Oil and Gas

UPDATE 2-U.S. EIA cuts recoverable Monterey shale oil estimate by 96 pct

(Adds EIA confirmation of downgrade numbers; production outlook)

NEW YORK, May 21 (Reuters) - The U.S. Energy Information Administration (EIA) on Wednesday cut its estimate of recoverable oil in California’s Monterey shale by 96 percent, casting doubt on what was once thought to be America’s next major energy play.

In what could be welcome news for environmentalists and a potentially bad omen for oil drillers, such as Venoco Inc, with large leases in the region, the EIA slashed its forecast of technically recoverable reserves, citing production difficulties from initial wells.

The reserves were downgraded by 96 percent, from 13.7 billion barrels estimated by a government-funded report in 2011, to just 600 million barrels, the EIA said. A detailed report is expected to be released next month.

“The EIA concluded that the technical recoverability of Monterey shale did not look as strong in 2014 because of the industry’s difficulty in producing from the region,” EIA head Adam Sieminski told reporters in New York.

Technically recoverable reserves are often a moving target, changing as new drilling techniques develop and the price of oil fluctuates. Further drilling will likely provide clearer evidence of the Monterey’s true reserves, the EIA said.

Horizontal drilling and hydraulic fracturing, or fracking, which involves cracking open shale rock using water, sand and chemicals, has unlocked vast amounts of oil and gas in recent years from other shale plays like the Bakken in North Dakota and the Marcellus centered in Pennsylvania, transforming the estimated amount of recoverable oil over the last decade.

But fracking alone has failed to produce the same results in the geology of the Monterey shale in central California, dampening expectations for a resource once thought to rival other giant U.S. shale deposits and seen as an economic boon for the state. Some drillers have turned to other methods, including using acid to help melt rock, though progress has been slow and met with strong environmental opposition.

Oil driller Occidental, one of the major leaseholders in the state, earlier this year put its California business up for sale in part due to lagging oil production.

“Not all resources are created equal,” Sieminski said. “It turned out that it is harder to crack the reservoirs and get the oil flowing from the Monterey” than from Bakken or the south Texas formation of Eagle Ford.

The downgrade will not impact near term production in the Monterey, estimates of which have increased to 57,000 barrels per day on average between 2010 and 2040, the EIA said on Wednesday. Last year’s estimate for 2010 to 2040 was 14,000 barrels per day.

The downgrade does not mean that the oil will not one day be recovered, Sieminski said. Indeed, much of the oil and gas in the Bakken and Marcellus was not always considered recoverable as technology lagged.

“The rocks are still there,” said Sieminski. “The technology is not there yet.” (Reporting by Edward McAllister; Editing by Grant McCool and Marguerita Choy)