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from the WSJ today, by Russell Gold (thesis is that EIA estimates vary wildly over time):

The internet is abuzz today over California’s Monterey Shale – and a news article that says the federal government will soon slash its estimate of how much crude oil drillers can extract from the region, which has been touted as the biggest potential oilfield in the country.

Here’s what is happening – and what matters.

The Los Angeles Times reports the Energy Information Administration will soon lower its estimate of how much oil can be recovered from the Monterey Shale. A couple years ago, the government estimated there were 13.7 billion barrels underneath California. The new figure? Six hundred million barrels, according to the article.

An EIA spokesman confirmed the change, attributing it to “new geology information…and a lack of production growth relative to other shale plays.”

Does that mean the oil has disappeared? Not at all. The 600 million barrel figure is the government’s estimate of how much oil drillers can get out of the earth with existing technology and at current prices. And based on the handful of wells that have been drilled, the Monterey is proving to be tough for energy companies to tap.

Unlike the Bakken Shale in North Dakota, or the Eagle Ford in Texas, the geology of the Monterey is complex. Take a look at this graphic to get an idea. The Monterey is riddled with faults, its oil is deeply buried, and its rocks aren’t amenable to being fracked, as they are elsewhere.

This shouldn’t come as a surprise to anyone paying attention. Companies focused on the Monterey, such as Venoco Inc., have been warning investors that the California shale was different from other shales. And oil output has been lackluster.

This isn’t the first time we’ve seen enormous gyrations in what are known in the industry as proved reserves. In 2002, the United States Geological Survey said its best guess about the amount of gas “resources” in the Marcellus Shale was 1.93 trillion cubic feet.

The wording it used is important. Resources means, basically, how much gas is in the rocks. It is a broad figure that doesn’t take into account whether the technology exists to extract the gas, or whether it would be prohibitively expensive.

Nine years later, in July 2011, the Energy Information Administration said there were 410 trillion cubic feet of “technically recoverable” natural gas in the Marcellus. Not only was the agency saying there was 200 times more gas than previous government estimates, but it was “technically recoverable”, meaning it could be extracted with readily available technology at prevailing prices.

The euphoria lasted a month. In August 2011, the United States Geological Survey slashed this optimistic assessment, saying there were 84 trillion cubic feet of “technically recoverable” natural gas.

More recently, the EIA reported reserves of 42.8 trillion cubic feet.

Calculating reserves is a very imprecise science. But this doesn’t mean the shale boom isn’t for real. About a million barrels of oil a day are flowing from the Bakken Shale and even more is coming from the Eagle Ford. That isn’t a best guess of reserves – that is actual oil production. The lesson here? Beware of forecasts that make too many assumptions about how much oil is available. You need to drill a lot of wells first before you can really figure it out.