[Graeme]

The great imaginary California oil boom: Over before it started

$this->bbcode_second_pass_quote('', 'I')t turns out that the oil industry has been pulling our collective leg.

The pending 96 percent reduction in estimated deep shale oil resources in California revealed last week in the Los Angeles Times calls into question the oil industry's premise of a decades-long revival in U.S. oil production and the already implausible predictions of American energy independence. The reduction also appears to bolster the view of long-time skeptics that the U.S. shale oil boom--now centered in North Dakota and Texas--will likely be short-lived, petering out by the end of this decade. (I've been expressing my skepticism in writing about resource claims made for both shale gas and oil since 2008.)



t's no surprise that those who work in the oil industry are perennially optimistic. This high-risk business isn't for the timid. And that optimism is necessary if the industry is going to raise the capital it needs from investors. But it should be obvious that relying on the oil industry for objective information that will form the basis for public policy is a mistake. Independent sources and objective data are important cross-checks on the industry's understandable but often misleading enthusiasm.

The other explanation for the Monterey miss is that the analysts at INTEK are simply colossally inept. Note that INTEK was also responsible for the overall U.S. assessment of 23.9 billion barrels of technically recoverable oil lodged in deep shale formations. The California miss alone reduced estimated U.S. resources to 9.1 billion barrels, a cut which by itself calls into question the entire premise of renewed American oil abundance. But, the gargantuan misreading of the Monterey Shale's resources also suggests that the firm's estimates for other areas of the country need review as well.


Moreover, while technology can improve, the laws of physics don't. The industry is already moving from the so-called "sweet spots" in shale deposits to those that are more difficult to exploit. That process will continue until the laws of physics and economics team up to make drilling unprofitable, and that will be the end of the shale boom in the rest of the country.

[Unit30Bull]

$this->bbcode_second_pass_quote('Plantagenet', 'T')he oil in the Monterey Shale is still there---it just isn't recoverable with current technology and at current prices.

Thats exactly what the Feds said about the Bakken in 2004 and look at the Bakken today.

[ralfy]

The catch is that there are costs for experimentation and technologies implemented that has to contend with a price range that the market can tolerate.

[Pops]

So what evidence shows there is 15B bbs of oil left in the MS?

Hughes points out that Intek in part used production of vertical wells drilled into sandstone reservoirs (of migrated oil) then extrapolated those results out to the entire extent of sourcerock @ 16 wells/sq mile. I don't know anything but thats certainly seems wrong to me, reservoirs are called that because they trap and concentrate migrating oil.

Sec. 4.3 - http://montereyoil.org/the-report/

$this->bbcode_second_pass_quote('', 'T')wo things strongly call into question these so-called “typical” shale well decline curves presented by EIA/INTEK. The first is that the Elk Hills Field primarily produces from the Stevens Sand member of the Monterey Formation, a conventional reservoir charged with migrated oil from Monterey source rocks. Thus it is in no way “typical” of what to expect from a tight oil well, which would produce from non-migrated oil in source rock as done in other tight oil plays.

[Graeme]

The Peak Oil Crisis: The Monterrey Shale Debacle


$this->bbcode_second_pass_quote('', 'T')he 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.

[ROCKMAN]

Some potential confusion. First, this 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 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 the "study" 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.

[hvacman]

ROCK - great info. your data rings true and still has me gap-jawed. I'm thinking the data you cite is probably easily accessible through the state Division of Oil, Gas, and Geothermal Resources or other standard industry databases. And there must be 1000's of sharp PG's and PE''s who have worked their entire careers on the MF and know every twist and fold by-heart. Yet with this huge and very accessible knowledge base and a wealth of on-the-dirt experience, the EIA and their subcontractors managed to get things so completely wrong. I know it has been completely swept under the rug by now in DC... a little "oops, our bad...never mind" but if anything warranted a major Congressional hearing, this is it.

[ROCKMAN]

h - The post wasn't based upon my immense knowledge. LOL. It took a 30 second web search and a very basic understanding of petroleum geology to gleam out those few but critical facts from the one report I pulled up. Why spend time searching the data base when someone has already done it and published a report. That's where almost all the immense knowledge I post comes from. Here is where the data (and a lot more details) that I posted came from: www.postcarbon.org

But I still would have been happy to bill the gov't $500,000 for the effort. Easy money

[hvacman]

Thanks for the link! I'd heard of PCI and David Hughes' report, but didn't ever dig online to trace it down. Looks like some good evening reading.

[ROCKMAN]

H - What's really absurd about their report is that their are hundreds in not thousands of reports on the MS as well as all the reservoirs in this formation: state geologic survey, grad thesis and university research, Am Assoc of Pet geologist, Soc of Pet Engineers, etc. And that would include numerous compilations of the production histories of those reservoirs...no need to dig through the data base...been done already. It would take any moderately experienced geologist only about 100 hours to put it all together (gotta love copy/paste) including many dozens of supporting references (from which he swiped all his "hard work" from). What's really a shame is not that thy came up with such a high reserve number but that they charged the gov't who knows how much for that crap report.

And it's not like frac'ng is unheard-of in CA: in 2011 over 600 wells (about 25% of all the wells drilled that year) were frac'd. There have been many thousands of wells frac'd in the state over the years. In 2010 the state Oil and Gas Division (not known as a big friend of the oil patch) reported no evidence of ground water contamination. Amazing isn't it: thousands of wells frac'd for decades for decades and no one was concerned. Maybe it's because of all case of contamination in the Marcellus trend. BTW in those three cases in PA where the EPA claimed franc contamination...they recanted all three claims. And the PA Dept of Environmental Protection (also known to be a tad hostile to the oil patch) issued a statement a while back: "...np ground water pollution or disruption of underground sources of drinking water have been attributed to hydraulic fracturing of deep gas formations". But there's no point in trying to explain the facts to the folks in CA: they don't need facts...they've got solid opinions. LOL.

[ROCKMAN]

Pstarr - For sure. No doubt the 180 million bbls of oil consumed in CA each year comes from contented organically fed cows. LOL.

[Pops]

Like I said
$this->bbcode_second_pass_quote('', 'T')hus the interesting parts of this story are: who said there were 15.4 billion barrels of shale oil under California in the first place?

[dinopello]

$this->bbcode_second_pass_quote('ROCKMAN', ' ')And the PA Dept of Environmental Protection (also known to be a tad hostile to the oil patch) issued a statement a while back: "...np ground water pollution or disruption of underground sources of drinking water have been attributed to hydraulic fracturing of deep gas formations". But there's no point in trying to explain the facts to the folks in CA: they don't need facts...they've got solid opinions. LOL.

[ROCKMAN]

dino - Over 2 years ago I began telling folks in PA to stop worrying about the frac'ng process and pay attention to what those trucks hauling the produced frac fluids are doing with those nasties. Illegal dumping is THE potential pollution problem. But concerns over radiation are truly absurd. You can soak in a bathtub filled with 100% frac fluid and as far as radiation goes you completely safe. The radioactive fluids coming out with the frac fluid is called NORM...naturally occurring radioactive material. The more common name is dirt. The rocks they are drilling are no more radioactive than the dirt in your yard. In fact, depending on where you live your yard may be more "radioactive". Same true for a water well. There are areas in Texas and PA where the naturally occurring radioactivity in water wells is so high it's deemed safe to drink for an extended period of time. You scared are you now? LOL. And no radioactive material is pumped down with the frac fluid. Saying a fluid is radioactive is pure propaganda BS and they know it which is why they don't report the radioactivity level. There are a lo of folks in PA whose granite counter tops are much more radioactive then any frac fluid being recovered.

BTW did you know the air you're breathing right now is "radioactive"? LOL.

Also did you know that in some areas where folks were complaining about their water quality the state of PA had ruled it unfit for consumption long before the first well was frac'd in the area? Their water was naturally crap. And did you see the video of a guy in the Texas Barnett shale play flaming NG from the end of his water hose? A huge hit on YouTube. He filed a lawsuit against Ranger that frac'd a well close to him. And he wasn't lying either: the methane was really coming from his well. So Ranger asked the Texas Rail Road Commission to investigate and they found his fresh water was badly contaminated with methane...and had been naturally for decades before. He actually has his garden hose hooked up to a methane vent line he had installed long ago. The judge immediately threw the case out and the Texas Rangers had considered filing criminal fraud charges against him. But they decided to pass and let Ranger go after his lying ass. Which, uncharacteristically, Ranger did file a civil suite. Most companies just let such situations settle down and move on. But apparently the folks didn't appreciate the many thousands in legal fees they had to pay and took personal the attempt to soil their reputation. The smart money says that Ranger will almost certainly win (the folks that helped make the film pleaded out by confirming that everyone one involved new it was a fraud) and the landowner/liar will lose his ranch and everything else when he's forced to pay a $2.2 million judgment.

The real shame is that I doubt even 1% of the folks that watched the YouTube video will ever know the truth and will swear up and down to the day they die they saw NG coming out of a water well because of frac'ng. Just not a story that fits the MSM agenda. LOL

[dinopello]

$this->bbcode_second_pass_quote('ROCKMAN', 'A')nd no radioactive material is pumped down with the frac fluid.

[ROCKMAN]

dino - A few pertinent points. First, NORM is the term created by the EPA. Second, in the oil patch we have always just called it dirt. Believe it or not if I pull drill pipe out of the hole with dirt on it I have to have the water used to wash it off sent to a NORM handling facility and pay for proper disposal. Third, no one can inject any radioactive material into the ground without govt approval. Forth, everyone knows what nasty chemicals are being used in frac fluids. What the companies aren't releasing is the exact chemical formulations they ar4 using. But consider benzene: it doesn't matter how you compound it you don't want it in your drinking water. And lastly on your map what's being dumped into that river. In Texas and La it's been illegal to dump frac fluids into streams for a long time. And I think they've finally made it illegal in NY and PA.

And the fresh water that's pumped out of the ground also contains NORM. And it's which dumped into the crop fields and some of it makes it to the drainage systems. The world is full of NORM...thus the "naturally occurring" portion of the term.

[TheDude]

Ron Patterson has charted a minor uptick in recent CA production:



Just to give all sides of the story. This from his excellent blog: US Individual States Production, Bakken Area and GOM » Peak Oil BarrelPeak Oil Barrel

Now, viewed against the secular trend this doesn't look like much:



But if you look at the corresponding graph for Texas it didn't look like they'd done much more than bottom out of their own tailspin for about 4 years either, beginning in 2005 or so.

Finally I'll note that CA oil production per se doesn't seem to be in the news much at all, aside from the EIA raining on their parade.

[ROCKMAN]

According to http://www.sfgate.com/business/article/ ... 314836.php:

"But fracking didn't cause last year's production increase in California, said Tim Kustic, the state's oil and gas supervisor. Instead, the increase is the result of oil prices, which have stayed high long enough that companies have the confidence to invest in more wells. The number of wells drilled within the state rose 30 percent last year, Kustic said. And most of the work occurred at oil fields that have been tapped for many years. "The increase does not correlate to hydraulic-fracture stimulation operations," he said. "The oil fields with the greatest production increases are all older oil fields." Kustic's office, the state Division of Oil, Gas and Geothermal Resources, has not yet released its own 2012 production statistics, which will go into greater detail than the federal figures."

As pointed out in my reference above they began playing the CA shales in the Monterey Formation over 15 years ago: 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. Production from the 3 major shale plays in the Monterey Formation has remained flat in recent years despite a 3X increase in oil price. So if the folks who got the McClure Shale production up to 160,000 bold when prices were much lower couldn't boost production with the higher prices I doubt someone in VA that has never drilled a well in CA knows better.

[Graeme]

Joe Costello: Why the Oil Industry is Running Into Major Trouble

$this->bbcode_second_pass_quote('', 'O')ver the last year, some deep truths about oil and the oil industry have begun to bubble to the surface. Not necessarily that they were ever hard to see, but they were easy to obscure and maybe more importantly, without too much effort, ignore. No longer. Spread across the oil companies’ quarterly reports and the pronouncements of government agencies from the U.S. Energy Information Agency to the International Energy Agency are the hard facts that the era of cheap oil is over. It’s impacting the U.S. and global economies and forcing a fundamental rethinking and restructuring of our economic activities and thinking.


Shale is both expensive and not nearly as plentiful as been propagated. The great shale revolution is greatly distorted by mountains of Wall Street generated debt, it might most accurately be described as “subprime” energy. Take for example the greatest shale company, Chesapeake, loaded with debt that’s created unprofitable and unsustainable prices. They’ve found it hard to make much profit in the last couple years – for an oil and gas company, that truly is a revolution.

In order to survive with over 13 billion dollars in debt, over the last couple years, Chesapeake shed billions of dollars in assets. Just last week, the prestigious oil industry publication, “The Oil and Gas Journal” announced Chesapeake’s latest divestiture, a rather unintentionally amusing and revealing report on the business and “accounting” of shale:

Chesapeake Energy Corp., Oklahoma City, has decided to proceed with spinning off its oil field services business, currently conducted through its wholly owned subsidiary Chesapeake Oilfield Operating LLC (COO), almost 3 months after reporting that a spinoff or outright sale of the business was under consideration. COO will also convert into a corporation and change its name to Seventy Seven Energy Inc.

Upon completion of the spinoff and an expected recapitalization, $1.1 billion of consolidated COO debt will be eliminated from Chesapeake’s balance sheet and Chesapeake will receive a $400 million dividend that will be applied to pay off intercompany debt from the oil field services business, the company said.

But, it’s not just the industry leader having trouble profiting from shale, so to the massive oil service company BHP Billiton, who in 2012 wrote down almost $3 billion in shale assets and the old oil companies such as Shell, which this year wrote down $3 billion of their own shale plays. Bloomberg announced recently that “shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent.” The entire shale industry has $162 billion in debt and a massive “shakeout” is inevitable.

Importantly, it’s not only no one can make money on shale, but there’s not nearly as much of it as Wall Street proclaimed. Recently, the Energy Information Agency stated the Monterrey Shale in California, which was being promoted to account for two-thirds of developable shale oil in the US, only contained 4% of previous estimates, a 96% drop! Thus, there’s only one-third as much shale oil as been touted in the financial press, that too is a highly suspect number.