In Search of the Next Bakken Shale Oil Field

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Fracking technology has reshaped the U.S. energy industry by opening up vast shale oil and gas fields that were previously uneconomical to exploit.

Now, following half a decade of rapid growth, so-called unconventional oil accounts for about 2 million barrels per day of production in 2012.

So much oil is being produced domestically, in fact, that six companies including the world's largest oil trader Vitol and Royal Dutch Shell PLC (NYSE ADR: RDS.A) have applied to the U.S. government for energy export licenses. If approved, it will be the first such exports to occur in decades.

It is expected that, by 2020, unconventional oil production will be at the 4.5 million barrel per day level.

This is a familiar story to energy investors. The names of the best known shale oil fields such as Bakken, Eagle Ford and Utica are very recognizable to these investors.

But some other names are less well-known and are worth investigating.

Unknown Shale Oil Fields

Some of the lesser-known shale oil fields that hold a lot of potential include the Niobara Shale in Colorado, the Tuscaloosa Marine Shale in Louisiana and Mississippi, the Cana Woodward Shale in Oklahoma, the Mowry and Baxter Shales in Wyoming, and the Monterey Shale in California.

Jim Mulva, the former CEO of ConocoPhillips (NYSE: COP), said earlier this year for energy investors to "look for all of these [fields] to become even more familiar names going forward." Since development of these fields is just beginning, he said "At this early stage, it's certainly very exciting."

And he's right.

Even Alaska, already a vast oil producer, has large shale oil deposits ready to be exploited. Its North Slope shale formation may hold as much as 2 billion barrels of oil. That would be the second-largest U.S. deposit of unconventional crude after the Bakken in North Dakota and larger than the Eagle Ford in Texas.

But, of course, harsh conditions there will make it very difficult to access these resources.

California, Here We Drill?

Another area with vast shale oil potential is California's Monterey Shale. It is located underneath much of southern California, terminating near Santa Barbara.

The very thick and relatively shallow resource is huge. According to the U.S. Energy Information Agency, it has 15.4 billion barrels of recoverable crude oil. That is four times as much as the Bakken formation in North Dakota!

The situation in California is unique in many ways.

For one, unlike elsewhere, much of the valuable acreage there is held by oil majors. Two companies – Occidental Petroleum Corp. (NYSE: OXY) and Chevron Corp. (NYSE: CVX) – hold a lot of the exploration rights in central California, overlying the Monterey field.

Knowing the potential of Monterey, these firms have little incentive to give up exploration rights even though little drilling is now occurring. This, in effect, slows development as Monterey does not have a vast number of small, independent oil companies drilling there. Small, independent drillers opened up much of the existing shale oil fields across the country.

Why aren't Occidental and Chevron drilling more in the Monterey? There are several reasons.

One is that majors tend to get more easily discouraged than junior exploration companies. A few early wells have not produced oil at the high expected rates.

There are lots of natural faults in the rocks, which makes it tougher to control the flow of oil through the faults that the drillers create. Also, there seems to be less pressure forcing the oil to the surface as in other formations and the oil seems to be thicker, too.

This means its costs more to get the oil out. Oil companies like Occidental and Chevron are waiting for higher oil prices (probably $15-$20 more) in order to tap this somewhat difficult resource.

Another reason for the lack of development so far, and another reason behind the need for higher prices, is that California is California. Due to all the state's strict environmental regulations, the permitting process for drilling is laboriously slow.

But it is likely activity will pick up in the Monterey in the months ahead. It has one big plus in its favor in that it is an important resource, one that will likely not be ignored for much longer.

Even if the state government in California slows development of the Monterey field, other fields in friendlier jurisdictions like Louisiana and Wyoming will allow further exploration and development of their shale oil fields. This means that over the next few years names like Tuscaloosa and Niobara will become as familiar to energy investors as Bakken.

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  1. bakkendispatch | November 30, 2012

    Interesting article, but I'm not sure the Monterey shale in California is going to measure up to the Bakken. From what I've heard, it's much tougher to get the oil out of the shale than it is in North Dakota.

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