California: Where 13 Billion Barrels of Oil Simply Vanish

The estimated recoverable oil from California’s Monterey Shale deposits were just slashed by 96%. However, that's not necessarily bad news for investors in Occidental Petroleum, Chevron, or Freeport-McMoRan.

May 25, 2014 at 1:39PM

Californial Oil Field

Photo credit: Flickr/IvyMike 

California was supposed to be heading toward a new gold rush. Although, this time it was for black gold. The Monterey Shale underneath the state was estimated to hold about 13.7 billion barrels of recoverable oil making it the country's largest shale oil deposit. That black gold rush is a lot less likely after the U.S. Energy Information Administration reportedly will slash its estimates of recoverable oil in the state by 96%.

According to the report in the LA Times, the EIA is set to announce next month that only 600 million barrels of oil can be recovered using existing technology. The reduction in recoverable reserves represents a huge blow for the state, which was expected to see its oil boom fuel 2.8 million new jobs while boosting tax revenue by $24.6 billion annually.

What went wrong
While the oil is still there, the hopes that it will one day be recovered are fading fast. Independent exploration companies are finding that even the latest drilling techniques, including horizontal drilling, hydraulic fracturing, and acid treatments, aren't working to unlock the oil trapped in the shale underneath the state.

What these companies are finding is that the shale isn't layered like a cake as it is in the Bakken or Permian Basin. Instead it has been folded and shattered by years of seismic activity. That is making it nearly impossible to economically produce oil from these rocks. So far the well results have been rather weak, and it is this data that is causing the EIA to revise recovery lower.

Game over?
For years big oil companies like Chevron (NYSE:CVX) have taken a cautious approach to the Monterey Shale. Last year, Chevron CEO John Watson said that he thought that, "the jury's out a little bit on the Monterey Shale," as Chevron, "hasn't seen the same economics that others have up to now." Because of that, Chevron wasn't investing a whole lot of capital into the Monterey Shale, as it didn't think the play would ever prove to be profitable.

Oil Field In Ca

Photo credit: Flickr/Bev Sykes 

The same can be said for Occidental Petroleum (NYSE:OXY), which is actually separating its California assets from the rest of its operations. While that move will free its California operations up to pursue unconventional growth, Occidental Petroleum sees a better future in the Permian Basin, which will become its cornerstone asset.

CEO Steve Chazen noted that Occidental's California operations have had problems that extend beyond the characteristics of the rocks beneath the state. There is a lot of opposition to fracking in California, which has made it difficult to explore for oil. In fact, it has been so difficult for the company that Chazen noted on Occidental Petroleum's last conference call that, "you can see why I'm not going to be part of the California company." Clearly, the potential of the oil underneath the state isn't worth it to him or Occidental Petroleum.

Right now it would seem like oil companies would rather continue to focus on pumping conventional oil out of the state and not worry about its shale. Freeport-McMoRan (NYSE:FCX), for example, likes its position in California because it provides fairly stable production and cash flow. Freeport-McMoRan actually has been getting out of the shale business it acquired last year as it recently cashed in on its Eagle Ford Shale assets. Instead, it would rather invest in large, conventional oil projects like those found in the Gulf of Mexico than spend money on shale.

Chevron Ca

Photo credit: Flickr/Loco Steve 

Investor takeaway
Clearly, big oil companies don't want anything to do with unlocking the oil trapped within California's shale formations. That means it's up to smaller independent exploration companies to find the keys to this shale. On the one hand these companies typically lack the vast technical knowledge and capital of big oil companies; however, America's shale revolution was sparked by these entrepreneurial companies in the first place as big oil never believed in shale. That does give some hope that the 13 billion barrels of oil that are disappearing from the estimates could someday be rediscovered.

America's energy boom is far from over
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information