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Monterey Shale Dreams Clash With Public Policy Drives

Despite greatly reduced federal predictions for recoverable resources (see Shale DailyMay 21), California's Monterey Shale will eventually live up to all of its previous hype unless public policy stops its full development, an official with the Western States Petroleum Association (WSPA) told an industry gathering in Bakersfield on Tuesday.

One of the biggest potential hurdles among a new well-organized and funded anti-oil effort at the grassroots level is a ballot initiative (Measure P) in Santa Barbara County that would effectively shut down any new oil or natural gas development in the county (see Shale DailyAug. 19), said Tupper Hull, WSPA vice president for communications, at the Oil and Gas Awards’ West Coast Energy Summit.

Calling the state's well stimulation law (SB 4) "a path forward," Hull urged more industry participation in the feedback to the state on its latest draft of the final rules governing hydraulic fracturing (fracking) and other oil/gas drilling activities (see Shale DailyOct. 10). While SB 4 has put a stop of moves to ban or suspend fracking, it has not put an end to the anti-oil groups who are now pushing various measures at the local level.

"There are now 22 different initiatives, ordinances and proposals in play locally," Hull said. "They are all different, but they all amount to de facto bans of production." Measure P is the worst, he said, because it is "so broadly written that it essentially would shut down production in Santa Barbara where there is a lot of oil produced by our members."

Both oil/gas associations -- WSPA and the California Independent Petroleum Association (CIPA) -- have well-funded, major campaigns in progress to defeat the measure, said Hull, calling it a "huge" issue as is a measure in San Benito County where there are only 26 producing wells currently. There is also a measure in Mendocino County, which has virtually no oil production north of San Francisco in a portion of the wine country.

Hull warned that for California's oil/gas industry this is a new battleground with a "different type of advocacy program" with a total local flavor and focus.

Billionaire climate change activist Tom Steyer has given up on a statewide ban on fracking, but he is shifting to taxes on the industry, and that is part of where the focus will be next year, according to Hull, who outlined attacks geared to imposing a severance tax on oil, and an added hit at the gasoline pump expected next year from the expansion of the state climate change-driven cap-and-trade market for greenhouse gas (GHG) emissions (see Daily GPIOct. 20).

"California is way, way out in front nationally on climate change," Hull contends, citing the upcoming addition of mobile GHG emissions sources from gasoline, diesel, propane, and natural gas to the cap-trade market that now just includes stationary sources: power plants, refineries and large industrial complexes.

"The state would have you believe this is just a natural normal, modest change to the cap-and-trade program," Hull said. "With all of its experience and respect for cap-and-trade, Europe has never attempted to regulate transportation fuels in the program, and no other jurisdiction in the world has placed transportation fuels at the retail level into cap-trade."

Why? Because what will become abundantly clear next year is that this [cap-trade] program in California that the public so far has demonstrated a high level of support for has been largely free. But on Jan. 1, there is going to be a bill submitted to the drivers of California where they are going to be asked to contribute to this program."

WSPA estimates the cost will range from an added 12 to 70 cents/gallon of gasoline. That comes from an analysis done by the California Air Resources Board (CARB), which runs the cap-and-trade program, and the state's overall implementation of its 2006 climate change law (AB 32). "The reality is that nobody knows what those added costs are going to be," Hull said. "Refiners and marketers are going to have to purchase allowances for the emissions generated by their products, and no one knows what the auction prices for allowances will be at that time."

Currently the cap-and-trade allowances are selling for about $12/ton, which translates into roughly an added 12 cents/gallon of gasoline, said Hull who added that financial players with no GHG compliance obligation, such as Goldman Sachs and other large Wall Street investment banks, could decide to buy up a large chunk of the allowances and sit on them until the prices rise.

"That's a huge issue for us and we're before CARB [urging a postponement of the expanded market], and we have a very large campaign to alert consumers with our allies at the Oil Marketers Association, and we've helped fund another program at a consumer-oriented group. There is a very large potential for consumer backlash," Hull said.

The chief CARB spokesperson told NGI's Shale Daily on Wednesday that the state agency doesn't see any reason the cap-and-trade program will cause a "sharp or appreciable" increase in retail gasoline prices.

"We don't estimate or project prices at the pump because the market is simply too volatile," CARB's spokesperson said. "We don't see a reason for prices to rise appreciably in January -- at least not due to any AB 32 programs. Any price increase would come because oil companies and suppliers decide to raise prices, and we have no control over that."

While it is still unclear what all of these potential public policy barriers to the Monterey Shale prospects will mean, operators who spoke at the energy summit were generally optimistic that California's shale play, which is very different from others around the nation, will eventually be developed. Ramon Elias, vice president for reservoir engineering at Santa Maria Energy, said in the fields within the Monterey that have been drilled already the average recovery has been 10%, so he sees this as a sign of "tremendous potential" just in the areas already drilled.

"There is a tremendous potential remaining in existing fields that we aren't going after right now," Elias said. "In addition, there is all the potential that exists in the more traditional shale-like Monterey formation. I don't think we [the industry] has put together the right combination of things to make it a reality. We're still trying to figure that out right now."

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