New EIA Estimate for Monterey: Dashed Dreams or Nightmare Deferred? (Oilgasmonitor.com)

Reading the dozens of dire, gleeful, mournful and doubtful headlines after Reuters and the Los Angeles Times broke news of the Energy Information Administration’s revised estimates, one would think that oil production in California’s Monterey Shale is either an industry dream that will never come true or a nightmare from which environmentalists have awakened, jubilant and relieved.

While the vast majority of the headlines displayed restrained neutrality, such as “U.S. officials cut estimate of recoverable Monterey Shale oil by 96%,” from the Los Angeles Times, there were of course more than a few that were markedly more celebratory:

                • “California’s Fracking Boom Just Got Busted” (from TruthOut.org)

                • “Write-down of two-thirds of US shale oil explodes fracking myth” (from The Guardian)

And, by far the best of the snarky:

                • “Monterey Shale: Fracking’s Great Moment Of Derp” (from CleanTechnica)

All this and the EIA report hadn’t even been officially released yet! (The report is due out in June.)

EIA “News” No Surprise

Of course, anyone who’s been paying attention already knew that production from the Monterey formation has been and will continue to be challenging. What the excited headline writers forget, or never understood, is that it’s not the current production from the Monterey that has industry so interested; it’s the huge potential.

Regardless of what the EIA now says about technically recoverable reserves, the estimate of 400 billion barrels of oil residing in the Monterey still stands. It may not be largely recoverable with today’s technology, but the oil will still be there when the technology catches up.

Interesting side note: none of these articles sounding the death knell for California’s oil industry acknowledged the fact that the state is among the top four oil-producing states in the U.S.

California’s mature oil fields continue their prolific production, ignorant of the premature obituaries being published in answer to the EIA’s revised estimate. In fact, during the same announcement, the EIA also noted that its revised estimate does not affect its projections for near-term production. On the contrary, the EIA expects an average of 57,000 barrels per day between 2010 and 2040. That’s an upgrade from last year’s estimate of 14,000 barrels per day between 2010 and 2040.

What EIA petroleum analyst John Staub told reporters was nothing new: “From the information we’ve been able to gather, we’ve not seen evidence that oil extraction in this area is very productive using techniques like fracking.”

Potential Outweighs the Challenges

Industry has long known that the directional drilling and hydraulic fracturing techniques that have proven so valuable in the Bakken, Marcellus, and other plays is not likely to be the key to unlocking the Monterey Shale. California’s seismicity has already fractured the shale and created a chaotic jumble that’s not conducive to the types of approaches used in other plays.

That hasn’t dampened interest in California’s potential in the least. This is an industry now booming in large part thanks to the stubbornness of folks like George Mitchell, who persisted in pouring money ($6 million), land (his own) and time (15 years) into the research to crack the code of the Barnett Shale, reviving a dying industry and putting the U.S. on track to energy security.

Combine the industry’s history of innovation with the potential of the Monterey Shale, and it’s clear why companies will continue researching, innovating and testing until they’ve unlocked this formation. In theory, development of the 1,750-mile formation could generate a half million new jobs by 2015 and nearly 3 million by 2020, according to a study by the University of Southern California and a Los Angeles think tank, the Communications Institute. Under this forecast, California stands to reap $4.5 billion in oil-related tax revenues by 2015 and nearly $25 billion by 2020—if industry can find the solution to the Monterey shale riddle.

Naturally, the fractivists are all over this announcement from the EIA, trumpeting their “victory” far and wide as if industry will now take its ball and go home. Having long waged a war against fracking in California, the rhetoric is bound only to continue heating up.

That’s despite the fact that fracking doesn’t seem to be the answer to profitable production from the Monterey. Energized by the EIA revision and recent developments like the permanent ban on fracking in Santa Cruz, it’s clear that the fractivists see the battle turning against industry. Expect renewed fervor over a California senate bill that would place a moratorium on fracking, acid injection, and other well-stimulation techniques while the state further studies their safety.

Only time will tell whether the fractivists’ nightmare is ending or industry’s dream of full production from the Monterey Shale will come true. If history is any indication, the safe bet is on industry’s dream.

Written By: Chris Faulkner, Chief Executive Officer of Breitling Energy Corp.

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