What's the Size of This Oil Prize?

I hope that by now most of my readers have heard about the Bakken, a multibillion-barrel oil resource play in the Rockies. Like the Barnett and other gas shale plays, the Bakken play is brought to you by horizontal drilling and hydraulic fracturing. There are differences in the particulars, but those are the key enabling technologies allowing folks such as EOG Resources (NYSE: EOG  ) to unlock exciting new oil resource plays across the country.

Following success in the Barnett, operators scrambled to find good gas shale analogues in places such as the Haynesville and the Marcellus. That search has since expanded to Europe, Asia, and elsewhere. The same thing is happening with oil resource plays. We've seen Hess team up with Toreador Resources (Nasdaq: TRGL  ) in France's Paris Basin, and a cavalcade of Canadian operators crack open the Cardium. Here in the U.S., one of the hottest new oil plays is the Niobrara, found in the Denver-Julesberg Basin, which covers a good chunk of northeastern Colorado and crosses over into southeastern Wyoming and southwestern Nebraska.

What's old is new again
The Niobrara has actually seen historical drilling in places like Wyoming's Silo field. What makes the play "new" today is, again, the aforementioned drilling and completion technologies that allow for much stronger flow rates. The Niobrara's potential became plain following the success of EOG's Jake well, which produced around 50,000 barrels of oil in its first 90 days.

Early Bakken pioneer Continental Resources (NYSE: CLR  ) has described the Niobrara as "huge," noting that it spans over 3 million acres and may contain more than 2 billion barrels of recoverable oil. As for recoveries per well, those estimates are all over the place. Given the limited number of data points, operators are forced to do some guesswork on that front.

What's in a well?
Noble Energy
(NYSE: NBL  ) , one of the biggest leaseholders in the area, as well as the leading producer, has reported that its first four horizontal Niobrara wells show an average estimated ultimate recovery (EUR) of 290,000 barrels of oil equivalent (290 MBoe). They're proving highly variable, however, as the company's Gemini well is estimated at more than 500 MBoe. Noble calls this well the best in the history of the Wattenberg field -- a core area of the greater Niobrara play.

Whether they're operating in the Wattenberg field or elsewhere in the play, most companies tackling the Niobrara are falling roughly in line with Noble's average EURs. Continental is estimating 286 MBoe per well, PDC Energy (Nasdaq: PETD  ) is at 300 MBoe, and Rex Energy (Nasdaq: REXX  ) projects a range of 200 to 350 MBoe.

Same stuff, different basin?
The real outlier appears to be Chesapeake Energy (NYSE: CHK  ) , which at its recent investor day stated that its Rockies assets have EURs of more than 500 MBoe per well, on average. This looks like a bold claim, but it's important to note that Chesapeake is lumping together Niobrara plays in two distinct basins -- the DJ and Wyoming's Powder River Basin -- as well as other targets like the Frontier and the Codell. The company didn't break out its estimate for the Niobrara play in the DJ Basin, so we don't have an apples-to-apples comparison here.

In the PRB (more famous for its coal than any other resource), the shale targets run much deeper than in the DJ. For example, SM Energy's Atlas 1-19H well had a measured depth of roughly 12,000 feet, whereas Chesapeake's Spillman 16-1H well traveled more than 17,000 feet. These PRB wells may deliver considerably higher average reserves and production rates, but they're also going to be more expensive to drill.

Chesapeake probably shouldn't be lumping these plays together, and I certainly encourage investors to avoid doing so.

Adding it up
So circling back to my original question: What's the size of the Niobrara prize? Say a million acres ultimately prove economically viable. At 320-acre spacing, that's 3,125 well locations. Assuming wells average 290 MBoe (given a wider range of perhaps 200 to 500 MBoe), we're talking about over 900 million barrels equivalent of reserves that are up for grabs.

While it's very early -- as of the date of Chesapeake's recent analyst day, only 33 wells had been drilled -- this looks like a very promising play. For those seeking leverage to the Niobrara's potential, they might want to size up PDC or Rex -- two smaller exploration and production companies with relatively large footholds.

Chesapeake Energy is a Motley Fool Inside Value recommendation.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


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