How does a country cope when nearly 13 billion barrels of oil reserves vanish overnight?
A soon to be released government forecast says that California's Monterey Shale deposit will yield only 4 percent of what was originally hoped. The downgrade immediately raised questions about the sustainability of the still nascent U.S. energy boom, which has sent domestic oil and gas production to its highest level in nearly 40 years.
Because the Bakken and Eagle Ford shale plays currently generate nearly 70 percent of U.S. unconventional oil and gas, experts say the downgrade to Monterey does little to alter the near-term trajectory of the energy renaissance. However, they added it does bring into focus two major red flags: A well depletion factor that ramps up the urgency of finding new shale plays, and the need to upgrade new technology for that same purpose.
Early estimates on recoverable Monterey shale oil by the Energy Information Administration—the data arm of the U.S. Department of Energy—which in 2011 topped 15 billion barrels, were "vastly overstated," said Dave Hughes, a Canadian geologist who has studied California's shale play extensively, in an interview.
Geologists were more surprised by the timing of the EIA's writedown than its actual findings, expected to be made official next month. California's shale deposit had been considered the U.S.'s most prolific energy reserve: the agency's prior estimate of 13.7 billion barrels comprised about two-thirds of America's shale bounty.
However, analysts say its terrain, as well as California's strict environmental regulation, always meant full scale drilling would be an uphill climb. Oil giant Chevron, at a 2013 shareholder meeting, bemoaned the lack of profit derived from its Monterey operations. Meanwhile, Venoco—once one of the biggest drillers in the shale formation—exited most of its Monterey acreage years ago in order to reduce debt and go private, a spokesman for the company told CNBC in an email.
"The Monterey's geology is not an analog for the Bakken or Eagle Ford," said Hughes. "Those produce 69 percent of all U.S. [shale] oil. The great enthusiasm for [shale drilling] comes largely from those regions, which are doing famously," he said, adding that the EIA was "correcting to reality."
Yet the practical impact of the EIA's downgrade puts a spotlight on an element of the shale boom that often goes unremarked by fracking advocates. Shale wells are prone to rapid depletion rates—spots in North Dakota's Bakken lose 85 percent of their capacity within a few years.
"At some point we're going to hit a wall," Hughes said. "Monterey was a huge field wiped out with a stroke of a pen: That's like two Bakkens off the table in one fell swoop."
If the U.S. boom is to be sustained beyond 2020, new shale plays will need to be discovered within the next few years, he added.
"You're going to have a whole slew of poorly producing wells in a decade or so," Hughes said. "The good news is that supply grows short term, but the bad news is that we may have a very serious supply issue 10-15 years out."
Tech may help make oil recoverable
At a minimum, the EIA's revision of Monterey's reserves means that at least a few economists will need to rethink some of the rosy job creation estimates associated with the shale boom. A widely publicized University of Southern California study predicted a windfall of nearly 3 million jobs and billions in tax revenues if the Golden State successfully tapped its shale bounty.
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Still, other observers point to the wide swings in recoverable reserve forecasts. Early in the U.S. boom, most estimates were fairly conservative, which changed as rapid advances in hydraulic fracturing technology made it easier to pull oil and gas from the ground.
"Forecasts need to be continually refined, so I don't think this is a death knell for the boom," said Stephen Trammel, director of unconventional energy at research firm IHS. "We now know the Monterey estimates were optimistic," but other U.S. natural gas and oil drilling areas are outperforming despite early lowball estimates, he said.
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"The same technologies we've seen developed ... have created a revolution in oil supplies in the U.S.," Trammel added. "Those same minds will keep working on Monterey to make it pay ... [until the] mystery wrapped in an enigma gets understood enough to make it pay."
Fracking has fed a renaissance in domestic manufacturing, experts say, helping the U.S. drill and export the most oil it has in at least three decades. Investment and technological innovation could go a long way toward turning recoverable reserves into actual barrels of black gold.
"Ten or 15 years ago, nobody would have projected Bakken or Eagle Ford to produce 1 million barrels a day. These technologies weren't in place 10 years ago. Now they clearly are," said Erik Milito, director of upstream operations at the American Petroleum Institute. "We're only about five or six years into this, and companies are finding ways to advance technologies ... and figure out which are worth the trouble."
Tupper Hall, vice president of the Western States Petroleum Association, said he was not surprised by the EIA downgrade, but insisted all was not lost.
Although he said fracking opponents were "gleeful" over the Monterey news, "it doesn't mean the oil isn't there and the technology will not evolve to the point where it can be produced in large volumes," he said.
—By CNBC's Javier E. David.
