California regulators released the state’s first draft regulations for hydraulic fracturing. The industry views the move as a positive start to drive oil and gas development in California, which has some of the strictest well safety regulations. The move could result in dramatic expansion of drilling activities in the state’s Monterey Shale, a major oil play that could substantially contribute to the domestic energy supply.

On December 18, 2012, California’s Department of Conservation released preliminary regulations for hydraulic fracturing, after a series of public discussions held this year to address environmental concerns. The draft rules, if passed, would require drilling companies to test well integrity and report test results to regulators before beginning fracturing operations. The proposal also seeks to require companies to maintain an online database of fracturing locations and chemical composition of fracturing fluids. It would however, provide an exemption for operators seeking protection for proprietary chemical composition information. The formal rulemaking process, expected to begin in early 2013 with further public hearings, could be finalized in about one year.

Hydraulic fracturing in California dates back to the 1960s, focused mainly in oil production in Kern County and southern areas. The state’s biggest oil shale resource – Monterey Shale – is estimated to be four times larger than the Bakken, where oil drilling has brought North Dakota to the forefront of the industry. Though geologists have known the Monterey formation as a productive source rock for oil extraction, interest in tapping the resource began after advances in hydraulic fracturing and horizontal drilling in other formations across the country. Hydraulic fracturing involves injecting massive volumes of chemical laden water and sand into the ground at high pressure. The technique has been driving the U.S. shale gas boom and boosting the economies of shale-rich states like Pennsylvania, Texas, and North Dakota. It has allowed economic access to large quantities of gas, thereby lowering natural gas prices significantly. The practice has also been acclaimed for its environmental benefit as access to cheaper natural gas has led utilities to consume less coal, a more carbon intensive resource.

Currently, the industry eyes substantial expansion into California’s Monterey Shale, which extends across Central Valley, San Benito, and Monterey counties. EIA estimates onshore shale oil resources in the lower 48 states as 23.9 billion barrels (BBL). Monterey Shale holds 15.42 BBL, about 64% of the total. Compared to the Bakken (estimated to hold 3.59 BBL) and Eagle Ford (estimated to hold 3.35 BBL), Monterey’s capacity is significantly higher. Estimates show the Monterey formation as larger than all other formations combined. The Monterey/Santos shale formations span an area of about 1,750 square miles and hold 1,000 – 3,000 feet thick shale deposits, located 8,000 to 14,000 feet underground.

California is already a major oil producer. Although it relies on several energy sources, such as geothermal, wind and solar power for electricity generation, unconventional gas development will contribute substantially to the local economy. EIA statistics show that California gets about 60-65% of its power from natural gas, 15% from hydroelectric sources, 10% from renewables, and the rest from nuclear power. The Monterey formation contains about 60% more crude than other shale-oil formations across the nation, including Bakken and Eagle Ford. Therefore, it is likely to become the next major unconventional oil play. On December 12, 2012, the Bureau of Land Management (BLM) leased 18,000 acres of land for oil and gas development in Monterey County. California’s move recognizes the crucial role that hydraulic fracturing can play in boosting the state’s economy as well as domestic energy supply.

Angelique Mercurio is an energy policy analyst and a founding partner at Energy Solutions Forum Inc., an energy policy research and data company based in New York City.