Production from the Bakken shale has exploded over the last few years as the oil industry used the combination of hydraulic fracturing and horizontal drilling to unlock the oil trapped in that rock formation. While it went through a rough patch during the oil market downturn, production from the Bakken shale has bounced back and recently hit a new peak.

That trend appears poised to continue due to the high returns that drillers can earn on new wells, as long as pipeline companies can keep up. In this Industry Focus: Energy clip, host Nick Sciple and contributor Matt DiLallo discuss:

  • What is the Bakken Shale formation?
  • How hydraulic fracturing and horizontal drilling have helped producers unlock more oil than they ever imagined from the region.
  • Recent production trends in the Bakken.
  • The need for more pipelines and related infrastructure in the Bakken.

A full transcript follows the video.

This video was recorded on Oct. 25, 2018.

Nick Sciple: Today, Matt, we're talking about the Bakken shale formation. This is something you follow pretty closely. First off the bat, let's just tell our listeners what the Bakken shale is, where it's located. It underlies parts of Montana, North Dakota, Saskatchewan, and Manitoba. Oil was first discovered there in 1951, but production efforts really struggled for the next 50 years until fracking came on board. Do you want to talk about how the Bakken has evolved over the past decade or so, and what fracking has made possible there when it comes to oil recovery and those sorts of things?

Matt DiLallo: Oil companies knew that there was oil there. They just didn't know how to get it out. As they figured out how to do shale plays, they started out in the Barnett Shale of Texas and then moved up to the Marcellus. They figured out that combining horizontal drilling with hydraulic fracturing was the key to unlocking these things. They tested it out in the Bakken in 2003, 2004. Continental Resources was the leader out there. They figured it out and it's just taken off since then. They've been tweaking the process, but it has been just phenomenal how much oil they've been able to pull out that region, mostly North Dakota. They pulled out some from Montana. Canada's got a little bit. But North Dakota has just been on fire.

Sciple: To illustrate these numbers for our listeners, in 1995, the U.S. Geological Survey estimated that the Bakken contained 151 million barrels of recoverable oil. Recently, in September 2018, Continental Resources -- which you mentioned, one of the largest players in the Bakken, which we'll discuss later on in the show -- estimated that there were 30-40 billion barrels of recoverable oil in the Bakken. That's a ridiculous increase in the recoverable oil, which has really been made possible by this hydraulic fracturing. A stat that I saw which blew my mind is that North Dakota is the No. 2 state in the United States for oil production, which is mind boggling. Everybody thinks about Alaska and Texas, but over there in North Dakota, these shale oil plays have really opened up.

What's the Bakken looking like today? What's the production profile? What are the prospects going forward?

DiLallo: Because oil prices dipped, that really hurt the Bakken. It had pretty high costs, like $12 million to drill a well. As the oil prices went down, companies just didn't have the money to drill. That caused production to fall off during 2016, 2017. I think it peaked at around 1.2 million barrels in 2015. It dipped below a million for a while. But with oil prices rising, and companies were able to cut their costs, they've really started to ramp up drilling up there. The latest peak I saw was 1.3 million barrels.

A lot of that has come because they've figured out better ways to drill wells. They're drilling them faster, they're drilling them more productively, they're using more sand as they're fracturing. That's allowed them to produce more oil per well, which has made it so much more profitable. I saw a stat from Continental Resources back in 2011. It was less than 20% return on a well. Now, it's 175% return on a well. That's a huge gain in how much they can make on these wells. That's what's driving this production. They think it could reach two million barrels a day eventually.

Sciple: That's 20% of Saudi Arabia's oil production. That's a large chunk of oil coming from a relatively under-appreciated oil play up there in North Dakota. We were talking before the show that as a result of this big spike in oil production in the Bakken, we've seen some pipeline capacity become a little strained. Do you want to talk a little bit about that and what risks that may pose for the play over the next 12 months or so?

DiLallo: Pipelines have been an issue in the Bakken since the beginning. A couple of years ago, they were trying to build what was called the Bakken Pipeline. It was two pipelines by Energy Transfer Partners that would move oil out of the Bakken. But it's very controversial. It made the news. It was delayed for a while. They finally got that online and that's really helped boost production lately.

However, it's basically full. Initially, it was a 470,000 barrel a day pipeline. It's currently over 500,000 barrels a day because they've been able to make some slight changes. However, with it basically full, they're asking shippers if they want to take some more capacity. If they do, then they're going to make some changes, add some pumping stations, to boost that pipeline.

In addition to that, you've got natural gas that they used to flare up there, just burn it off, because there were no pipelines. Now, they've got the processing plants and the pipelines to get that out. However, again, that's filling up. Kinder Morgan, they mentioned that they're looking at some natural gas pipeline possibilities. Maybe taking it down the Rockies, maybe going to California.

The third thing they produce out there is natural gas liquids, NGLs. Oneok is in the process of building the Elk Creek Pipeline, which will move NGLs down the Rockies and also pick up some from Powder River Basin. There's a lot of pipelines that they're building, there's a lot of pipelines that need to be built. There's huge opportunity, especially for income investors that are looking for growth and income. Pipeline companies that are building in the Bakken could be pretty big in the future.

Sciple: We're seeing all this investment from the pipeline players. It just goes to show that over the long-term, they're expecting oil to continue to come out of this region and for production to continue going forward.