Bakken Formation Has More Oil and Gas Than Prudhoe Bay, CEO Claims

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The Bakken Shale hydrocarbon formation underneath North Dakota contains more oil and gas than Alaska's giant Prudhoe Bay field, Harold Hamm, the chief executive of Continental Resources Incorporated (NYSE:CLR) (Enid, Oklahoma), told about 350 attendees at a conference in Denver on Tuesday. "The Bakken is the biggest hydrocarbon find in years--it basically doubles U.S. hydrocarbon reserves."

Hamm estimates that the Bakken holds 24 billion barrels of oil equivalent (BOE), well above the 19 billion BOE of recoverable oil and gas reserves found in Prudhoe Bay. He predicted that aggressive development of the oil and gas in the Bakken would increase U.S. energy independence, "providing federal policy doesn't block us."

But Hamm, whose company is the largest producer in the Williston Basin, an area that includes the Bakken formation, acknowledged there are significant near-term impediments to oil and gas development in the Bakken, including:

• Lack of oil pipeline capacity, leading to relatively high reliance on the railroads to transport the oil to markets
• High and rising daily rig rates
• The oil pipelines that do exist transport too much of the Bakken's oil to Cushing, Oklahoma, where an over-supply has depressed the crude-oil price paid to Bakken's oil producers.
• A lack of skilled craft labor in North Dakota and the Upper Midwest
• A "critical shortage" of housing, grocery stores, retailers, restaurants and other trappings of a modern economy

But Hamm, the keynote speaker at Infocast's 2nd Annual Bakken Infrastructure Finance & Development Summit, said the world is gradually recognizing the huge potential value of the hydrocarbons in the formation. "Our crude oil is the highest quality in the world--a lot of it looks like Pennzoil. Production started off slow, and the major oil companies overlooked the Bakken at first. But that's changing. Right now, oil and gas drilling is booming. Roughly 200 rigs are operating in the Bakken, more than double the number from two years ago."

Crude oil production from the Bakken will reach about 450,000 barrels per day by the end of this year, about double what it was at yearend 2009, Hamm predicted. And he cited industry forecasts that the Bakken could produce up to 1.24 million barrels of oil per day by yearend 2015.

"For 60 years, since hydrocarbons were discovered in the Bakken, producers have focused on gas and neglected oil--which means we have a lot of oil left," he said. Hamm said oil from the formation could be produced profitably when crude oil sells for $40-50 per barrel, about half of what it sells for today.

The Continental Resources CEO said the Bakken is one of the largest domestic oil fields not currently served by a major oil pipeline. "Pipelines will someday look back and kick themselves for missing 40 years of crude oil transportation opportunities," he added.

The Infocast conference highlighted infrastructure needs and investment opportunities in the Bakken formation. Despite the impediments noted by Hamm and other speakers, producers operating there are reaping hefty internal rates of return (IRR), noted Jodi Quinnell, senior energy analyst for BENTEK Energy LLC (Evergreen, Colorado). Hydrocarbon plays with significant deposits of crude oil and natural gas liquids (NGL) are generating significantly higher rates of return compared to plays lacking oil or NGLs, she noted.

IRRs for dry-gas producers range from 14% in the Barnett shale to 15% in the Fayetteville shale and 21% in the Haynesville shale, Quinnell told the attendees. Dry-gas producers in the Marcellus shale reap a 37% IRR, she added. However, producers in oil- or NGL-rich area of the Marcellus shale garner a 78% internal rate of return. And IRRs in the Bakken shale reach 79%, while portions of the Eagle Ford shale have generated IRRs of 98%, she said.

"Capital is moving from gas to oil," she said, noting that NGLs and crude oil fetch an average of $15 per BOE compared to $5 per BOE of dry gas. "The technological advances pioneered by shale gas drillers are being transferred to liquids production."

She noted that the Bakken area is scheduled to have several crude-oil pipelines, gas-processing facilities and NGL pipelines become operational over the next few years, which will alleviate bottlenecks there and expand the area's hydrocarbon production. Quinnell, like several speakers at the conference, said if the Keystone XL crude oil pipeline was built, it would alleviate the Bakken's current shortage of crude oil pipeline capacity. For more on that project, see October 19, 2011, article - Keystone Crude Oil Pipeline Expansion Draws Strong Support, Fierce Opposition. However, if the pipeline is not built, the Bakken's economic outlook would dim from its current brightness.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.