenant-Governor ( A Democrat) has gone to Texas a couple of times to interview ex-California business people to find out why they fled the 'Golden State'. If that ain't proof that all is not well in the 'trend setting state' then i don't know what is.

  • Report this Comment On May 25, 2014, at 7:17 AM, Dahun wrote:

    A 2007 report by the Rand Corp. funded by the US Energy Department assesses the amount of recoverable oil in the Green River Formation in Wyoming to be in excess of one Trillion barrels of oil. Obama has placed any new development of this oil reserve 4 times the size of Saudi Arabia's off limits.

    We can be 100% energy independent unless we choose to keep Democrats in charge come November.

  • Report this Comment On May 25, 2014, at 10:03 AM, PoorPeter1 wrote:

    People don't realize that an effective alternative to the hydraulic fracture treatment is the gas frac'. Natural gas, nitrogen, or CO2 can be used to fracture a well in place of water. In northeast PA that is what many companies have converted to.

  • Report this Comment On May 26, 2014, at 2:57 PM, antred wrote:

    @Dahun: The stuff in the Green River Formation is __NOT__ oil. It's kerogen ... that's sort of precursor to actual oil; mother nature just didn't finish cooking it. It's a wax-like substance embedded in rocks and to turn it into oil you'd first have to dig it up in a classic mining operation and then heat it to several hundred °C. There's a reason no one is touching that stuff ... it would be prohibitively expensive. Shell or BP (I forget which one) actually had a small research project on oil production from kerogen-bearing rock formations running a couple years ago. Nothing much came of it because it would just be too expensive, at least at current oil prices.

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