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Producers slow to chase California shale oil

22 Aug 2011, 6.35 pm GMT

Houston, 22 August (Argus) — The largest shale-oil reservoir in the US – at least by the estimation of the Energy Information Administration (EIA) – is not spurring the sort of land rush found in similar formations such as the Bakken of North Dakota or the Eagle Ford of south Texas.

In fact, California's Monterey formation, which the EIA estimates holds 15.4bn bl 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, even though the EIA says the formation holds 60pc more crude than all other US shale-oil deposits combined, including the Bakken and Eagle Ford.

Although Chevron has Monterey output, partly because it is a stakeholder in properties operated by Oxy, the major does not plan to expand its position there. The company said that while it will do some test drilling to gain further knowledge, other projects are drawing its capital investment.

“We have not changed our overall view of the Monterey relative to our other opportunities in the world,” Chevron vice chairman George Kirkland said. “We do not see it yet competing.”

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 recordkeeping 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.

Venoco is devoting about half its capital budget to the Monterey this year and sees the formation eventually proving to have even more recoverable oil than estimated by the EIA, once the industry determines the best way to exploit it. More producers, including US integrated energy company Hess, are taking an interest in the area, according to Edwards, who said concerns over environmental rules and permitting difficulties are overblown.

“It may seem difficult if you are coming from another region, and that is one reason why it is seen as a moat around California,” he said. “We know how long things take and plan accordingly, but it may seem like a foreign world if you live in the midcontinent.”

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