But what if the boom is just a bubble?
By J. David Hughes
May 22, 2014
For nearly three years, the U.S. Energy Information Administration (EIA) and the nation’s oil and gas industry have trumpeted vast unconventional oil and gas wealth across the country. California was to be the crown jewel thanks to tight oil (shale oil), an ocean of which was merely waiting to be unlocked by enhanced oil recovery techniques such as hydraulic fracturing (“fracking”), matrix acidizing, and other forms of well stimulation.
The excitement around California was based on a widely cited 2011 report from the EIA which estimated that 15.4 billion barrels of tight oil—64 percent of the nation’s total—were contained within the state’s Monterey formation. A University of Southern California study followed, projecting that development of the Monterey would produce millions of new jobs and billions in new tax revenue. The oil industry began an intense campaign fighting calls to tax oil extraction and ban fracking.
We now know this excitement was all for naught. In a single line in an appendix to its yearly Annual Energy Outlook, the EIA has quietly reduced its Monterey shale oil estimate from an earlier downgrade of 13.7 billion barrels to a measly 0.6 billion barrels—barely 4 percent of the original estimate. When coupled with the EIA’s concurrent downgrade of shale gas in the Marcellus formation, it is clear that what counts as “technically recoverable resources” is actually far from certain. We must ask how reliable the federal government’s estimates of shale gas and tight oil really are.
Furthermore: How did the EIA make such a big mistake?
In the hoopla surrounding the original Monterey Shale estimate, most everyone failed to recognize that the EIA’s estimate was little more than a back-of-the-envelope calculation. It essentially applied the best production scenarios of the geologically straightforward Bakken Shale (America’s second largest producer of tight oil) to the much more geologically complex Monterey. Its basic assumptions came not from reliable third-party information but from oil industry investor presentations—according to the report’s own author. The original shaky case for the Monterey Shale bonanza was available for anyone to see on the EIA’s website, in under 500 words in its July 2011 Review of Emerging Resources report.
While the Monterey’s supposed riches went uncritically reported by the media and exuberantly promoted by the oil industry, several independent analysts viewed these too-good-to-be-true numbers with suspicion, myself included. In 2013—with the support of Post Carbon Institute (PCI) and Physicians, Scientists and Engineers for Healthy Energy (PSE)—I completed the first publicly available empirical analysis of actual Monterey production data from shales within the formation and their geological characteristics.
The resulting report, Drilling California: A Reality Check on the Monterey Shale, found that the EIA’s tight oil resource estimate for the Monterey was wildly overoptimistic, and that talk of a “bonanza” was illusory at best. Over the following months, news media and industry references to 15.4 billion barrels of Monterey shale dwindled. That skepticism has now been confirmed with the EIA’s drastically reduced estimate of 0.6 billion barrels.
California will produce oil and gas for many years to come from a variety of sources. But based on the new estimate, it is pure fantasy to think windfall revenues from the Monterey Shale can be counted on to solve energy and fiscal problems at either the state or federal level. To put a finer point on this, the new estimate would only meet the oil consumption of the United States for 32 days.
Although tight oil production has increased U.S. oil production significantly and is likely to continue to increase it in the short term, the U.S. remains the second largest importer of crude oil in the world. High well-decline and field-decline rates require a continual drilling “treadmill” to maintain—let alone increase—production in shale plays, with high collateral environmental impacts. Available data now point to the two largest U.S. shale oil plays (Bakken of North Dakota and Eagle Ford of Texas) likely peaking in the 2016-2017 timeframe and beginning an inexorable decline. Although other shale oil plays are being developed, none appear to match the productivity of these plays. Thus the medium- and long-term supply outlook from U.S. shale oil plays is problematic, at best.
California’s legislators, businesses, and communities have been led on a costly wild goose chase. Neither California nor the rest of the country can afford to lose more time or money on boondoggles like the Monterey Shale. Tight oil production in the U.S. should be viewed for what it is: a short-term reprieve from the longer-term vulnerability of reliance on finite fossil fuel resources. A long term vision is required to move towards true energy sustainability.
J. David Hughes is a geoscientist who has studied the energy resources of Canada for nearly four decades, including 32 years with the Geological Survey of Canada as a scientist and research manager. He is a Fellow of Post Carbon Institute and on the Board of Physicians, Scientists & Engineers for Healthy Energy (PSE).