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Monterey Shale: An oil sector opportunity that's bigger than Bakken

Keith Schaefer
6 Comments| August 19, 2013

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Production from the Bakken and Eagle Ford make up 80% of the two million barrels of oil production the United States is now getting from horizontal drilling.

Together, these two plays have turned United States oil production on its head. A steady multi-decade decline in American oil production has not only been stopped, but production is actually rapidly growing.

But neither the Bakken nor the Eagle Ford is the biggest shale play in the United States. Not even close.

That title rests with California’s massive Monterey Shale.

The Monterey is two times larger than the Bakken, and 4 times bigger than the Eagle Ford.

Drink that in for a moment.

The EIA (Energy Information Agency) released an attention grabbing study in 2010 that pegged the Monterey as having over 15 billion barrels of technically recoverable oil.

The next largest plays (according to the EIA) are the Bakken with 7.4 billion barrels and the Eagle Ford with 3.4 billion barrels, respectively.

The EIA estimated the technically recoverable shale oil resources in the onshore lower 48 states at 23.9 billion barrels. That means that the Monterey’s 15 billion barrels represent more than 60% of the total shale oil in place for the entire country.

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The Monterey is located in a 1,750-square-mile chunk of California, mostly in the lower San Joaquin Valley. This region was the site of a major oil boom in the early 20th century and continues to produce today.

The Monterey is the prolific source rock for almost all of the oil in the state of California. This includes producing giant fields such as the Kern River, Elk Hills and Midway-Sunset among others. These plays still have California ranking as the fourth largest oil producing state in the United States.

So if the Monterey is so enormous, why isn’t it front page news like the Bakken and Eagle Ford? Why is the Monterey not contributing to the two million barrels of production United States is enjoying from unconventional oil plays?

The answer is that “it is complicated."

What I mean is...the Monterey is complicated.

Production in the Monterey Shale has not exploded like the Bakken and Eagle Ford because it is geologically more inconsistent, or variable, than the first two—the Bakken and Eagle Ford, which are very consistent and repeatable across the entire play.

The reason for this?

The Monterey was deposited at the edge of the North American continent as it broke up—so it has had all kinds of shifting and faulting that other shale plays haven’t.

This actually has one very important positive: the result of all that seismic activity is that the rock in the Monterey is already naturally fractured. The tectonic forces opened up the rocks so that the oil was free to migrate.

But it does make the Monterey more unpredictable…and knowing where to place horizontal well difficult.

Bakken drillers can easily locate the precise interval to hit with a horizontal well. In the Bakken you are breaking those rocks open for the first time which allows the oil to come out.

The bottom line is that the Monterey is just a different beast than the Bakken and Eagle Ford. But the oil is unquestionably there—the industry is just trying to figure out how to tap into it.

Given the motivation created by America’s biggest oil prize of 15 billion barrels in place, you can bet they will.

Development of the Monterey Shale probably will follow the same pattern as most other shale plays in North America.

Sooner or later, one company will figure out the right recipe of drilling, fracturing and completing wells to make the play work.

The most likely candidate to be the Monterey “code cracker” is Occidental Petroleum Corp. (NYSE: OXY, Stock Forum). Occidental has not only a huge acreage position (900,000 acres) in the play, but also the deep pockets and time that will be needed to figure the play out.

Occidental believes it has already identified one significant 50 million barrel of oil unconventional discovery in the San Joaquin Basin. In the second half of 2013 Occidental will drill 15 exploration wells and gather significant 3D seismic data in an effort to expand the size of its productive California unconventional acreage.

The work that Occidental does in the second half of 2013 could be a major turning point for the Monterey play and all of the companies with acreage in it.

One key to this puzzle could be “acidizing"—which isn’t used in the Bakken or Eagle Ford near as much—they frack instead.

Acidizing sends high volumes of hydrofluoric acid, a powerful solvent, into the oil well to dissolve rock deep underground, which allows oil to flow freely up through the well. Time will tell; but there are billions of dollars riding on cracking the Monterey code.

While cracking the Monterey offers massive potential for the oil producers involved, the biggest benefit could go to the people of California. A study by the University of California shows development of the Monterey could generate 500,000 jobs with the first couple of years and nearly 3 million within a decade.

Cash-strapped California meanwhile could stand to reap nearly $25 billion per year in oil-related tax revenues within the first decade of Monterey development.

This play is clearly one to keep an eye on. With 15 billion barrels of oil in place it has potential to impact not just the companies involved and the State of California, but the entire continent.

- Keith

Keith Schaefer is publisher of the Oil and Gas Investments Bulletin.


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