Until recently, the U.S. Energy Information Administration (EIA) estimated that California’s Monterey Shale contained more than 13.7 Bbbl of unproved technically recoverable oil reserves. Even factoring in the EIA’s recent revision of its estimate of recoverable oil down to 600 MMbbl, the Monterey Shale is still the sixth largest oil play for hydraulic fracturing techniques in the U.S.

The Monterey Shale is about 4,532 sq km (1,750 sq miles), and it covers a substantial portion of the San Joaquin Valley. Tapping this resource could have tremendous economic benefits to the state. By one estimate, successful E&P activities targeting these reserves could create nearly $30 billion in additional tax revenue for the state, create nearly 3 million jobs and significantly reduce California’s dependency on oil imports.

Why is this play controversial? California is the nation’s third largest oil producer. And unlike some other states, fracking techniques are not new to California—producers here have been using such methods for more than 50 years without protest. And despite its reputation for litigiousness, California has not seen anywhere near the same level of oil and gas royalty litigation as other states. In some respects, exploiting the Monterey Shale reserves can be seen as a natural progression of this state’s historic E&P activity.

Yet times have changed. The increased attention fracking has drawn nationally certainly has played a role in increasing its profile in California. For example, while producers have long used fracking fluids offshore on federal leases in Southern California, the U.S. Environmental Protection Agency only recently issued reporting and discharged permit regulations for such fluids due to publicity around fracking. And environmental groups’ opposition to hydraulic fracturing is more vocal now, alleging not only that the practice will be detrimental to the local environment but also contesting any increase in oil production as exacerbating global warming.

Gov. Jerry Brown and the California legislature stepped into the breach last year, passing a comprehensive law covering “well stimulation” known as Senate Bill (S.B.) 4. This bill and the regulations that ultimately will accompany it do not ban hydraulic fracturing in California but establish a detailed regulatory scheme for reporting and monitoring potential groundwater impacts.

No ban—yet

One of the most significant aspects of S.B. 4 is that it does not ban hydraulic fracturing. The bill requires California’s Department of Conservation-Division of Oil, Gas and Geothermal Resources (DOGGR) to conduct a scientific environmental assessment of the hazards and risks to natural resources and to public, occupational and environmental health and safety and to report its findings by Jan. 1, 2015. However, S.B. 4 does not ban hydraulic fracturing in the interim. In fact, the bill explicitly requires DOGGR to continue to issue permits for hydraulic fracturing in the interim. This provision is significant as experience teaches that interim bans can be quite lengthy. New York, for example, issued a moratorium on hydraulic fracturing in 2008 while its Department of Environmental Quality conducted a supplemental environmental review. That report still has not been issued, and many wonder if it ever will be.

S.B. 4’s provisions about interim permits were critical in the dismissal of a lawsuit early this year that sought an injunction preventing DOGGR from issuing any fracturing permits until the agency fully assessed (and mitigated) the alleged environmental and health impacts from such activities. The lawsuit was filed in 2012. Industry groups intervened after passage, arguing that S.B. 4 set forth DOGGR’s responsibilities for an environmental assessment and that it commands DOGGR to allow the practice in the interim. The trial court dismissed the lawsuit, holding that the environmental groups’ claims about past practices were moot and that the current regulations deserve deference. Thus, interim permits are still allowed, although the environmental groups are appealing that ruling.

But the fight over a ban is not over. Just last month the California State Senate Natural Resources and Water Committee voted S.B. 1132 out of committee, which would place a moratorium on hydraulic fracturing and other forms of well stimulation until the state examines the potential economic, environmental and public health impacts. Five Democratic senators voted for it, with only the two Republican members voting against (while two other Democrats abstained). It now goes to the Senate Environmental Quality Committee.

If enacted into law in its current form, it would prohibit various forms of well stimulation until: (a) DOGGR completes a broad environmental assessment (with a new deadline of June 2016); (b) a multistate agency panel reviews the report and makes recommendations to the governor; and (c) the governor concludes that state regulations and other measures protect public health and welfare and the environmental and economic sustainability of the state and such well stimulation will not impede progress for greenhouse gas reduction under California Global Warming Solutions Act of 2006. If the governor concludes that any of the preceding conditions are not satisfied, the ban on well stimulation will remain in place.

It is not clear if the Senate will pass S.B. 1132 despite a large and coordinated lobbying effort by environmental groups. The two Democratic senators on the committee who abstained cited economic reasons for doing so, and Gov. Brown has shown no support for the bill. So for now at least, hydraulic fracturing continues in California.

Notice and groundwater monitoring

Under S.B. 4, 30 days before commencing well stimulation a well owner/operator must notify surface property owners within a 457-m (1,500-ft) radius of the wellhead and surface owners within 152 m (500 ft) of the horizontal projection of the subsurface portions of the well. The surface owners can request that operators test their wells, which will establish a baseline condition. Owners also can request that operators test their wells going forward on the same schedule as pressure tests in the oil well. The well operator pays for this testing and must report the results of any such testing to the State Water Board.

Oil producers should welcome these provisions. Although they undoubtedly increase costs, the data should prove very helpful to producers and industry in the future. The unknown is often worse for oil companies in the mind of the public or jurors. By collecting baseline data and then conducting periodic testing, oil companies can establish that their operations have not impacted local wells. Over time, this should help alleviate concerns over fracking. And if an impact is discovered, producers will be in a position to react quickly before the problem escalates.

S.B. 4 also requires a groundwater monitoring model plan. The State Water Board is currently working with DOGGR to develop such regulations, which are due by July 1, 2015. This may take the form of individual well monitoring plans or regional plans. Depending on the regulations ultimately proposed, this too may prove beneficial to the industry in the long run. Groundwater modeling in contamination cases is often ripe for abuse by experts seeking to develop large damage claims against oil companies. Obtaining data in real time will guard against any unfounded claims and, in the event issues are uncovered, operators can address them quickly before the problem worsens.

Hydraulic fracturing may allow the production of vast, technically unproven reserves in the Monterey Shale. S.B. 4 allows such operations but will require increased groundwater monitoring. Both are good news for industry; however, there are still efforts in the state to ban fracking, at least in an interim period while the state studies the potential environmental and economic impacts of well stimulation.

References available on request.

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