Venoco (NYSE:VQ) will sharply increase its spending to develop the Monterey Shale in 2011 as the company shifts capital away from the Sacramento Basin in California and other areas in its portfolio.

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Monterey Shale
Venoco has 170,000 net acres that are prospective for the Monterey Shale in various basins in California, including the San Joaquin, Santa Maria and Salinas Valley areas. The Monterey Shale is a little different than other domestic shale plays that the exploration and production industry is developing. The Monterey Shale is not an over-pressurized formation and lacks the steep decline rates that wells in other shale plays have.

Venoco plans to spend 50% of its capital budget in 2011 on the Monterey Shale. This $100 million will be used to drill 22 gross horizontal wells and eight vertical wells here. The company will also add more leasehold here in 2011.

If the exploration and development of the Monterey Shale is successful, the company plans 50 wells and up to $180 million in capital here in 2012.

Venoco will also finish a 3D seismic program that the company is jointly performing with Occidental Petroleum (NYSE:OXY) in the San Joaquin Basin in California. This data will be used to help plan the company's future development program on its properties.

Although Venoco likes the potential of the Monterey Shale, the company still has to prove that the formation is viable. One recent well here in late 2010 was producing with a high water cut and was labeled by the company as "uneconomic." The company has several other Monterey wells in various stages of drilling or completion, and the stock will see some volatility as results are announced.

Other Development
Despite the shift in capital, Venoco is still planning development of its properties in the Sacramento Basin and other areas in California. This program includes the drilling of 40 wells and 220 recompletions.

Other Players
Other exploration and production companies are planning development in the Monterey Shale in 2011. Plains Exploration and Production (NYSE:PXP) has 86,000 net acres that are prospective for this play, but it's only putting 1% of its total capital budget into the Monterey Shale in 2011.

Another company that might have exposure is Aera Energy LLC, which has thousands of acres in several different fields in California. Aera Energy LLC is jointly owned by Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A).

Bottom Line
Venoco is shifting capital in 2011 towards development of the Monterey Shale as the company pursues more oily plays on its acreage in California. (To learn more, see our Oil & Gas Industry Primer.)


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