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Saturday, October 29, 2022

California -- Peter Zeihan -- October 29, 2022

All typographical errors are mine.

Read this in the context of Saudi Arabia's new policy: "Saudi first."

This was written in 2016. Today, California gasoline runs $7 / gallon; in Texas about $3 / gallon, a $4-difference, close to the $5 - $9 spread suggested in this piece, and the Saudis have not yet put into place "Saudi first." 

And remember: the US Congress has fast-tracked "NOPEC."

From Peter Zeihan, The Absent Super Power: The Shale Revolution and A World Without America, c. 2016; pp. 279 - 280.

Just as the United States is becoming the exception to global energy prices, California is becoming the exception to American energy prices. While California boasts a promising shale field in its Monterrey formation and while California has consistently ranked as the second-largest oil user in the United States, state-level regulations have equally consistently prevented a shale industry from arising within the state.

This decision has a cost: California is nearly separate from the American energy complex. There are no oil pipelines that cross the Rockies from the Greater Midwest and Texas. There aren't even smallish pipelines that come in from Canada. Any crude produced iin North Dakota (or Canada) that is shipped to California must come by raiil (or a combination of rail to and then barge from the Pacific Northwest).

In a globalized world of open borders this is deserving of little more than the occasional comment or quiet snicker (the sounds from Texas are probably more guffawlike). After all, the Californians are quite capable of importing crude from elsewhere in the world to make up for what they refuse to produce locally, and an extra buck per gallon of gasoline is a price they are willing to pay for their politics.

But that price is about to increase substantially. Most of the oil "imported" into California comes from three locations, the first of which is Alaska. A quirk of American law allows petroleum produced in Alaska to be exported to the wider world independent of other laws that sometimes bar domestic energy exports. This will allow Alaskan crude oil to flow to what soon will be the highest-paying end-market in the world: Japan. Imports from the second source, Latin America, are likely to follow a similar logic. California will have to replace all these supplies from elsewhere.

That elsewhere is likely to be the remaining major current source of California's imports: the Persian Gulf. At the time of this writing (2016), California imports 450 kbpd from the region, nearly as much as the 550 kbpd it produces locally. When Iran and Saudi Arabia's conflict erupts, California wil suffer nearly as must as the East Asian states do in terms of supply disruptions and price. American shale will kick into overdrive, eliminating extra-hemispheric oil imports ... except those to California.  The state will now be importing more Persian Gulf crude than the rest of the country combined. The spread between California gasoline prices and other Lower-48 prices can counted upon to increase from today's $1 barrel to something in the $5 - $9 range -- easily enough to hurl California into a protracted energy-induced depression.

But it isn't a depression without escape. The Californians have everything they need within their own state to fix the situation.

Nearly all of California's oil and natural gas production lies in a single county: Kern. Kern County also is home to the Monterrey shale. Though the Monterrey has been massively underexplored and underutilized, the lack of activity is not wholly due to regulations and restrictions out of of Sacramento. The Monterrey's geology is tangled; it's a series of stacked layers crisscrossed by a multitude fo fault lines. While locals may grind on about Sacrament's limiting of local industry, even if the Monterey were in Texas it wouldn't have been considered a world-class energy play.

Or at least it wouldn't have until recently. The Texans and Pennsylvanians and North Dakotans have been unlocking shale's secrets bit by bit during the past decade, but it wasn't until 2016 that true best practices started to form up. The same complex, stacked features that made the Monterrey difficult-to-impossible to develop in 2014 make it a mouth-watering play  now. Microseismic and especially multilateral drilling are turning similarly complex shales like the Permian and the Marcellus into fabulous production zones. Kern may be lat to the party, but it will enjoy a distinct second-mover advantage.

Kern already has the capital, infrastructure, local regulatory structure, and workforce required to transform the Monterrey. Double (or more) the price of energy in California, change Sacramento's view of Kern -- and more important Sacrament's regulation of Kern -- and a California shale boom will happen almost overnight. The Untied States' Big4 shale plays are about to become the Big 5.

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