Monterey Shale – More potential challenges ahead

One of the biggest potential tight oil fields in the United States lies in California, but the future of the Monterey Shale appears likely to gain a higher profile in the months ahead as opposition groups mobilize to block hydraulic fracturing in one of the nation's environmentally conscious states. The Monterey is relatively young, 17 million years, compared with other tight oil-play formations and is in the peak oil-generating window as a result. This lithologically and tectonically complex formation, found at depths between 6,000 ft and 14,000 ft and up to 3,000 ft thick in places, presents many geological and technical challenges to establishing commercial production. Now above ground issues may present additional challenges.

It is estimated almost 50 billion barrels of oil produced in California are sourced to the Monterey. According to the Energy Information Agency of the US Department of Energy, the Monterey may have as much as 15.4 billion barrels of technically recoverable hydrocarbons from the reservoirs in the Salinas, Santa Maria, San Joaquin, Ventura, and Los Angeles basins. Those numbers make the Monterey a target for oil and gas companies which have been trying to break the code on the difficult to produce formation for several years.

While California Gov. Jerry Brown (D) has been closely allied with the environmental community on a wide range of energy and environmental issues, his administration is being cast as the villain in two lawsuits recently filed by groups contending that the California Department of Conservation of Oil, Gas and Geothermal Resources (DOGGR) has improperly allowed "fracking" in the Monterey Shale without proper safeguards. In fact, the state has pushed forward with its development of hydraulic fracturing rules, publishing a "discussion draft" in December. The draft rules for discussion provide tight controls on the completion technique, some of the more stringent rules in the US.

Brown appears to face much the same political problem now plaguing New York Gov. Andrew Cuomo, whose otherwise strong green credentials are being threatened by controversy over the state's rich Marcellus Shale gas reserves. Cuomo has repeatedly extended the state's four-year moratorium on hydraulic fracturing as he tries to meet the concerns of opposition groups and the desire of depressed New York communities eager to capture the same sort of economic benefits from Marcellus development already seen in towns in neighboring Pennsylvania.

California differs from New York in that hydraulic fracturing has been allowed under its existing oil and gas rules, but the lawsuits are meant to stop or delay Monterey development. The suit claims DOGGR has violated state laws through improper permitting practices that fail to adequately protect groundwater.

Led by the Center for Biological Diversity (CBD), the opponents in January filed a lawsuit saying hydraulic fracturing ought to be regulated under the state's underground injection control (UIC) program-even though federal law specifically exempts the technique from UIC controls.

The lawsuit contends that the state can enforce UIC controls because the US Environmental Protection Agency has given DOGGR "primacy" to enforce the federal Safe Drinking Water Act in California. The group note that under federal law, states can only be granted primacy if their rules are at least as protective of underground sources of drinking water as federal standards, but that federal law does not bar states from setting standards more restrictive than federal rules.

CBD and other groups filed another lawsuit in October alleging the state has violated the California Environmental Quality Act (CEQA) by allowing drillers to use hydraulic fracturing to stimulate old wells without conducting studies of the practice's impacts on health and the environment.

Before legally allowing more hydraulic fracturing in the state, the plantiffs say DOGGR must study the potential risks to groundwater supplies. In addition, the groups say the agency must begin keeping track of which wells are stimulated by fracturing so environmental impacts can be documented.

Among other safeguards, the new DOGGR draft rules would require drillers to wait at least 48 hours for cement jobs to set before continuing well construction. They also would require stringent pressure testing of wells above expected stress levels to ensure casing and cement integrity. In addition, pumps and all other downstream equipment from the well must also be pressure tested above expectations to prevent loss of well control.

For groundwater protection, DOGGR's proposed rules require drillers to simulate the projected extent of their fractures, and evaluate whether any known geologic faults or other wells might act as conduits for hydraulic fracturing fluid to contaminate drinking or irrigation water supplies.

After fracturing and well completion, operators would be required by the rules to monitor the pressure of each well's tubing and casing on a daily basis for one month. After that, the proposed regulations require operators to monitor the pressures on a monthly basis for five years.

Rock Zierman, chief executive officer of the California Independent Petroleum Association, expressed concerns that the requirement to monitor well pressure for years after completion might be costly for operators while not improving public safety.

There is a certain irony in these attempts to stop hydraulic fracturing. In a departure from other tight oil plays like the Bakken where horizontal drilling and multi-stage hydraulic fracturing have unlocked new oil production, the Monterey play has historically been characterized by vertical oil wells. Horizontal drilling reached maximum levels in the early 2000s but has now reverted back to vertical drilling because of better economics with the less costly vertical wells. In another departure from other tight oil plays, hydraulic fracturing does not boost peak production sufficiently to justify its cost. Operators, especially Occidental Petroluem Co. (OXY), prefer large-volume hydrofluoric acid jobs to multistage fracturing. The acid jobs work better with Monterey rock types and also reduce well completion costs.

It will be interesting to watch how the new rules proposed by the DOGGR, if fully implemented, will alleviate environmental concerns to the degree the lawsuits will be dropped or if the litigation will be moved forward anyway to slow down or stop fossil fuel developments in California.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.