SOURCE: VantageWire.com - According to IHS Cambridge Energy Research, California's Monterey Shale may contain 400 billion barrels of oil. That's enough oil to meet 100% of the United States oil demand for the next 55 years.
"The Monterey Shale has far more shale oil than anywhere else in the lower 48 states," confirms CNBC (February 2013). "California could be in store for a new oil boom," echoes The New York Times.
It is no surprise that big companies like Chevron (CVX-NYSE) have been operating profitably in Monterey for decades , but the investment community is just waking up to the realisation that two small cap Canadian oil developers are drilling deep into the Monterey's McAdams formation which has already yielded over 400 million barrels of oil.
Rango Energy (RAGO-OTC) and Hangtown Energy (HEI) have formed a strategic joint venture on approximately 12,500 acres of oil rich leases in the Central San Joaquin Valley of California.
Rango is a publicly traded independent energy company engaged in the acquisition, exploration and development and production of crude oil and natural gas within the United States.
Hangtown Energy (HEI) is a private Nevada based company, which actively reviews quality oil production targets.
The story of how this Monterey Shale asset was acquired and developed involves the vision of Vincent Ramirez, CEO of Hangtown Energy and the tenacity of Rango Energy CEO Harp Sangha.
"In the spring of 2011, the writing was on the wall," explains Sangha, "I could see that raising money for metal projects was going to be close to impossible. At the same time it was clear that the United States was undergoing an oil and gas exploration renaissance."
"Along with my geologist, Craig Alford, I started looking at hundreds of different deals. I put 70,000 kilometers on my S.U.V., driving through Texas, Colorado, North Dakota, Montana, Oklahoma and California".
"In early March I got a call from Vincent Ramirez, CEO of Hangtown Energy. Vince is a talented oil developer and he can articulate a story beautifully from a technical standpoint. After intense due diligence we came to the conclusion that Rango Energy needed to get involved."
"There were intense time pressures. Hangtown had acquired the asset in December 2012. We had to drill by May 31, 2013 or lose the lease. The cost of the well was $6 million. Hangtown didn't have the money and neither did we at the time. But all parties agreed. We signed the agreement on May 23, 2013. The drill showed up May 25th and we started drilling May 28th. Rango forwarded $1.2 million to secure the rig and we've paying the costs of this well on a weekly basis."
Rango is providing a 100% of development costs of an initial program of 2 wells per project area and will receive 100% of the production cash flow until payback is achieved. After payback, Rango's working interest will revert to 75% for the life of the 6 wells.
Management expects these initial wells will ultimately produce up to 6 MMBO representing over $500 million of revenue at current oil prices. Net cash flow could be reinvested to expand production into all drilling locations identified on the existing land.
"For pure upside, no North American deal I have seen in the last 18 months comes close to this," states Sangha, "To use precious metals terminology, this is a 'mother lode' type project".
"We have rights to every formation and we are permitted to drill to 13, 500 feet. The part of the formation that we are most excited about is called the McAdams formation. It's been a prolific producer in North Kettleman Zone. The 301 wells drilled into North Kettleman zone have produced an average of 2.7 million barrels of oil per well. "
"We are currently at 8,000 feet in the Temblor formation," states Sangha, "We are going to do a pressure test to find out the kind of production we can expect. But this is not our target formation. "
"The McAdams is at 12,000 feet, it is estimated to be 700 feet thick. A historical well produced 600 barrels a day from the top 70 feet. Our best case scenario is 6,300 barrels a day. Our financial models are based conservatively on 700 barrels but the upside is much, much higher."
The Middle Dome appears to contain both the prolific McAdams sandstone formation as well as the shallower oil bearing formations which are the source of production in the South Dome. In Total, the Middle Dome area contains at least 5 oil bearing formations, the McAdams, Temblor, Vaqueros, Kreyenhagen and the Monterey Shale.
Middle Dome oil is typically 48 gravity oil that sells at a $7 premium to spot price. From the time Rango and Hangtown complete the current well, they could be collecting cheques within 60 days.
"In 2008 Oxidental Petroleum started drilling formations just south of us called "Gunslinger", states Sangha, "they discovered 250,000,000 barrels of oil. The initial production rates were about 3,000 barrels of oil per day.
The McAdams formation at Kettleman Middle Dome has been drilled and tested three times; each time proving significant oil exists there. However, it was never put into production. One reason KMD did not receive the same attention as Kettleman North in the 1940's was ownership. Chevron owned 100% of the surrounding land, but only 75% of KMD.
"I don't believe that this is an exploration well, "concludes Sangha, "We have $24 million of 3D data. The 301 wells in North Dome are producing out of this formation. This well is an engineering exercise not a geological exercise. The biggest risk I see is problems with the drilling but we have a very strong technical team on site and with only 5,000 feet to go – everything is perfectly on track."
Rango Energy is currently trading at .41 with a market cap of $41 million.
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