As of 2011, the company planned to spend $6.3 billion over the next four years developing acreage, but not necessarily on shale plays. In addition to its massive land interests, Occidental boasts the advantages of its large size and knowledge of how to operate in a state like California, with its popular green initiatives and unique regulatory environment.
Especially in light of the political controversies surrounding fracking, OXY’s substantial monetary, economic, and political clout may prove a unique advantage over competitors in the region. However, the company is taking a far less proactive approach to penetrating the shale formation than Venoco, seemingly content to build upon more reliable conventional reserves.
A number of other smaller players also have stakes in the region. These include Zodiac, Gasco, Plains Exploration, Berry Petroleum, and National Fuel and Gas. Although Occidental is the major presence in the region based on acreage, the company’s stake is relatively small compared to its total enterprise value, so the positive impact of development in the region will have a more modest effect on its share price than it would on that of some of the smaller operators.
The companies with the most leverage from the Monterey play are Gasco, Zodiac and Venoco, for which acres/enterprise value is above 100. Because the last two are private companies, individual investors with an eye on profiting from development in the Monterey should focus their attentions on Gasco or, for the more risk averse, Occidental.
A Forthcoming Political Battle
The Obama administration occupies a policy space somewhere between benign apathy and tentative support of the development of American shale oil and gas deposits. With the fairly straightforward trade-off between hydraulic fracturing’s potential negative impact on the environment and the positive impact of drilling on both national security and economic growth, the latter choice seems much more politically palatable given the Obama administration’s current policy priorities and the still relatively weak employment growth.
Nevertheless, California has a reputation as a vigilant guardian of the environment and is often portrayed as a state at the forefront of combating global warming. Despite compelling reasons for developing the Monterey shale, oil and gas companies should expect a struggle with environmentalist groups and should expect to be subjected to more stringent extraction regulations than in North Dakota and Texas.
The state’s cap-and-trade program and related climate change legislation (although not focused on hydraulic fracturing) will also impact oil and gas companies’ cost basis for developing Monterey shale assets. Tupper Hull of the Western States Petroleum Association also expressed concerns that although the shale formation contained major reserves, the state of California also boasts about 10 billion barrels of oil that can be recovered by conventional means. It is questionable whether the state will be amenable to fracking in shale regions as long as conventional reserves are still available for extraction in large quantities.
There are additional concerns to address before development of the scale appropriate for the quantity of estimated reserves can occur. The area is relatively more populous than major developments in Texas and North Dakota, compounding concerns about water contamination, further environmental degradation, and pollution related to building out the supportive infrastructure needed to transport extracted oil and gas to existing or newly built refineries and then to end users. Labor is also a concern for future development. In North Dakota, wages have skyrocketed as companies try to attract laborers to the relatively desolate plains of the Dakotas and the similarly desolate lifestyle of an unskilled rig worker.
