Oil and gas trapped in shale formations doesn’t flow freely, so the rocks are hydraulically fractured (“fracked”) to create fissures for the oil and gas to flow to the well bore. Over the past decade fracking was combined with horizontal drilling to make shale oil and gas production economical for the first time. Oil and gas production in shale plays across the US began to surge, and the US reversed a nearly 40-year decline in oil production.

Let’s back up a step and review some terminology. An oil resource describes the total amount of oil in place, most of which typically can’t be technically or economically recovered. For example, the Bakken Shale centered under North Dakota may contain several hundred billion barrels of oil (the resource), but what is economically recoverable may be less than 10 billion barrels. The portion that is technically AND economically recoverable is the proved reserve. Because of the requirement that the oil be economically recoverable, proved reserves are a function of oil prices and available technology.

While the most recent estimate from the EIA is that there are 3.2 billion barrels of proved reserves in the Bakken, that reserve would have to be written down to essentially zero if oil prices fell and remained depressed. This is an important point often missed when an oil or gas company, for example, has to write down reserves. There is often a misinterpretation that the company failed to find oil or gas where its geologists thought it existed, but more often it’s that the oil or gas that is there requires a higher price before it can be classified as a proved reserve. Another way to think about it is that proved reserves are much larger with oil at $100/bbl than they are when oil is $50/bbl. So if oil and gas prices fall, companies may have to write down proved reserves (and vice versa).

To illustrate, according to the 2013 BP Statistical Review of World Energy, US proved crude reserves were 30.7 billion barrels at the end of 2002, when oil prices averaged around $25/bbl. Over the next 10 years, the US produced 27 billion barrels of oil — 88 percent of the 2002 proved reserve — and yet at the end of 2012 the proved reserves had grown to 35 billion barrels (with oil prices over $100/bbl). What happened? The shale oil boom happened, enabled by much higher prices and improved technology, and oil resources in North Dakota and Texas turned into proved reserves at the higher prices.

But the oil in the Monterey Shale was never in the proved reserves category. It is a case where there is a potentially big resource, but the geology is much more complex than in the Bakken or Eagle Ford. As a result California has not enjoyed the shale oil booms underway in North Dakota and Texas.

Between 2002 and 2012, California’s proved reserves actually declined from 3.63 billion barrels to 2.97 billion barrels. Over that same time frame, North Dakota’s proved reserves ballooned from 342 million barrels to 3.76 billion barrels (again, “resources” became proved reserves as fracking made production economical), while Texas’ proved reserves went from 5.02 billion barrels to 9.61 billion barrels.

Why is the Monterey Shale different, and why were estimates slashed? The original estimates for the Monterey Shale assumed that the oil would be as easy to produce as it is in the Bakken or the Eagle Ford. In those locations, the resource is relatively horizontal and layered, so a drill can be turned to drill a horizontal well 5,000 to 10,000 feet in length. The Monterey Shale layers have been bent and fractured by California’s seismic activity, such that the 2 mile horizontal wells in the Bakken don’t translate to the Monterey. As oil companies gathered experience in the Monterey, it was recognized that it would be no Bakken — at least not with oil at current prices.

Many of the narratives in the wake of this revision pointed fingers at “the oil industry” for the inflated estimates of the oil held in the Monterey Shale. But guess who has been warning for years that the Monterey estimates were inflated? Actually, the oil industry.

One has to keep in mind is that the “oil industry” is not a unified, monolithic entity. Chevron (NYSE: CVX) has a major presence in California (it’s also headquartered there), and is among those who have long expressed skepticism at the Monterey’s potential. In a statement for CNBC story on the Monterey Shale more than a year ago, Chevron wrote “Chevron does not see the same level of promise in the Monterey Shale as other companies…we have not been encouraged by the results of the wells we have drilled into the formation.”

There is an important lesson there. No all oil companies are the same, and one has to be careful of painting with a broad brush. Some oil companies are overleveraged. That doesn’t extrapolate to the conclusion some have made that the shale boom is built on a house of (credit) cards. Some companies are investing far more than they will recoup any time soon, and some will have negative free cash flow for several years. These companies need prices to remain high, and for production to continue expanding. But that isn’t universally true. There will be winners and losers (and that includes countries, some of which have huge shale resources but either challenging geologies or insufficient water for fracking).  

So I wouldn’t be so quick to dismiss the shale boom on the basis of the Monterey revision. In contrast to the downsized estimate for Monterey, last year the US Geological Survey (USGS) more than doubled its estimate of recoverable oil in the Williston Basin (home to the Bakken) on the basis of field results — the same process that led to the downward Monterey revision. Was this widely reported by those who are now gleefully calling the shale boom a myth? If not, I would argue that they aren’t being entirely objective, and are falling victim to confirmation bias.

Yes, this shale boom will inevitably end. And yes, we still have to keep in perspective that oil is a depleting resource, and we need to continue to plan for the ultimate depletion of that resource. But we also have to acknowledge reality. It’s not a myth that since 2008 US oil production has been rising at its fastest rate in history. It’s not a myth that North Dakota has had a 10-fold increase in oil production in 10 years, or that Texas oil production has gone up by nearly 2 million barrels per day in four years. If you have shunned shale oil and gas companies because you have been convinced that this boom is a myth, you have missed out on a lot of very real opportunities.

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