Betting on the Monterey Shale: Occidental Petroleum Corporation (OXY), Plains Exploration & Production Company (PXP)

Until very recently, the state of California did not even regulate fracking. Venoco, an energy company exploring the Monterey formation and a major player in the region based on acreage owned, drilled two wells utilizing the hydraulic fracturing technique in the summer of 2012 without even alerting state regulators. To the dismay of local residents and environmentalists, when state energy officials discovered the wells, they were legally prohibited from taking any action. Although California has passed regulations since this incident, environmentalists criticized the new laws for lacking sufficiently strong environmental safeguards and enforcement mechanisms. Thus, infrastructure and regulation need to be built out further before major sustainable development can occur in the Monterey region.

Golden State Oil Renaissance

In addition to government regulation, geology may be another impediment. According to Don Clark of the American Association of Petroleum Geologists, “What people are looking for is, ‘Is there a secret to opening this thing up?’ To my knowledge, nobody has really done that yet.” Clarke says this is related to the highly variable stratigraphy and composition of the formation in contrast to the fairly uniform composition of Bakken and Eagle Ford formations.

California is already the third-largest largest oil producing state in the U.S., thanks in part to the natural “fracking” caused by periodic earthquakes breaking up shale formations and releasing oil and gas. The state boasts 10 billion barrels of conventional reserves (although some can only be extracted through offshore drilling which is heavily restricted) and now may be home to an additional 15.5 billion barrels of shale oil—in addition to large quantities of natural gas.

Nevertheless, there is reason to temper undue optimism: Hull expresses the difficulties of extracting these reserves: “You have to jump through a lot of hoops to produce in [California].” Regulation aside, the economic benefits of development for both California and the United States as a whole would be substantial. And the necessary extraction technology and high price level needed to make extraction economical are there. It is likely just a matter of time (perhaps a long time) before large-scale development is undertaken; the potential reserves of the formation are simply too large and the potential economic impact too substantial for the oil to be left in the ground. To read more on this subject, continue reading “10 Ways to Invest in Fracking.”

Disclosure: I have no positions in any of the stocks mentioned above