Are We Still Underestimating the Bakken's Potential?

Well production is improving, costs are dropping, and reserves are growing at these big Bakken players. This region still has tons of room to run.

May 20, 2014 at 1:21PM

Chesapeake Well

Source: Chesapeake Energy Media Relations

Back in 2011, Continental Resources (NYSE:CLR) founder and CEO Harold Hamm made waves when he said the Bakken shale formation in North Dakota and Montana held up to 24 billion barrels of recoverable oil. This seemed completely outlandish considering that the U.S. Geological Survey had estimated total recoverable oil in the region to be about 4.3 billion barrels. Since that time, though, the results from this region have just been better and better, and it makes the investment thesis for Bakken players such as Continental, Kodiak Oil & Gas (NYSE:KOG), and Enerplus (NYSE:ERF) all the stronger. Let's look at some astounding numbers coming out of this oil patch that are making Hamm's claims less outrageous by the day. 

Getting more bang for the buck
Horizontal drilling and hydraulic fracturing made shale oil formations like the Bakken an economic reality, but recent well results from certain companies in the region are starting to show how economical that can be. We all know that shale oil wells' output declines pretty quickly. When investing in a single well, though, the total production of that well is more important than how much it will decline over a certain period of time. The metric used to evaluate this is the estimated ultimate recovery, or EUR, which can normally be forecast based on historical well performance and some early well data. 

In the Bakken, the average well is expected to generate an EUR in the range of 400,000 to 900,000 barrels depending on where in the formation drilling occurs. Through optimization programs and testing, the EUR for wells has been improving dramatically recently. At some of Continental's recent test wells, EUR has exceeded its typical 600,000 EUR projection by as much as 50% through tighter spacing between wells and increased use of sand in the hydraulic fracturing fluid

Clr Eur

Source: Continental Resources Investor Presentation.

Such results aren't unique to Continental. Kodiak has noted that several of its most recent wells have outperformed its 900,000 EUR projection curves at its wells in Dunn County, N.D., and Enerplus' most recent wells in the Fort Berthold region have seen early production nearly double its own 800,000 projection curves. 

This is promising for two main reasons: it means that new wells coming online will likely produce more oil than originally anticipated, and it shows that these companies can revisit several previous well locations and boost recovery from them without too much additional spending. This will ultimately boost production and the companies' total reserves.

The best part of it all? Even with these increasing well results, the cost of an individual well is still dropping. Kodiak, Enerplus, and Continental have all knocked at least $1 million off the cost for a completed well since 2012, with Kodiak leading the way with total well costs down by $3 million.

It can still get better
As encouraging as these numbers may seem, Bakken producers can still fix some massive operational inefficiencies in order to boost output and reduce spending. Oil services companies operating in the Bakken have made the following conclusions:

  • Better selection of the well location -- which can mean relocating a drilling pad as little as a quarter mile -- can improve well performance by 50%.
  • Switching from the traditional rod lift system -- those iconic nodding donkeys you see in traditional oil fields -- to a submersed electrical pump can increase a well's total output by 20%.
  • Nearly 80% of all hydraulic fracturing stages produce little to no oil from the well because of poor placement.
  • Only 3.5% of the oil in place is currently being recovered.

While it may take time for some of findings things to take root, these discoveries show there is a lot of oil left, and companies can get much better at extracting it.

What a Fool believes
For those who doubt the longevity of oil producers in the Bakken, the numbers presented above suggest that the chances of drawing 24 billion barrels of oil from the region are getting better every day. Companies may have tapped a large swath of the "sweet spot" where the best acreage is found, but as technology improves less attractive acreage will become more economical, and the prime real estate will likely be tapped again with better results. This doesn't mean every company in the Bakken will be successful, though, and perhaps taking a more innovative approach to investing in this space could help identify some of the better players. Overall, though, the foundation these oil companies are built on is sound and will likely remain sound for many years to come.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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