(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Oct 30 (Reuters) - California’s lawmakers have ensured the state will remain a major oil and gas producer by approving new legislation allowing hydraulic fracturing and acid treatments to rejuvenate its ageing wells in exchange for strict controls and tougher enforcement.
Senate Bill No 4 (SB 4), which Governor Jerry Brown signed into law on Sept. 20, directs the state Department of Conservation and other agencies to adopt new rules and regulations covering well construction, fracturing and other well stimulation treatments by the start of 2015.
The chemicals used will have to be disclosed to regulators and published, subject to special treatment for trade secrets. Penalties for violating certain regulations on oil and gas operations were increased from $25,000 per violation to between $10,000 and $25,000 per violation per day.
In another concession to environmental and community groups worried about the safety of fracturing and acidizing, the law directs the state’s Natural Resources Agency, which focuses on environmental protection rather than oil and gas production, to conduct an independent scientific study into the hazards and risks.
The bill was approved on a largely party-line vote in the state Assembly and Senate, with Democrats providing most of the votes in favour and nearly all Republicans voting against.
Governor Brown, who has supported fracking, said in a signing statement the bill, “needs some clarifying amendments”, which he hopes will be made in 2014. But the political deal is clear: the law endorses fracking and acidizing in exchange for what the governor called “strong environmental protections and transparency requirements”.
Brown also directed the Department of Conservation and other agencies to develop an efficient permitting programme that “groups permits together based on factors such as known geologic conditions and environmental impacts” to expedite approvals, rather than requiring the risks of each well to be assessed individually.
SB 4 brings widespread fracking in California a step closer. By providing a clear legislative framework, it should reduce the risk of endless court challenges brought by opponents to agency regulations and permit approvals.
The Conservation Department’s Division of Oil, Gas and Geothermal Resources (DOGGR) has been drafting and consulting on fracking regulations for the past year.
Rather than starting again, much of that earlier work can be used as the basis for the regulations required by SB 4. The DOGGR claims it is “well prepared to meet” the deadline of having them in place by Jan. 1, 2015. So the first pilots with fracturing could occur in just over a year’s time.
In the past century, California has produced more oil than any other U.S. state except Texas. It was still the third-largest producer in 2012 at 536,000 barrels per day (bpd), surpassed only by Texas (1.992 million bpd) and North Dakota (663,000 bpd).
But output has halved since the 1980s. California’s aging fields long ago lost much of their natural pressure. Waterflooding to drive some of the remaining oil towards the wells and attempts to enhance oil recovery by injecting fields with steam and carbon dioxide are yielding diminishing returns.
California is one of only a handful of states where oil output is still in decline, since the fracturing revolution has raised production in the rest of the country (Chart 1).
Nowhere is the decline more evident than in Kern County at the southern end of the Central Valley, which accounts for around three-quarters of the state’s oil wells and a similar share of output.
In the groves around Bakersfield, Kern is a major producer of almonds, citrus fruits and pistachios as well as one of the heartlands of California’s oil industry.
Oil production and agriculture have long co-existed in Kern. Many farmers receive royalties from wells on their land.
Chart 1: link.reuters.com/qur83v
Chart 2: link.reuters.com/far34v
But output is dwindling. Production has fallen by nearly 40 percent from almost 230 million barrels in 1990 to just 141 million in 2012, according to the state Oil and Gas Supervisor. Average output per well has declined from more than 20 barrels per day in 1980 to just nine last year (Chart 2).
New wells are still being drilled near the almond groves: the total number of active and shut-in wells has risen to over 58,000 from just 48,000 in 1990. But new bores cannot offset the declining output from old wells.
Well output is poor even by the low standards common in the United States. Virtually all wells in the county would be classified as marginally economic “strippers”.
Kern needs new investment and techniques to arrest and reverse the decline in its aging fields. Only fracking and perhaps acidizing can stop further production losses.
Unlike the Bakken in North Dakota, where fracking is used to develop unconventional continuous-type oil resources in shale formations, Kern County’s existing fields are conventional, with oil pooled in discrete accumulations.
Fracturing could still improve the permeability of the reservoirs, however, and enable more of the remaining oil to flow to the wells.
An even bigger prize is the vast Monterey Shale formation, which stretches from Kern northwards up the Central Valley. California’s Monterey and Santos shale formations could contain 15 billion barrels of technically recoverable oil, according to an estimate published by the U.S. Energy Information Administration (EIA) in 2011.
Unlocking oil from these shales would require techniques similar to those employed in North Dakota and Texas.
There is no evidence that fracturing is any more risky than other forms of oil production.
Fracturing was used 1 million times on oil and gas wells between 1947, when the first well was hydraulically fractured in Kansas, and 2002, according to the U.S. National Petroleum Council, an industry-expert body set up to advise the federal government.
Most of the threats associated with hydraulic fracturing are shared by conventional oil and gas production techniques, which have been employed in the state for decades.
The main problems with fracking have been political. While other major oil-producing states, such as Texas, North Dakota and Oklahoma, have embraced fracking as a way to bring new life to aging oil areas, fear of the environmental risks and political fallout has caused California to hesitate.
But the passage of Senate Bill 4 suggests the logjam is about to break. If so, the state could start to see fracking from 2015/16 onwards, opening up a new frontier in shale production. (editing by Jane Baird)