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Why California Oil Country Lags in US Shale Boom

Thursday, 30 May 2013 | 12:52 PM ET
Oil workers on a hydrofracking site.
Getty Images
Oil workers on a hydrofracking site.

California, historically a major force in alternative energy, is also home to one of the best-kept secrets of the U.S. fossil fuel renaissance—the Monterey shale, a formation that houses the country's largest supply of proven reserves.

The word "prolific" is often used to describe Monterey's shale bounty, which according to Energy Information Agency estimates holds at least three times the reserves contained within the Bakken and Eagle Ford formations—currently two of the hottest regions in the U.S. shale boom.

Yet despite sitting atop what the U.S. Geological Survey estimates is about 15 billion barrels of oil, the Golden State has yet to tap Monterey with the same fervor that North Dakota has developed Bakken, or in the way Pennsylvania is moving rapidly to explore the Marcellus shale.

A patchwork of byzantine regulations, environmental concerns and geological factors have stunted development of a region in the heart of the state's San Joaquin Valley that is ripe for exploration.

(Read More: Marcellus Turns Pennsylvania Into 'Saudi Arabia' of Natgas)

Before Investors Begin Gushing Over Oil...
A famous oil trader is warning the shale revolution will only "temporarily" boost oil production while prices will remain high. David Greenberg, Greenberg Capital president and founder, disagrees and explains why he believes the United States will "get this right" and find cheaper ways to extract the oil.

"The economics of producing oil in California are tough," said Tupper Hull, a spokesman for the Western States Petroleum Association, a public policy advocacy group. He said unlike Bakken or Eagle Ford, the Monterey terrain lacks uniformity and consistency conducive to natural gas and oil production.

"It's fair to say there's a fair amount of exploration taking place, and companies are trying to figure out how to cost-effectively [drill]. With the challenges of the geology, they are still in the process of working those issues out," Hull added.

While a handful of midsize oil companies like Occidental Petroleum and Venoco are players in Monterey, the region thus far lacks the flood of investment and lavish attention of the largest U.S. oil companies, all of whom have ramped up production in other areas of the country. Although California has a history of natural resource exploration, some say the shale renaissance has caught the largest U.S. state flatfooted.

"California is late in the shale game," said Anthony Ingraffea, an engineering professor at Cornell University. Moves to exploit shale "started in Texas nearly 20 years ago, and in Pennsylvania about six to seven years ago." With no fewer than 10 separate pieces of shale-related legislation working their way through the state's legislature, "California is rushing to figure out what to do," he added.

Observers, however, see Monterey as a dicier proposition than its counterparts. Barriers to its full-scale development include its being situated near an earthquake prone and geologically sensitive region, ravenous U.S. energy needs that outstrip Monterey's estimated reserves and regulatory uncertainty.

"The geology in Monterey is significantly more variable than in the other major plays," Frank Wolak, an economics professor and expert on sustainable development at Stanford University, said in an e-mail to CNBC. He also cited environmental concerns over hydraulic fracturing that are "not based on experience or scientific evidence, but emotion."

For most environmental lobbyists, BP's 2010 disaster in the Gulf of Mexico still looms large, and is frequently cited as a major argument against domestic oil production. For its part, California is debating a fracking moratorium, among other measures that could put new roadblocks on Monterey's road to becoming the next Bakken.

"I agree that fracking done irresponsibly has the potential for environmental harm, but I'm skeptical that it will be done irresponsibly in California, particularly by the majors," Wolak said. Given California's stringent approach to environmental regulation, "they understand that if someone screws up, the industry is done in the state," he added.

Amid the much ballyhooed expectations of a U.S. fossil fuel resurgence, Ingraffea is skeptical about California's hurried regulation efforts—which he called "the height of irrationality"—as well as Monterey's ability to be a linchpin in the country's energy independence story.

The formation's proven reserves are "a drop in the bucket for what the U.S. would need," he said. As excitement grows over regions like Bakken, Marcellus and Monterey, "there's just too much hype and too little understanding" of the issues, he added.

_ By CNBC's Javier David

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