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On September 11, 2013, the California Assembly passed a law attempting to regulate fracing in the state’s Monterey shale.

The bill, listed as Senate Bill 4 (SB 4), will go into effect on January 1, 2015. SB 4 will require companies to apply for a fracing permit, disclose what chemicals and well stimulation fluids they were using, and notify local residents and water authorities of their activities, as well as requiring groundwater monitoring and a plan to dispose of wastewater.

Governor Jerry Brown is expected to sign the bill as soon as September 16, 2013. Until January 2015, further studies will be conducted on fracing and its environmental effects. Click here to read the bill.

The bill has been met with harsh criticism from both ends of the spectrum. Republicans opposing the bill argued that the Legislature should not try to supplant the department’s authority to release regulations, which they called sufficient. They also claimed the measure would limit economic development, particularly in the energy-rich Central Valley.

Rock Zierman, chief executive of the California Independent Petroleum Association, said the bill contains the most comprehensive set of fracing regulations of any state. Still, he said, the industry intends to comply, and energy groups had no objection to many of the bill’s provisions, including the chemical disclosure requirements. Environmental groups, on the other hand, claim the bill doesn’t go far enough.

Monterey’s Potential Economic Boost130110071032-california-shale-map-monster

The Monterey Shale in California is believed to hold more than 400 billion BOE, according to IHS Cambridge Energy Research Associates. The U.S. Energy Information Agency (EIA) estimates more than 15 billion BOE can be recovered from the Monterey using today’s technology.

Development of the oil-shale deposits could provide huge returns for the state. Studies by the EIA estimated the state’s economic activity would increase by as much as 14.3%, and add as many as 500,000 new jobs by 2015. In addition, the state could collect an estimated $4.5 billion in oil-related tax revenue by 2015. In the year 2020, projections expect the job expansion to reach 2.5 million and tax revenue to reach $24.6 billion. California’s 8.7% unemployment rate is the seventh highest in the country. The state is believed to be more than $800 billion in debt.

The development of shales, such as the Bakken and Marcellus, has propelled the oil and gas industry while the rest of the economy treads water. The oil and gas industry has a proven track record of boosting economies. It has created more than 162,000 jobs—a 40% increase—from the start of 2007 through yearend 2012, according to a January 2013 report from the U.S. Department of Labor’s Bureau of Labor Statistics. Over the same period, the increase of total U.S. private sector employment amounted to more than one million jobs, or about a 1% rise. Oil &Gas 360 elaborated on the energy industry’s growth despite the country’s struggling economy in a recent feature article.

The emergence of the Bakken shale in North Dakota has directly affected the state’s economy. In 2012, North Dakota reported the highest annual increase in real per capita GDP of any state in the country for the second consecutive year. In 2012, real per capita GDP in North Dakota increased by nearly 11% from the previous year, according to statistics released June 6, 2013 by the US Bureau of Economic Analysis (BEA). This is considerably higher than the national growth rate of less than 2% and is more than three times as large as the growth rate in Texas (3.27%), the state with the next highest annual growth.

gdp

Real per capita GDP has been rising steadily for the past decade in North Dakota, even as incomes around the rest of the country have fluctuated. Particularly high growth started in 2007, when increased production of oil and natural gas in the Bakken region was made possible by advancements in horizontal drilling and hydraulic fracturing practices.

Between 2007 and 2012, annual crude oil production in the state increased five-fold, and annual natural gas gross withdrawals more than tripled. As a result, the real GDP of the state mining industry has grown by nearly 42% in the past year with a compound annual growth rate of about 39% between 2007 and 2012. This has led to increased demand for electricity by the industrial sector, and is spurring development of new oil and gas infrastructure.

Monterey Shale Producers

Pages from Bernstein_Strategic_Decisions_Conference_2013Occidental Petroleum (ticker: OXY) is the largest oil natural gas producer in California. It’s also the largest mineral acreage owner with about 2.1 million net acres, about half of which is prospective for the Monterey. OXY has already devoted 25% of its $1.5 billion 2013 California capital budget to its unconventional opportunities. With such a huge investment in the region, OXY is the industry’s best bet in developing the Monterey and turning it into a commercial operation.

Other companies own acreage in the Monterey shale, but not to the extent of OXY. Freeport-McMoRan (ticker: FCX) is believed to hold about 70,000 net acres in the Monterey. FCX recently purchased Plains Exploration and Production and is still adjusting to its additions. Meanwhile, energy giant Chevron (ticker: CVX) also holds a large prospective acreage position in the play. Additionally, Venoco (former ticker: VQ) owns a small interest in the shale.

Statement from Western States Petroleum Association

While no energy companies have publicly commented on the passing of SB 4, the Western States Petroleum Association (WSPA) released a statement on September 12, 2013.

Catherine Reheis-Boy, President of WSPA, said: “(Our) members are disappointed the Assembly passed SB 4 in its current form. We have acknowledged the need to develop comprehensive and balanced regulations of hydraulic fracturing in California and had hoped SB 4 would provide those regulations. Unfortunately, SB 4 could create conditions that will make it difficult to continue to provide a reliable supply of domestic petroleum energy for California.”

She added: “Additionally, we are concerned the bill could make it difficult for California to reap the enormous benefits offered by development of the Monterey Shale formation in the San Joaquin Valley – benefits that include thousands of new jobs, increased tax revenues and higher incomes for residents of one of the poorest regions in the nation. Nevertheless, SB 4 will soon become law in California. We will work within the framework created by SB 4 and with the Governor and the Department of Conservation to ensure that our members can continue to deliver affordable energy to the State of California.”

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.