The Take

Monterey Shale isn't all it's fracked up to be

Monterey Shale isn't all it's fracked up to be

Posting in Energy | From Issue 04 December 9, 2013

A detailed new report on California's Monterey Shale finds previous claims about its potential were vastly overstated.

We've seen this movie before. 

In February, coverage of California's Monterey Shale exploded in the mainstream press. "The Next Oil Boom," shrieked CNBC. "Vast Oil Reserve May Now Be Within Reach," declared The New York Times. Investor's Business Daily wondered if it could "save California." The Economist quoted the president of a small oil producer in the region, Santa Maria Energy, as saying that the formation would be "California's way out of the 'fiscal toilet'." Fox News gushed about the region's potential for "making California the country’s top oil producer and revving up the state's economy like a smaller shale-oil deposit did for North Dakota."

As usual, the purveyors of this pablum were mainly interested in generating buzz, not investigating the reality. And as usual, it worked.

Millions of readers took away a wafer-thin narrative about how fracking would create a new California "gold rush" in the Monterey Shale, which contained two-thirds of the nation's estimated tight oil resources (or "reserves," in the case of the more energy-illiterate writers). Industry money was pouring into the region, which could become the next Bakken or Eagle Ford. The Monterey Shale resources could slash California's oil imports, bolster its balance sheet, and create lots of good jobs, if only those damned environmentalists would get off the industry's back.

The only data anyone cited was that the formation covered 1,750 square miles and contained 15.4 billion barrels of oil -- figures that came from a July 2011 report published by consultancy INTEK, that was commissioned by the Energy Information Administration (EIA).

The following month, teams at the University of Southern California (USC) and a public relations firm released an economic assessment based on the EIA/INTEK report, saying the formation could increase the state's tax revenue by $24.6 billion per year and create 2.8 million new jobs, slashing seven percentage points off the state's unemployment rate.

The press exploded with enthusiasm for the Monterey Shale region all over again.

Investigative research by DeSmogBlog.com labeled the report as bogus "frackademia," since it was funded by the oil and gas industry, but it would have been lucky to reach one percent of the readers who believed every word of the credulous coverage in the Los Angeles Times.

Reality check

Now, some 10 months after the ballyhooing in February, Canadian geoscientist David Hughes has blown the Monterey Shale story to bits, with a report offering the "first publicly available empirical analysis of actual oil production data from the Monterey Formation," published by Post Carbon Institute and Physicians, Scientists & Engineers for Healthy Energy.

Based on an analysis of actual production data from the Drillinginfo database, the most comprehensive oil and gas production database publicly available, "Drilling California -- A Reality Check on the Monterey Shale" explains in exacting detail what the geological properties, current production, and production potential of the formation really are.

The gap between the reality and the hype could not be more stark:

  • The initial production rates of the existing Monterey wells are only about one-half to one-quarter of those claimed in the EIA/INTEK report.
  • Total lifetime oil production ("ultimate recovery") per well is likely to average one-third or less of that assumed by the EIA/INTEK report.
  • The Monterey's productive oil regions are a relatively small part of the overall formation. The claim in the EIA/INTEK report that 1,750 square miles can be drilled to a density of 16 wells per square mile is likely not true.

With brutal precision, Hughes highlights the difference between the actual figures and those in the EIA/INTEK report:

Monterey-production-table-Hughes.jpg
* BOE: Barrels of oil equivalent, including non-crude natural gas liquids
** For wells more than 10 years old. Many of the wells are still too young to determine cumulative production.

The bottom line from Hughes' analysis is stark. Where the USC study estimated that 4,112 wells could produce between .42 and 3.3 million barrels per day from the Monterey region by 2030, Hughes estimates that it would actually take somewhere between 49,119 and 232,562 wells to reach this capacity, depending on the production decline curve used in the estimate. To put this in perspective, current California production from roughly 50,000 wells is just over 0.5 million barrels per day.

Considering that the EIA/INTEK report estimated the total number of potential well locations in the Monterey at 28,032, it's highly unlikely that the USC production target could be achieved even under the best circumstances. As Hughes flatly states, "the oil production estimates in the USC study lack credibility."

Separately, five California academic economists who reviewed the USC study "were puzzled by its findings, and baffled by its methodology," and likewise concluded that it was not credible.

Old news

The Monterey Shale is not a new discovery; in fact, it's one of the longest-producing formations in the country. Its source rocks have provided the oil produced from wells in the San Joaquin basin for more than a century, as well as decades of production from numerous other fields, including offshore Santa Barbara. (For a close-up look at one of those regions, see my June 2011 story on the Kern River oil field near Bakersfield.)

California's oil production peaked in 1985, and it has slowly declined ever since. Despite nearly 5,000 wells that were drilled in Monterey Formation over the past three decades, its production peaked in 1982 and likewise steadily declined since then.

 

California-Monterey-oil-production-Hughes.jpg
As is typical for an old, well-exploited oil play, the longer drilling goes on, the less productive the wells get. We generally tap the best spots first, then progress to the less-productive, more difficult areas. Production from the Monterey Formation has declined from an average of 140 barrels per day per well in the early 1980s to just 17 barrels per day per well today, while the number of producing wells more than doubled. In other words, we're drilling more to get less oil every year.

MontereyProduction.png
The Monterey Formation is not like the Bakken or Eagle Ford shales that have brought newfound wealth to North Dakota and Texas. It's a very complex, folded and highly variable rock unit with numerous oil-bearing subdivisions, and although it is much thicker than the Bakken or Eagle Ford, it covers a much smaller area. Because of its complex geology, Chevron, one of the largest oil producers in the area, suspects much of the oil formed in the Monterey Formation has migrated to reservoirs outside the formation. "The Monterey’s best years," Hughes writes, "may already be behind it."

The distinct shale reservoirs within the Monterey Formation that might be subject to further development through fracking have been rather a disappointment so far, producing a collective 15,000 barrels per day at their peak in 2002, or about three percent of California's total oil production. Today, they produce about 11,500 barrels per day collectively.

MontereyShale.png

Dream on

Alas, California will have to find another way to keep its budgetary house in order and its people employed.

As I said at the opening, we've seen this movie before. It always starts with a hyped-up story about incipient "energy independence," based on little but opaque industry-funded claims. Then the "gold rush" ensues, with players rushing in to snap up acreage and drill, baby, drill. A few operators make money. Some leases get flipped to latecomers with deep pockets, who wind up writing down massive losses on their purchases. More leases wind up languishing on operators' balance sheets, having failed to live up to their promise or to be lucky enough to get sold off at an inflated price. And a few operators wind up bankrupt or acquired for pennies on the dollar. In the oil and gas industry, it's the circle of life. I have documented the cycle repeatedly in my columns, and I expect I'll never run short of such stories.

But don't expect any of the big-name publications who touted the "next oil boom" in February to breathe a word of the reality, now that the facts are out for all to see. Nobody cares about facts. As I explained in 2012, we all just want to hear a good story. A story about independence, American exceptionalism, sticking it to OPEC, and striking it rich. We can listen to those stories all day long. It doesn’t matter if they're true.

Indeed, as Wall Street Journal columnist Farhad Manjood wrote in his excellent piece this week about how a Gawker editor consistently manages to pick out the viral stories of the day, "telling the truth kills virality, reducing traffic." In what passes for news journalism these days, editors pick out stories with a cynical eye for what tickles our fancies with mercenary precision.

It's all about the eyeballs, kids. And frankly, that's on you.

(Photo: Chevron's Kern River field, in the Monterey Formation. Courtesy of Chris Nelder)

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Chris Nelder

Columnist (Energy)

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California. Follow him on Twitter. Disclosure