Analysis: Big bets on U.S. oil bonanza after shale gas boom

By Selam Gebrekidan

NEW YORK (BestGrowthStock) – As the U.S. shale gas revolution enters its third year, companies are making big bets to try to recreate that success with the billions of barrels of oil locked in the sedimentary rock even though geologists doubt the actual production potential.

New technology has enabled companies to extract gas from previously uneconomic shale plays, triggering a boom in production that has driven down prices in the giant U.S. energy market and triggering a spate of takeovers by oil majors eager to get in on the action.

The less publicized success story has been booming oil production from shale plays like the Bakken formation in North Dakota. In the course of three years, oil production in the state’s Bakken formation has jumped more than 20 fold to 135,000 barrels per day in 2009 from recoverable reserves now estimated at nearly 4 billion barrels.

As things stand, the Bakken play is the only proven and successful source of oil from a shale formation, but independent producers are fanning out to other shale formations in search of similar gains.

The true yield from these deposits will become clearer by the end of the year, with a number of companies, including EOG Resources (EOG.N: ) and Noble Energy (NBL.N: ), poised to begin drilling wells in new territories.

The breakthrough in hydraulic fracturing technology caused a surge in U.S. gas production that drove U.S. gas prices 55.3 percent lower, from an average of $8.93 per million British thermal units (mmBtu) in 2008 to $4 mmBtu in 2009 and 2010.

Now, independent oil companies are hoping to replicate the Bakken boom in shale deposits like the Niobrara area in Colorado, and the Barnett and Eagle Ford plays in Texas.

Analysts estimate the breakeven price for shale oil at around $50 a barrel, making it an attractive investment at current prices, which have held between $70-80 a barrel for much of this year.

“There’s been a bit of a land rush in places like the Niobrara. There have been rumors which were later confirmed that a few companies have had success with their test horizontal wells there. So companies are scrambling to add more acreage,” said Kenneth Carroll, analyst at Johnson Rice & Company.

While oil output from these deposits will not add decades worth of supply to the U.S. market, as they did for natural gas, it may potentially put more pressure on oil prices than its modest scale would suggest.

Unlike the deepwater fields of the Gulf of Mexico, which require years of planning and can therefore be factored into prices well in advance, oil from shale formations comes from a multitude of smaller wells that can be drilled quickly — potentially catching traders off guard in the same way that a stealthy natural gas glut walloped prices in 2008.

For example, North Dakota’s oil production, three-quarters of which comes from the Bakken play, shot up from 85,000 bpd in 2004 to 218,000 bpd in 2009, according to the Energy Information Administration.

It rose by over 46,000 bpd in 2009 alone, a meaningful contribution to overall average U.S. production growth of close to 400,000 bpd or 8.3 percent — the first rise in a decade and a rate of growth that took some analysts by surprise. Total U.S. production in 2009 averaged 5.36 million bpd.


It started in the Bakken, a rich shale formation spread over Montana and North Dakota that was originally estimated to hold only 150 million barrels of recoverable reserves.

That figure now stands at 3.65 billion barrels, according to the U.S. Geological Survey, as new horizontal drilling and hydraulic fracturing technology made it easier to produce.

“The formation looks like an Oreo cookie, with lighter colored siltstone and limestone layered between darker shale layers,” said Julie LeFever, a geologist at North Dakota Geological Survey, adding the light sweet crude oil is in the cream, so to speak.

With average costs at about $4-$7 million per well in Bakken, according to the state Geological Survey, and oil prices higher than $50 a barrel, this was a sweet deal.

“Bakken has been a real blessing,” said Harold Hamm, chief executive of Continental Resources (CLR.N: ), which saw its Bakken output jump 37 percent jump in the second quarter versus 2009.

“It is very large, onshore and in the U.S. We’re going to be drilling there for the next ten years,” Hamm added.

Independent producers are now rushing to grab land in Texas and Colorado.

Continental Resources, which claims the largest acreage in Bakken at close to 800,000 acres, recently bought more than 59,000 acres in the Niobrara outcrop in Colorado and Wyoming.

EOG Resources (EOG.N: ), the largest producer in Bakken, at close to 28,000 barrels a day, is already in Niobrara. The company owns four rigs on 400,000 acres of land in the play although it hasn’t started production yet. Noble Energy (NBL.N: ) is the most active in this play, having drilled seven wells on 750,000 acres.

EOG’s more dominant presence, however, is in Eagle Ford, Texas, the next hottest play in the crude oil and liquids market, where the company owns at least 580,000 acres of land, runs five rigs and hopes to add seven more by the end-2010.

The Barnett combo, also in Texas, is now catching producers’ attention for its crude oil, natural gas liquids and residue gas resources, in addition to its shale gas reserves.


Still, geologists aren’t convinced that these new hot spots can replicate Bakken’s success.

“The Niobrara play is very similar to the Bakken in many respects, but it’s too early to tell how productive it is going to be,” said Vince Matthews, director of Colorado Geological Survey. “I doubt that it’s as good or better. We won’t even see it as a blip on the decline in production for the whole nation.”

The geology of the Eagle Ford and Barnett plays has even less resemblance to Bakken’s, although the Texan plays have substantial proven good gas reserves.

“We’ve only seen sporadic well-testing in the newer plays so we don’t know if they’ll be successful. The rocks in these formations are different and we’re not sure if the technology can be applied wholesale,” said Phani Gadde, an analyst at Wood Mackenzie.

There are other variables at play. In Texas, oil production from the shale plays in Eagle Ford and Barnett have been negligible as the infrastructure to bring crude to market has is still in the works.

“There was no build up. These are places where nothing is going on so there weren’t pipelines or other infrastructure,” Michael Kay, an equities analyst at S&P said. “The companies will start production in the second half of the year and we will see the numbers ramp up next year.”

(Reporting by Selam Gebrekidan; Editing by Marguerita Choy)

Analysis: Big bets on U.S. oil bonanza after shale gas boom