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 (CVX 1.62%) 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.
Photo credit: Flickr/Bev Sykes
The same can be said for Occidental Petroleum (OXY 1.04%), 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 (FCX -0.86%), 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.
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.
