The Exploding Trend in North American Energy

It's no secret that shale drilling has revolutionized America's energy landscape, helping boost domestic oil production last year to its highest level since 1998 and natural gas production to its highest level ever.

Major improvements in drilling technologies, such as hydraulic fracturing and horizontal drilling, have allowed energy companies to coax massive quantities of oil and gas from shale formations across North America. But due to the technical complexity of shale drilling, costs have been sky-high.

A report by the American Petroleum Institute (API), a trade association representing the U.S. oil and natural gas indU.S.try, sheds greater light on the topic.

Lots of drilling, lots of spending
According to API's 2011 Joint Association Survey on Drilling Costs report, shale drilling expenditures and the number of shale wells drilled in 2011 both surged to record levels.

The number of unconventional oil and gas wells drilled in 2011 totaled 10,173, 43.8% more than the number of wells drilled in 2010, at a cost of about $65.5 billion, up 87.6% from the previous year. Of the total shale wells drilled in 2011, 6,759 were targeting oil, while the remaining 3,414 were looking for natural gas. 

The data reflect the growing importance of shale fields to U.S. oil and gas production growth. After years of intensive drilling, many mature conventional fields have been largely depleted, forcing energy producers to turn toward unconventional ones.

Shale gas now accounts for roughly 30% of all natural gas production in the U.S., up from next to nothing just a few years ago. And shale-drilling expenditures in 2011 accounted for more than half of total well drilling expenditures, up from roughly one fourth in 2009. However, as the technology behind shale drilling continues to improve, there are some promising signs beyond the horizon.

Good news ahead?
Even as shale drilling expenditures surged in 2011, there is evidence that expenses are now declining across several major U.S. shale plays, as operators continue to see efficiency gains through pad drilling methods, more efficient water handling techniques, and other cost-saving measures.

Take North Dakota's Bakken Shale, for instance. Well drilling and completion costs routinely averaged north of $10 million a few years ago, but have since declined meaningfully. Continental Resources (NYSE: CLR  ) , the largest leasehold owner in the play, said its average well costs fell by $1 million last year, while Kodiak Oil & Gas (NYSE: KOG  ) , another Bakken operator, reported a 15%-20% decline in well costs for 2012.  

Though efficiency gains will obviously slow down at some point, many operators should continue to see meaningful improvements in well costs, spud-to-spud cycle times, and other measures over at least the next several quarters.

One such company may be Kodiak Oil & Gas, which has reported solid efficiency improvements in its Bakken operations. Though the company is a dynamic growth story that offers tremendous opportunity, it also comes with great risks. Before you hitch your horse to this carriage, let us help you with your due diligence. To find out whether Kodiak is currently a buy or a sell, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started simply click here now.


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