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Luck and Wisdom in the Monterey Shale

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In life, good decisions in the face of uncertainty may be the result of either wisdom or luck.

So it is in the energy business, too.

Earlier this month, the EIA put a damper on much of the enthusiasm surrounding California's Monterey Shale when it reduced its estimate of the formation's oil reserves by a dramatic 96%. The EIA now believes that only 0.6 billion barrels of oil are recoverable under existing conditions with current technology, down from its previous estimate of 13.7 billion barrels.

Monterey Shale. Source: CNN

The Monterey Shale was believed by many to be the greatest of all the shale plays, constituting well over 60% of U.S. shale oil reserves. The formation's potential attracted quite a bit of attention from oil and gas companies, many of which made significant investments in prospecting and extraction infrastructure. However, some companies were much more cautious about the idea of a Californian Bakken. Three companies that may still all come out as winners -- though for different reasons -- are Chevron (NYSE: CVX  ) , Hess Corporation (NYSE: HES  ) , and Occidental Petroleum (NYSE: OXY  ) .

Chevron shows wisdom in caution
Chevron, the second largest producer of oil in the U.S. and the largest in California, did not hop on the Monterey Shale bandwagon. Company executives, such as CEO John Watson, challenged the premature consensus of the formation as the new Bakken. Chevron spokespeople openly questioned the economic soundness of investing resources in extraction, particularly when more productive and reliable sources are being tapped and developed.

Through employing a healthy dose of caution, Chevron showed wisdom in its handling of the Monterey Shale. The recent revelation that its potential can't be taken advantage of today does not affect Chevron negatively.

Hess hedges its bets
Although Hess, which has experience with the Bakken, established a presence in area surrounding the Monterey shale, the company remains noncommittal. Hess spokesman Jon Pepper remarked last year that it was "too early to talk in any definitive way" about the company's moves with the Monterey. The company's "wait and see" approach prevented it from making significant investments outside its major areas of operation that would not have paid off. However, if the Monterey Shale ever becomes a viable option, Hess positioned itself well to quickly move into the area and begin operations.

Both Chevron and Hess avoided the mostly hype-driven heavy investments in the Monterey Shale. They are both winners in this round of Shale Games in that regard.

Occidental incidentally wins, too
Unlike Chevron and Hess, Occidental comes out as a winner seemingly by luck rather than wisdom.

The second-largest producer of oil in California is currently a major player in the Monterey Shale. It holds over 1.2 million acres and planned to spend $6.3 billion on developing that land by 2015. Production from this acreage was projected to reach 25% of Occidental's California output by next year. If Occidental is that invested in an area yielding disappointing production and that can't be fully exploited under present circumstances, it must not bode well for the company, right?

Wrong, because Occidental is spinning off its California assets into the California Resources Corporation. The company announced that it was ending its relationship with the California assets and moving its headquarters from Los Angeles to Houston on Valentine's Day this year. Occidental's management explained the move as being motivated by a need to focus the business, whose operations are increasingly concentrated in the Permian Basin and in the Middle East and North Africa.

With the spinoff, the challenge presented by the disappointing Monterey Shale becomes California Resources Corporation's problem, not Occidental's. The company seems to have made a lucky good decision.

What's the Foolish conclusion?
As bubbles burst and booms go bust with California shale oil, these three companies can stand on the outside looking in. However, it is important to see how they got to those positions. A fool chooses luck over wisdom, but Fools choose wisdom over luck. And, in this round of the Shale Games, it was Chevron and Hess that displayed wisdom.

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  • Report this Comment On June 03, 2014, at 2:37 PM, buyandsqueeze wrote:

    "[Occidental] seems to have made a lucky good decision."

    No. Big oil companies have huge staffs of engineers and scientists who dig very deeply into every aspect of an issue. There is no luck involved in their decisions.

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Dajahi Wiley

Dajahi is a graduate of Cornell University, where he earned his Bachelor of Arts in Government. His work largely focuses on energy. His analyses help readers to identify and understand micro- and macro-level drivers and trends. Follow on Twitter @DWCommentary.

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