Tuesday, March 29, 2011
Parks Paton Hoepfl & Brown
by G. Allen Brooks
Maybe you've seen the advertisements from various financial newsletters touting the investment potential of companies involved in developing the Bakken oil shale formation that spreads across North Dakota and Montana and into the neighboring Canadian provinces of Saskatchewan and Manitoba. The claims, which several years ago appeared outrageous, of the Bakken containing eight times the amount of oil as in Saudi Arabia or 21-times the reserves held by Kuwait seem less than fantasy today.
These newsletters began trumpeting the financial impact of the Bakken for various oil exploration companies active in the formation following the 2008 U.S. Geological Service (USGS) revised estimate for the basin's reserve potential suggesting it might contain between 3.0-4.3 billion barrels, a 25-fold increase over the organization's prior estimate made in 1995, which said the field might contain 151 million barrels.
The USGS stated that the Bakken formation is estimated to be larger than all other current USGS oil field assessments in the Lower 48. The agency called it the largest "continuous" oil accumulation ever assessed. This means the oil is spread rather evenly across the basin as opposed to being located in discrete deposits. The next largest continuous oil deposit is the Austin Chalk trend stretching from Louisiana to central Texas that is estimated to contain 1.0 billion barrels.
Jeff Hume, president and chief operating officer of Continental Resources was quoted in an article not long ago suggesting that there could be as much as 24 billion barrels of reserves in the Bakken formation.
Exhibit 1. Bakken Is U.S. Largest Continuous Oil Field
Source: EIA
The success the domestic exploration and production companies have had in the Bakken has been partially responsible for U.S. oil production growing over the past two years to the highest level in over a decade.
Exhibit 2. Domestic Oil Production Up Last Two Years
Source: EIA
North Dakota's oil production reached a peak last November at 356,697 barrels per day from 5,099 producing wells. Over the past three years, monthly oil production in North Dakota has grown by more than 2.5 times. Production is off slightly in January to 342,088 barrels per day from 5,061 wells. While we can't be certain, we suspect the traditionally harsh winter in that region of the country impacts oil production efforts, especially since the infrastructure to produce much of this additional oil has not kept pace with the rising production.
There have been media stories about the dramatic increase in the number of railroad tanker cars hauling Bakken production to refineries. We are also aware of some of the oil making its way by truck across the US-Canadian border to shipping facilities there. All of that will change as new pipelines are constructed.
Exhibit 3. North Dakota's Oil Production Soaring
Source: North Dakota Natural Resource Department
More important is the growth in drilling, which will be critical for boosting the state's oil and gas production in the future. The most recent Baker Hughes rig count showed 153 working rigs in North Dakota, more than double the count merely 14 months earlier.
According to Mark Williams, senior vice president of exploration and development for Whiting Petroleum, "All current and planned projects could take us up to 1.1 million barrels a day."
The most important factor in the growth of Bakken oil production has been the application of drilling and well completion techniques learned from drilling the gas shales – horizontal wells with longer lateral sections and a greater number of hydraulic fracturing treatments. Estimates are that by applying these technologies, Bakken wells that were drilled only a few years ago might produce 100,000-200,000 barrels over their lifetime but are now getting 400,000-700,000 barrels out of the deposits. Even though the cost to drill and complete these newer wells is greater than for the older wells, the economics of greater production, especially at today's $100 per barrel oil price, are extremely attractive.
These newsletters began trumpeting the financial impact of the Bakken for various oil exploration companies active in the formation following the 2008 U.S. Geological Service (USGS) revised estimate for the basin's reserve potential suggesting it might contain between 3.0-4.3 billion barrels, a 25-fold increase over the organization's prior estimate made in 1995, which said the field might contain 151 million barrels.
The USGS stated that the Bakken formation is estimated to be larger than all other current USGS oil field assessments in the Lower 48. The agency called it the largest "continuous" oil accumulation ever assessed. This means the oil is spread rather evenly across the basin as opposed to being located in discrete deposits. The next largest continuous oil deposit is the Austin Chalk trend stretching from Louisiana to central Texas that is estimated to contain 1.0 billion barrels.
Jeff Hume, president and chief operating officer of Continental Resources was quoted in an article not long ago suggesting that there could be as much as 24 billion barrels of reserves in the Bakken formation.
Exhibit 1. Bakken Is U.S. Largest Continuous Oil Field
Source: EIA
The success the domestic exploration and production companies have had in the Bakken has been partially responsible for U.S. oil production growing over the past two years to the highest level in over a decade.
Exhibit 2. Domestic Oil Production Up Last Two Years
Source: EIA
North Dakota's oil production reached a peak last November at 356,697 barrels per day from 5,099 producing wells. Over the past three years, monthly oil production in North Dakota has grown by more than 2.5 times. Production is off slightly in January to 342,088 barrels per day from 5,061 wells. While we can't be certain, we suspect the traditionally harsh winter in that region of the country impacts oil production efforts, especially since the infrastructure to produce much of this additional oil has not kept pace with the rising production.
There have been media stories about the dramatic increase in the number of railroad tanker cars hauling Bakken production to refineries. We are also aware of some of the oil making its way by truck across the US-Canadian border to shipping facilities there. All of that will change as new pipelines are constructed.
Exhibit 3. North Dakota's Oil Production Soaring
Source: North Dakota Natural Resource Department
More important is the growth in drilling, which will be critical for boosting the state's oil and gas production in the future. The most recent Baker Hughes rig count showed 153 working rigs in North Dakota, more than double the count merely 14 months earlier.
According to Mark Williams, senior vice president of exploration and development for Whiting Petroleum, "All current and planned projects could take us up to 1.1 million barrels a day."
The most important factor in the growth of Bakken oil production has been the application of drilling and well completion techniques learned from drilling the gas shales – horizontal wells with longer lateral sections and a greater number of hydraulic fracturing treatments. Estimates are that by applying these technologies, Bakken wells that were drilled only a few years ago might produce 100,000-200,000 barrels over their lifetime but are now getting 400,000-700,000 barrels out of the deposits. Even though the cost to drill and complete these newer wells is greater than for the older wells, the economics of greater production, especially at today's $100 per barrel oil price, are extremely attractive.
