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California could have place in the shale revolution

  • Article by: The Economist
  • February 17, 2013 - 2:30 PM

 

Shale exploitation in North Dakota has lifted incomes and brought unemployment down to 3.2 percent of the workforce, the lowest level in the country.

Californians are rarely found looking longingly toward the Midwest, but the revelation that their state, with unemployment at 9.8 percent and America’s highest poverty rate, may be sitting on the largest deposit of shale oil in the continental United States has led some to wonder if their salvation lies 10,000 feet beneath them.

California has been an oil state since 1865. Thanks largely to reserves that still can be tapped by conventional means, it remains the third-largest producer in the country. But output has been declining by 2 percent to 3 percent a year, according to the state’s Energy Commission.

In 2011, however, the federal Energy Information Administration declared that the Monterey shale formation, which spans 1,750 square miles in southern and central California, holds 15.42 billion barrels of recoverable oil, 64 percent of the total estimated to be in the 48 contiguous states.

That should be an attractive prospect for a state with a history of unemployment and fiscal woe. Environmental scruples have long been as characteristic of California as budgetary mismanagement, though, and a battle is brewing.

Opponents of hydraulic fracturing, or “fracking,” the technique often used to extract oil and gas from shale rock in “unconventional” drilling, say that regulations proposed by the state in December do not adequately protect against groundwater contamination or air pollution. Some mutter about earthquakes. Such concerns find receptive ears in a seismically active state with a large farm sector.

The oilmen reply that fracking has been conducted in California for years without trouble. Moreover, they add, surely the environmentally concerned should want as much Californian oil as possible produced under the state’s tight regulations, rather than imported from places with looser regimes.

The great divide

Some see an emerging split between inland counties, which tend to have higher unemployment and more conservative politics, and the conservationists along the coast. The row will rumble on, with revised rules expected later this year.

For some the complex geology of the Monterey shale opens up alternative means of extraction. Santa Maria Energy, a small producer in Santa Barbara County, about 150 miles northwest of Los Angeles, extracts 200 barrels of crude a day from the shale at depths of around 2,500 feet by exploiting natural fractures in the rock. Although the firm has no plans to begin fracking, David Pratt, its president, likes to say that the Monterey is California’s way out of the “fiscal toilet.”

Some of the “Saudi America” talk is overblown. Even if California does begin exploiting the Monterey aggressively, an economic miracle is unlikely.

California’s population is more than 50 times bigger than North Dakota’s and, as Kevin Klowden of the Milken Institute, a think tank, points out, the opportunity costs of giving over land to drilling may be far higher in California than in some other states.

No producer yet has found a way to begin large-scale extraction from the Monterey. Despite the geological and regulatory uncertainties, however, several firms have placed large bets on its future.

 

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