The past several weeks have seen headlines dominated by the once impending (and now very real) shutdown of the federal government. Leaders failed to make concessions, politicians butted heads, and ultimately the constituents are left bearing the brunt of the disaster. Politics can be very frustrating.
However, on occasion, political decisions can surprise. Beneath government shutdowns, budget battles, and spending cuts, one significant political decision recently brought into the light can have major implications for a very large number of Americans.
Fresh off of the largest municipal bankruptcy in American history, a renewed concern over the financial condition of individual cities and states emerged once again. The real story; Detroit is not alone. There are many cities, and more alarmingly, several states that have ventured into precarious financial situations. In particular focus is the condition of California, the most populous state in the Country.
California is no stranger to budget concerns. During the term of Gov. Arnold Schwarzenegger, the state budget was showing massive shortfalls, largely in response to decreasing tax revenue.
Spending cuts and mandatory furloughs ensued after the Obama administration refused to guarantee the repayment of state issued “IOU’s”, instead insisting that California solve their own problems.
California lawmakers finally realized they were on their own, and additional revenue was needed to come from inside the state. At the same time that California was struggling through one budget issue after the other, an economic renaissance was occurring halfway across the country in the sparse, open countryside state of North Dakota.
The Bakken shale revolution was initially taking hold, and the state of North Dakota was raking it in. For the untrained eye, the correlation between rural North Dakota and the urban metropolis of California is difficult to see.
What many people do not know is that California is sitting on a Bakken formation of their own. Tucked away in the San Joaquin Basin of Southern California is an often overlooked shale formation named the Monterey. When initially discovered, the Monterey shale was rumored to be among one of the largest unconventional oil shale formations in North America.
Unfortunately, the relative uncertainty surrounding the practice of “fracking” and its impact on seismic activity made exploration of the Monterey shale very difficult. Since the location of much of the activity is in proximity to the fabled San Andreas Fault, the risk of hydraulic fracturing resulting in an earthquake was simply too great and many major oil companies decided that the play was not worth the capital risk to continue to develop.
Only a few companies stayed behind. Fast forward a handful of years, and incorporate a number of detailed geological studies on fracking, and the picture is more clear. There is very little evidence to support the claim that fracking has any real impact on the formation of earthquakes.
This revelation changed the game in California. Suddenly, the roughly 15 billion barrels of oil locked in the ground in the Monterey appeared to be recoverable. The 15 billion barrel early estimate of recoverable oil places the Monterey shale at roughly two times the size of the Bakken formation in the Williston basin. The state of California may have hit another gold mine 160 years after the 49ers made their first cross country voyages to cash in on the riches of California. It could all be happening again.
Political figures can be surprising, and in a state filled to the brim with environmentalists and green energy advocates, a Democratic governor, Jerry Brown, signed into law the state’s first legal authority to permit and regulate the practice of hydraulic fracturing and other related oil production procedures via a bill dated September 20th.
Nationwide, environmentalists and anti-fracking activist groups cried foul. Even the Western Petroleum Association (an organization that represents oil companies across the state of California) opposed the legislation.
There is little doubt that this new law will slow down oil production in California. The permitting regulations are likely heavy, and the oil companies will not like the full disclosure requirements of the new bill, but in the light of New York state’s complete moratorium on fracking, and the harsh regulations signed into law in Illinois, legislation like this in a state like California can be seen as a win for energy investors.
Fracking has been accepted, albeit tightly, but this new law makes Monterey shale recovery even more possible in the future and sets a national standard (and general acceptance) for the practice of fracking. Ultimately, this could lead to widespread acceptance across the nation unlocking billions of energy reserves from their earthly storage tanks.
The companies that stayed behind, like domestic producer Occidental Petroleum (OXY), have more clarity on the future of their methods and can rest assured that the roughly 800,000 acre position they have acquired in the Monterey will now be able to be utilized more effectively.
The permits may cause an added expense, and slow down the process, but they will allow OXY to move forward. While federal lawmakers spend their time pointing fingers at each other and blaming one another for the shutdown, state governments like California are making serious headway towards bipartisan compromises that can benefit the greater good.
Environmentalists have regulated and clarified the process of fracking to a certain degree, and oil companies are allowed to continue to frack and harvest liquid black gold from the bedrock beneath them. Both parties, and most importantly, the citizens of California win.
Each barrels that emerges from the ground equates to extra tax revenue for California. The nation’s most populated state now houses one of the nation’s largest concentrated onshore oil reserve, and that reserve is open for business.
The investments discussed are held in client accounts as of September 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
