Monterey shale acreage on the block
The US is set to put a large swath of federal land up for bidding in California’s oil-rich Monterey shale in the latest test of the industry’s interest in the play, which is thought to have the potential to be the largest in the country
The US Bureau of Land Management (BLM) will auction 15 parcels of land covering nearly 18,000 acres in central California on 12 December. It is the latest in a series of auctions in the area as interest has picked up in the shale play, which covers a vast area of California stretching from Fresno in the north to Los Angeles in the south, an area better known for its vineyards than oilfields.
The last auction was in September 2011 and saw three licences awarded. Vintage Production California, a subsidiary of California-based independent Occidental Petroleum was the highest bidder in that round. It won a licence with a bid of $900 per acre, much lower than prices seen in proven shale oil plays such as the Bakken and Eagle Ford, but an indication of keen industry interest in the play’s potential.
That interest is being fuelled by estimates that the Monterey could be the biggest shale oil play in the country, potentially dwarfing the prolific Bakken. The Energy Information Administration said in a 2011 report that the Monterey shale held recoverable resources of more than 15 billion barrels of oil, nearly five times the estimates for the Bakken and Eagle Ford shales. Many think that estimate is conservative, with some putting the figure well over 20 billion barrels.
The Monterey shale is the source rock for the California discoveries that sparked an oil rush in the state around the turn of the 20th century and has made it one of the country’s leading oil-producing states since.
Occidental has taken the lead in exploring the Monterey shale. The company helped thrust the play into the spotlight in 2010 when it said that California shale could become its largest business unit by the end of the decade.
The company is in the middle of a four-year exploration programme during which it has said that it will drill 10 to 15 test wells per year in different parts of the shale play. Occidental has been typically tight-lipped about specifics on the progress of its programme. In October, Stephen Chazen, the company’s chief executive, did concede that cost cutting had seen curb its California shale exploration programme.
Other operators targeting the play include Aera Energy, a Shell-ExxonMobil joint venture, recently privatised independent Venoco and Underground Energy.
The Monterey shale poses a number of challenges for those explorers. It is a geologically diverse play. In some parts of the Monterey shale, for instance, porosity is very low, similar to other shale plays. In other parts, though, natural fracturing caused by the seismic activity that regularly shakes the region means porosity can be as high as in some conventional plays.
In the areas with higher porosity, hydrocarbons may be able to flow without the use of hydraulic fracturing (fracking). That cuts down significantly on drilling costs. The complex geology, though, makes it difficult to scale up operations as the technologies and methods needed can be completely different from one area to the next.
That could force operators to develop the California shale differently than other shale plays, where they are deploying a manufacturing approach to drilling. That approach focuses on finding a formula that works for a particular shale play and repeating it as efficiently as possible to drill the hundreds, and sometimes thousands, of wells needed to sustain production.
Companies also face a growing anti-fracking movement. The technology has already been banned in some parts of the US, and environmental groups as well as some politicians in California have called for the state to follow suit. Legislation that would have banned fracking died in the state congress earlier this year. California’s recently re-elected governor, Jerry Brown, though, has said that his administration was working on new measures to regulate fracking in the state.
Environmental groups sued the state in October in an effort to block the December auction. The bidding round is set to go ahead as planned, but as shale exploration expands so too, it seems inevitable, will efforts to stop it.