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January 27, 2012

Why there has been no rush for over 15 billion barrels of recoverable oil in Monterey California

Argus Media - California's Monterey formation, which the EIA estimates holds 15.4 billion barrels of technically recoverable oil, cannot even attract new investment from the oil major in its home state, Chevron.

Other than Los Angeles-based Occidental Petroleum (Oxy), no major or large independent is earmarking drilling capital for the Monterey.

The reticence to invest stems from a combination of factors, from geology to the high cost of doing business in California.

Oxy, which produces about 45,000 b/d of oil equivalent (boe/d) from California shale, said its Monterey wells have average initial production rates of about 370 boe/d. Some wells in other shale resource plays, such as the Granite Wash of Texas and Oklahoma, start up with output more than five times that high.

But one economic plus of the Monterey is that California oil sells at prices in the same range as Brent crude, rather than West Texas Intermediate (WTI). Another plus: some wells can be drilled vertically and stimulated with hydrofluoric acid, which is cheaper than horizontal drilling and hydraulic fracturing. Monterey oil deposits are 6,000-12,000ft below ground.

“If we went back to what we said roughly a year ago or a little more than a year ago, I think we are a little more optimistic on the verticals and a little more pessimistic on the horizontals,” Oxy chief executive Stephen Chazen said.

Oxy's pace of development may be slowed by California's permitting process, which would become even more difficult under proposed state legislation. A bill seeks to impose additional reporting and record keeping requirements designed to protect groundwater, even in desert areas where no groundwater is present.

The company's California shale-drilling program, including 150-175 wells this year, will yield “more predictable production growth going forward.” While Oxy has permits in hand to continue its current pace of drilling through the end of 2011, Chazen acknowledges “some uncertainty around future permits, particularly related to injection wells.”

“If we can get the permitting issues worked out in the next six months, you will see significantly higher rig counts in California,” he said. “Right now, I just do not have a basis to raise that rig count in California. I do not have enough confidence in the permitting process.”

Companies are not only slow to move because of politics. Major producers have tied up much of the land in the Monterey, but they have little incentive to exploit the formation when shallower deposits in the same region offer lower costs and potentially higher returns, according to Mike Edwards, vice-president at US independent Venoco.


The oil boom will happen when aggressive oil players like Hess and Continental Resources buy out positions of the oil majors and overcome any regulations in California.




Monterey Geology

Energy and Petroleum Magazine - The Monterey is not likely to see the types of multi-stage fracs performed in other shale plays, with operators preferring large-volume hydrofluoric acid jobs. Edwards said that Occidental Petroleum (Oxy) published a white paper several years ago stating that its engineers didn’t see an economic benefit to hydraulic fracturing. “We’ve tried some fracs,” he said. “We haven’t concluded that the model doesn’t work, but we believe acid jobs will yield better results overall.”

Overall, the Monterey shale is estimated to contain more than 400 Billion barrels of original oil in place.

It remains to be seen if new superfracking techniques will be superior to hydroflouric acid.

The Monterey shale is rather atypical of the types of shales found elsewhere in the country. For one thing, it’s much younger, only about five to 17 million years old compared to other shales that are around 300 million years old. This means that the shale is in the peak oil generating window.

It’s also quite thick and not at all homogeneous. It’s been characterized as a large deposit of diatomaceous material. At shallower depths it has very low permeability and needs stimulation to recover oil. Further down, as temperature and pressure increase, the shale becomes more brittle and contains more natural fractures. Ultimately it evolves into a quartz phase, and any part of the shale may contain sandstones as well.

Occidental Petroleum investory report from November, 2011




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