Los Angeles Leading The Charge Against Fracking

BMI View: We believe the main impact of the recently passed Los Angeles fracking moratorium will be to increase pressure on California's governor, Jerry Brown, to pass more stringent state-wide regulations. While we remain sceptical that this will create the desired effect, we note that if successful it would hinder the still nascent development of the potentially promising, but also technically challenging Monterrey shale play.

Los Angeles' City Council has passed a motion which would prohibit fracking and other well-stimulation techniques within the city limits until drillers can prove the safety of such activities to the body's satisfaction. The motion will now move to the city attorney's office to be written as a zoning ordinance, before returning to the council for a final vote. If it receives final approval, this will make Los Angeles the largest city in the US to have banned fracking, and the only oil-producing city in California to have done so. As it is uncertain how many wells are being fracked in the area at this time, there is little way to determine the immediate implication of this ban, though the ramifications on state-level politics are perhaps even more important.

Direct Impact Uncertain…

Opposition To Fracking Runs High
California - Public Opinion Poll: Do You Favour Or Oppose Fracking?

Los Angeles Leading The Charge Against Fracking

BMI View: We believe the main impact of the recently passed Los Angeles fracking moratorium will be to increase pressure on California's governor, Jerry Brown, to pass more stringent state-wide regulations. While we remain sceptical that this will create the desired effect, we note that if successful it would hinder the still nascent development of the potentially promising, but also technically challenging Monterrey shale play.

Los Angeles' City Council has passed a motion which would prohibit fracking and other well-stimulation techniques within the city limits until drillers can prove the safety of such activities to the body's satisfaction. The motion will now move to the city attorney's office to be written as a zoning ordinance, before returning to the council for a final vote. If it receives final approval, this will make Los Angeles the largest city in the US to have banned fracking, and the only oil-producing city in California to have done so. As it is uncertain how many wells are being fracked in the area at this time, there is little way to determine the immediate implication of this ban, though the ramifications on state-level politics are perhaps even more important.

Direct Impact Uncertain…

Los Angeles has modest hydrocarbon production, with 59,236 bbl of liquids and 1,251million cubic meters of natural gas as of 2012. However, the immediate impact of the ban is uncertain given a dearth of information on local unconventional activity. Indeed, while local news sources report that there are 1,880 active and 2,932 abandoned oil and gas wells within the city limits, it is uncertain how many of them have undergone fracking, as until the start of this year operators were not required to report such activity.

…Political Repercussions Ahead?

That said, the implication of the vote on state-wide policy is worth watching. The move by local legislators coincides with renewed efforts at the state-level to impose a temporary moratorium against fracking, acidisation and other forms of well stimulation by way of bill SB 1132. Ultimately, we think that despite moves at the local level, a state-wide moratorium will struggle to gain traction. Indeed, state lawmakers had tried to push similar legislation through last year, but even with a Democratic majority in the state legislature (including a supermajority in the Senate), and a governor known for his strong pro-environmental leanings, the bill failed. Instead, the state passed fracking regulations which required firms to obtain permits for fracking and acidising, notify neighbours, publicly disclose chemicals used in their processes and ensure groundwater and air quality are monitored by an independent scientific survey.

Opposition To Fracking Runs High
California - Public Opinion Poll: Do You Favour Or Oppose Fracking?

We cannot completely rule out more stringent state-wide legislation, especially given a still high level of public antipathy toward unconventional drilling. Indeed, while the economic benefits of allowing fracking were likely too great to ignore as the state slowly recovered from the dual impacts of a global financial crisis and a high debt load, we could see legislators facing increased pressure from constituents for supporting fracking as the economy continues to improve. Moreover, a state government report, expected in 2015, which will evaluate the risks of unconventional activity, could reignite the issue. That said, with the governor firmly supportive of allowing some fracking, for now we see it as unlikely that we will see a halt to all activity.

High Potential Play

Ultimately, were we to see any regulatory changes, it would likely come to impact the state's production levels. The state's liquids production has plummeted over the past decade. However, despite the massive resource potential in California, especially the 1,750 mile Monterey Shale Basin, a challenging below-ground picture has stymied hydrocarbon development. Indeed, with the oil-bearing strata folded on top of each other, this has seen companies struggle to bring the play's resources online in a rapid and economical manner. Were we to see any uptick in regulation will only further disincentivise attempts at production.

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