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Page added on May 28, 2014

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The Peak Oil Crisis: The Monterrey Shale Debacle

Geology

Last week the LA Times ran a story saying that the U.S. Energy Information Administration (EIA) is about to reduce “its” estimate of the amount of shale oil that can be recovered from the Monterrey Shale under California by 96 percent. This reduction cuts the estimate of producible shale oil in the U.S. by 60 percent.

This development, of course, came as no surprise to those of us who have been watching the Monterrey Shale situation closely. To begin with, anyone with the most rudimentary knowledge of geology knows that California is where great tectonic plates have been banging together for millions of years turning the earth below the surface into an incredible jumble. To produce shale oil one needs nice flat strata of oil bearing rock that run on for miles.

Then of course we have the issue of Chevron which has been drilling in California since 1879, and if one believes there really are 15 billion barrels of shale oil under the state, then why isn’t Chevron pumping it out by the tanker load?

Thus the interesting part of this story is who said there were 15.4 billion barrels of shale oil under California in the first place; and how did the Department of Energy come to accept such an obviously flawed estimate; trumpet the story far and wide so that many investors and policy makers in California and Washington fell for it; and then why did it come to such a screeching halt leaving the country’s prospects for “energy independence” a dubious proposition.

Moreover, the government’s retraction of its estimate of shale oil prospects in California raises issues about just how good are its forecasts that North Dakota and Texas will continue producing large amounts of shale oil into the next decade.

The great Monterrey Shale oil myth got its start back in July 2011 when the EIA stapled a cover on a contractor-produced “study” that it paid for entitled Review of Emerging Resources: U.S. Shale Gas and Oil Plays. In the fine print of the cover pages, however, the EIA did note that the “views in this report should not be construed as representing those of the Department of Energy.”

The underlying study, which was prepared by a small consulting company, INTEK, Inc., in Arlington, Virginia, purports to have been based on a wide range of sources and methods. However when it came to California the report’s author, Hitesh Mohan, said the California portion was primarily based on technical reports and presentations from oil companies. Presentations from oil companies are prepared to raise money from investors and can be expected to lay out the most optimistic view possible.

The methodology that produced the mythical estimate seems to have been something like this: take the 1,700 square miles of the Monterrey Shale, drill 28,000 wells in it at the rate of 16 wells per square mile, wait until each well produces 550,000 barrels of oil and you have your 15.4 billion barrels. Later research showed that only a handful of California oil wells ever produced 550,000 barrels of oil or anything close.

The California story only gets worse. The California oil industry funded a joint industry – University of Southern California study concluding that exploiting the supposed 15 billion barrels of shale oil would result in from 512,000 to 2.8 million new jobs in the state; would increase per capita GDP by $11,000 and boost government revenue by up to $24.6 billion per year. All the politicians had to do was get out of the way, stop all this environmental nonsense over fracking and more regulations, and the state would be rich.

The writing on the wall came last year when thorough and independent studies by the Post Carbon Institute pointed out first that very little oil was coming out of California due to fracking of shale deposits as compared to those in North Dakota and Texas. In December of last year, a second more detailed well-by-well study of what was actually happening in California blew the ridiculous INTEK/EIA conclusion out of the water. Although the Post Carbon Institute studies got little nationwide attention, several California newspapers and TV stations, which are much closer to the state’s well being, did in-depth stories concluding that the 15 billion number and the ensuing riches were unlikely eventualities.

It is obvious that the new studies brought pressure on the Department on Energy to take a second look at what they were saying about shale oil in California. When it became obvious that were endorsing nothing but industry hype, they did an about face and lowered the estimate to 600 million barrels, which in itself may be high.
The EIA’s reaction to questions about one of the biggest blunders in its history is interesting. EIA Director Adam Sieminski told the Wall Street Journal that the oil bearing rocks are still under California, but the technology to extract the oil has not yet been developed. Industry spokesmen are more upbeat, saying that hundreds of smart engineers are working on the problem of producing California’s shale oil and that someday, if not sooner, they will be successful.

The California shale story raises once again questions about just where America’s shale oil and gas production is going and along with it the future of industrial society. Naturally, none of us want to hear that hard times, lower economic growth, and fewer jobs lie ahead. The Department of Energy clearly is trying to draw a fine line between the gross over-optimism exhibited in the Monterrey shale incident and an energy apocalypse. But, do we really have to wait until the evidence of over-optimism is so overwhelming that it has to be admitted? There are several other “Monterrey Shales” out there well-understood in the peak oil community where the Department of Energy continues to make overly optimistic estimates which will one day rebound to the detriment of us all.

FCNP



15 Comments on "The Peak Oil Crisis: The Monterrey Shale Debacle"

  1. rockman on Wed, 28th May 2014 6:00 am 

    Very informative but I noticed some potential confusion. First, the is the Monterey FORMATION: a geologic unit that contains a number of conventional and unconventional reservoirs. In the last 34 years production from Monterey FORMATION peaked in 1982 at 170,000 bopd but almost all from the conventional Stevens Sandstone conventional reservoir. I did my grad thesis in 1975 on one of the Stevens fields. The reservoir is a very good quality pod of turbidite sands deposited in the deep water muds of the Monterey FORMATION. Currently production is down to 35,000 bopd.

    The actual shale play that’s been going on in the Monterey FORMATION has been in the McLure Shale. It’s the new play that has been frac’d in both vertical and horizontal wells. It peaked in 2001 around 160,000 bopd and is now doing about 35,000 bopd.

    There are other shale reservoirs in the Monterey FORMATION such as the Antelope and Reef Ridge Shales which are doing a combined 40,000 bopd. So besides being a ridiculous overestimate of recovery it ignores the details of where the actually production is coming from today and, more important IMHO, is the fact that there’s a recent history of development in the shales of the Monterey FORMATION such as the McLure, Antelope and Reef Ridge Shales which have remained relatively flat since oil prices boomed.

  2. Northwest Resident on Wed, 28th May 2014 9:32 am 

    Was it honest mistakes perhaps combined with over-optimism that lead to the extremely unrealistic estimate of the amount of oil that can be recovered from the Monterrey Shale? Or did a group of individuals get together in some dimly lit room and develop an elaborate plot to crank up investment and buy-in to the “American shale oil boom” fantasy? Based on the vast array of over-hyped pro-shale-oil investment articles that we’ve been bombarded with, my guess is that the Monterey LIE was a well-planned and executed attempt to bolster the fantasy of American energy independence, in fact it was probably THE center piece. The fact that the Monterey Shale Fantasy has collapsed into a pile of dust around our feet means that the rest of the illusion will soon follow. When there are no more illusions remaining and Americans wake up one morning to the stark and brutal reality of our near-term energy situation, don’t look for a lot of happy faces — there won’t be any.

  3. rockman on Wed, 28th May 2014 9:53 am 

    I think I’ll vote incompetence over conspiracy. It appears from other reports that the reports were based upon a compilation of oil companies’ optimistic press releases. Pubcos always make wild claims…that’s their business. LOL. Why we call it wildcatting…just tear ass, drill a bunch of holes and see what you have when the dust settles. The incompetence comes in when the writers didn’t understand how to tell when the pubcos are making silly optimistic projections: their lips are moving.

    But it allowed them to cheaply create a report they then charged the govt a lot for is my guess. And the govt “experts” weren’t competent enough to even do a back of the napkin reality check.

  4. rockman on Wed, 28th May 2014 11:11 am 

    BTW if it isn’t clear: this wasn’t a debacle in the eyes of the oil patch. None of us, not a single one, gave any credibility to those billions of bbls of oil. And very few, if any, buy even the 600 million bo.

    This ain’t our first rodeo. LOL

  5. Charlie O. on Wed, 28th May 2014 11:33 am 

    Shows you the idiocy of effectively rejecting Keystone XL, particularly if more downward revisions in shale reserves are forthcoming. KXL would have provided, at the very least, a reliable source for the production and export of refined products. Too bad about the lost revenue, jobs and taxes.

  6. Jerry McManus on Wed, 28th May 2014 11:34 am 

    @rockman

    Just curious, any updates on the “reserve replacement” problem? I hear the pubcos are spending big dollars upstream and not getting a whole lotta bang for the buck.

  7. rockman on Wed, 28th May 2014 1:23 pm 

    Jerry – In my four decades the problem has never disappeared for the pubcos. It was a constant goal that many couldn’t meet and they eventually disappeared. Right now high oil prices have opened up some opportunity. But it’s a dangerous route. With the huge debt loads they are taking on it won’t take much of a price retreat to force them out. And by that I mean it’s what ExxonMobil et al are waiting for: their only hope to keep increasing their reserve base (or at least hold even) is through acquisitions of weakened companies. Their production rates are so high it’s nearly impossible for them to replace reserves sufficiently with just the drill bit. That’s exactly how Exxon became ExxonMobil.

  8. J-Gav on Wed, 28th May 2014 3:35 pm 

    Rockman – “I think I’ll vote incompetence over conspiracy.” That was my tendency for a long time too but then I realized the two are not mutually exclusive.

  9. rockman on Wed, 28th May 2014 3:54 pm 

    True. Sometimes folks do the right thing for the wrong reason and sometimes they do they wrong thing for the wrong reason.

  10. Northwest Resident on Wed, 28th May 2014 4:32 pm 

    rockman — I have a hard time chalking up the dramatic Monterey Shale over-estimation to incompetency when every day we are seeing similar over-estimates and wild assed predictions for shale production coming from multiple sources. They can’t all be that stupid. It is much easier for me to believe that there is a coordinated, dedicated effort being made to keep investor money invested in shale oil development/extraction and to continually “pump up” the Grand Illusion that BAU is on firm ground as far into the future as the eye can see.

  11. rockman on Wed, 28th May 2014 7:46 pm 

    NR – Maybe. But I’ve been doing this for 4 decades and have run into more than a few really foolish folks. And yes sometimes their stupidity was fueled by greed. But I have met “experienced” folks who talked themselves into believing their own BS. Greed has a bad habit of making one believe the unbelievable.

  12. Northwest Resident on Wed, 28th May 2014 8:30 pm 

    rockman — True. But on a scale as large as the Monterey Shale was “proven” to be? Maybe. It just seems to me that somebody involved in that estimate and in all the marketing of investment “opportunities” must have known the truth. Especially when as you say those of you in the oil patch didn’t give it any credibility. Well, either way and for whatever reason, they got it flat ass wrong. Kiss American energy independence goodbye I guess. It was a sweet dream while it lasted!

  13. rockman on Wed, 28th May 2014 9:54 pm 

    NR – IF you dig thru all the press releases I doubt you find one pubco that used the term “proven reserves”. They, or their surrogates, certainly may have used phrases to make such an impression. But I suspect pound for pound most of the hype came out of stock brokers and fund managers. And none of them are oil patch by my definition. And I also suspect most of the monies invested were in stock positions and not directly in drilling. And if a real investigation were conducted you might discover some of the best returns were made by folks shorting stocks of any small pubco that rode the hype up. Would have been nice for a friend in the AEI to tell you about the revision a few days before it was made public.

    Excluding stock position very little money from outside the oil patch was don’t buying leases or drilling. There are oil patch companies that lease with no intention of drilling. Sometimes pays off handsomely (like Petrohawk flipping their cheaply acquired Eagle Ford Shale leases and some production for $12 BILLION. And sometimes the hype crumbles and they lose their ass. This happened to some land speculators in the Marine Tuscaloosa trend in La. That might have happened in the MS.

    BTW the former Petrohawk (now known as Halcon…a Mexican hawk) is doing it again in eastern Texas in a trend dubbed the “Eaglebine”…were the Eagle Ford melds into the Woodbine trend. So far it doesn’t look like it’s catching on fire like the EFS did. They might lose some of that $12 billion this time around.

  14. Northwest Resident on Thu, 29th May 2014 12:04 am 

    rockman — Thanks for the education, as usual!

  15. charmcitysking on Thu, 29th May 2014 5:42 am 

    ^^^ Let me second that post. Rockman, you are a Ghawar of quality information.

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