The Monterey shale deposit in California is huge, holding an estimate of nearly 14 billion barrels of oil. Or is it really small, holding just 600 million barrels? That depends on how you look at the question. Right now, the U.S. government says that it's the smaller number. However, technology and higher oil prices could eventually change that.
No two regions are alike
Matthias Bichsel, projects and technology director at Royal Dutch Shell (NYSE: RDS-B ) , commented at a company conference last year that, "We only talk about the Bakken, Eagle Ford, and the Permian in West Texas, and the Marcellus — we never talk about the basins that have not worked. We have some areas that are simply not as good as others."
He highlighted the Green River, but the U.S. government is adding California's Monterey shale deposit to the list. The change is a big one, with the estimate of recoverable oil falling by over 90%. This shouldn't come as too much of a surprise, however, because Chevron (NYSE: CVX ) recently told CNBC, "Chevron does not see the same level of promise in the Monterey Shale as other companies...we have not been encouraged by the results of the wells we have drilled into the formation."
More struggle than it's worth
Although not specifically responsible for Shell's U.S. troubles, the Monterey shale helps to show why the international oil giant has been reshaping its U.S. operations and writing down the value of assets. The Monterey region is in a geologic hot spot, so the earth has been shifted and folded. That, in turn, has moved the oil around in such a way that it's harder to find. That's different from other regions where the oil is laid out, conveniently, in undisturbed layers.
In other words, some oil and gas regions are better than others. It's why Shell says that its "Upstream Americas profitability has been affected by losses in resources plays such as shales." The company plans to shrink its U.S. portfolio and reduce spending in the region by 20% this year. Basically, it intends to refocus around its best U.S. opportunities after getting caught up in a land grab. In keeping with this, Shell just sold about 100,000 acres of land in Texas for around $640 million.
Getting better at what we do
Some regions of the country are better than others when it comes to drilling, and there's nothing new about that. So why the Monterey downgrade? The geology of the region means that current drilling methods won't be as useful as originally expected; that's something that Chevron obviously already knew.
Technology is an interesting thing, though. In early 2013, Chevron announced that it had discovered oil in the Gulf of Mexico some 31,000 feet below the sea's surface. That's about six miles. Imagine the technology needed to do that. With about 25% of its oil located in the United States, Chevron really has no choice but to be at the cutting edge of drilling techniques because the easy oil and natural gas has already been found.
That's exactly why the revision in Monterey is both bad news and good news. That oil didn't disappear, it's simply going to be harder to extract than originally expected. We can't do it profitably today, but that doesn't mean we won't be able to do it tomorrow.
The long, long term
Giant oil companies like Chevron and Shell have to balance profits today against the future. That means making a profit while investing in the technology and properties that will produce the oil and gas to replace what is being pulled out of the ground today. They don't always get it right, as Shell proves, but technology can put oil and gas once thought unreachable within reach. That's something that Chevron's Gulf of Mexico efforts prove.
If there's oil in Monterey, it will be profitably drilled someday. That will eventually extend the U.S. growth profile of energy giants like Shell and Chevron.
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