12/09/2013

Shale Opportunity Snapshot: West Coast Shale

Challenges and opportunities in the Monterey/Santos play.

This is the final article in FPDA's series examining opportunities in shale oil and gas markets. It provides a snapshot of the West Coast region with a focus on California, home to the largest shale oil formation in the country.

The largest shale oil formation in the country is the Monterey/Santos play in Southern California. In 2011, the Environmental Information Administration estimated it has 15.4 billion barrels of shale oil resources. That's more than twice the shale oil reserves of the U.S.'s next-largest plays, the Bakken and Eagle Ford, with a combined 7 billion barrels of reserves.

The Monterey is the primary source for oil reservoirs in the Santa Maria and San Joaquin Basins in Southern California.

Challenges

Despite the plentitude of resources in the state, California's shale oil remains largely untapped, and production there has been in decline since the 1980s, according to the EIA.

According to a report from CNN, the San Andreas Fault has caused the geologic layers underneath the state to fold up onto themselves "like an accordion" rather than lie flat like the layers in other plays. According to the report, "The folds mean recent advancements that have made shale oil and gas profitable to extract – horizontal drilling combined with hydraulic fracturing – don't work as well in California."

New regulations may be another obstacle to utilizing the resource. Reuters reports that in September, Democratic Governor Jerry Brown signed Senate Bill 4 into law, requiring oil companies to obtain permits for fracking or acidizing. "It would also require notification of neighbors, public disclosure of the chemicals used, as well as groundwater and air quality monitoring," according to the report.

The California Department of Conservation has announced that emergency regulations for the new law will go into effect January 2014; the final regulations are expected to go into effect Jan. 1, 2015, following a formal rulemaking process lasting about one year.

Opportunities

Tupper Hull, vice president of strategic communications for the Western States Petroleum Association, told FPDA that the Monterey shale resource has been a little tougher to develop than in places like North Dakota or Texas. Despite that, he says, there's significant optimism within the industry about overcoming those challenges.

Innovative manufacturers who develop new technologies, Hull says, will likely play an integral role in increasing production in the state. "This is just another evolutionary step in the story of California production, which is a story of technology. One technological solution after another has kept California oil production moving forward," he says. "People who are innovators, people who are problem-solvers, people who are willing to work within California's unique environmental sensitivities should be able to thrive in this environment."

Despite the challenges it will pose, Hull seems optimistic about Senate Bill 4. "It sets up the most stringent environmental regulations, monitoring, reporting, disclosure and permitting requirements that we know of anywhere in the country," he says. "The good news is it does not include a moratorium." Many of the bills introduced earlier this year, he says, would have banned hydraulic fracturing in California entirely, so in one sense the passage of the S.B. 4 was a small victory for the industry.

It is also helpful, Hull says, that the governor appreciates the petroleum industry's role within California's economy and will enforce the new regulations in a way that allows the industry to continue to operate. "What we have now is a vigorous but, in our view, workable framework to go forward," Hull says. "It's going to be tougher. It's going to be more costly. It's going to take more time. But we think there is a good future for production here."

The map at right, created using data from the California Department of Conservation, shows the 10 California counties with the greatest number of active wells as of 2012. The top five counties are:

Kern County: 58,960 active wells
Los Angeles County (onshore): 3,938 active wells
Fresno County: 3,160 active wells
Ventura County: 2,290 active wells
Orange County (onshore): 1,106 active wells

Kern County has nearly fifteen times the active wells as the second-most active county in the state, Los Angeles County. According to a September report created by the California State University's Craig School of Business and commissioned by the Western States Petroleum Association, the petroleum industry in Kern County contributes almost 20 percent to U.S. gross domestic product.

Hull expects high production there to continue. "I think it's quite clear that if and when this Monterey shale resource is developed, that activity is going to take place in the San Joaquin Valley, and the vast majority of that is going to take place in Kern County," he says.