If you have an email address you have probably received numerous advertisements for newsletters produced by Stansberry & Associates hyping the Bakken Shale in North Dakota. Stansberry claims there are 2 trillion barrels of untapped oil in this formation. More oil that all of OPEC combined just waiting to be tapped. Are the claims real?
Unfortunately the claims contain a shred of truth magnified thousands of times in the various hype emails. The Bakken Shale does exist. There is recoverable oil in this formation and it is being actively drilled. However, if there were 2 trillion barrels of recoverable oil there we would be seeing a land rush of monumental proportions.
The Bakken or more accurately known as the Williston Basin is located primarily in the Dakotas. The Williston Basin is a geologic basin that is located in North and South Dakota, Montana and southern Canada. It is NOT a formation. The Bakken Shale is completely contained in the Williston Basin.
The spammed email hyping the basin refer to a US Geological Service (USGS) report that reported 3 to 4.3 billion barrels were "technically" recoverable. The emails claim that 2 trillion barrels are untapped and 503 billion barrels are recoverable. Obviously somebody is wrong. (Link to USGS article)
The first problem lies in the term "technically recoverable." There is a big difference between technically recoverable and practical oil recovery. Oil may be technically recoverable if you don't mind paying $500 a barrel to produce oil you can sell for $75 per barrel. Practical oil recovery must take into account current and future technologies, drilling and completion costs, operating costs, oil prices, state and Federal taxes, local, state and Federal regulations. Scientists can always devise ways to get oil out of the ground but if it costs 5 to 10 times the going price then it will stay in the ground.
The practical oil recovery from the Bakken Shale is probably way less than 500 million barrels. That is a huge deposit that will be producing for many decades to come but it will never be a major producer at a rate that will do much to delay peak oil.
Drilling and completion costs for Bakken wells can reach $5 million not including the lease bonuses paid to acquire the drilling rights. Those can cost $500,000 per well. Production of normal wells run in the 79-116 bpd range and take many years to pay out the development costs. There have been several wells that produced up to 1,000 bpd but they are rare. The depletion of a Bakken well is very fast with production falling to 50% within 5-years. Depletion rates of up to 60% per year have been reported. This is shale oil NOT a reservoir like we see in Texas, Louisiana, or Saudi Arabia.
The Williston Basin is a very harsh place to work due to weather, extremely difficult surface conditions and lack of infrastructure. Most developers report that the Bakken requires oil prices to be over $75 per barrel to be commercially productive. That means there is no rush to the Bakken by the oil majors. The current group of drillers active there include Continental Resources (CLR), Marathon (MRO), Enerplus (ERF) and Xterra to name a few. As of April 2008 a total of about 111 million barrels had been produced from the Bakken since its discovery several decade ago.
Stansberry began to hype the Bakken based on the USGS study and the fact that nobody knew about the Bakken Shale. They sent millions of unsolicited emails with claims like:
"Enough crude to fully fuel the American economy for 41 years"
"We now have access of up to 500 billion barrels in the Bakken. Because this is light, sweet oil, those billions of barrels will cost Americans just $16 per barrel!"
"Largest reserve in the world! Hidden 1,000 feet beneath the surface of the Rocky Mountains lies the largest untapped oil reserve in the world with more than 2 trillion barrels."
They claim President Bush mandated its extraction on August 8th 2005.
This was a typical excerpt from their emails:
"The USGS reported stunning news: We have more oil inside our borders, than all the other proven reserves on earth. Here are the official estimates:
8 times as much oil as Saudi Arabia
18 times as much oil as Iraq
21 times as much oil as Kuwait
22 times as much oil as Iran
500 times as much oil as Yemen and it is right here in the Western U.S."
(Link to an actual Stansberry Email)
Snopes.com, the urban legends, rumor and hoax proofing site called Stansberry's emails a "mixture of true and false information" and called them "Tout Sheets." (Link to Snopes article)
FactCheck.org debunks the entire email as untrue for most of its major claims. "Unfortunately, the claims are false. The email combines and twists several different news stories and studies into a longer tale of sound and fury that ultimately signifies nothing (factually anyway)." (Link to FactCheck.org article)
Back to Reality
The Bakken does exist and commercial drilling first began back in 1971. In 1991 the first wave of horizontal drilling technology boosted production from the field to 11,790 bpd. The second wave of horizontal drilling technology implemented over the last decade along with new methods of hydraulic fracturing increased production to 75,000 bpd in October 2007 with 951 wells producing. The rise in oil prices also made the Bakken more attractive and drilling increased using those methods.
In 1980 all wells were vertical. That changed to 50% horizontal in 1990, 78% in 1995 and 95% horizontal today. The oil deposit is roughly 150 feet tall and varies from 3,000 feet to 10,000 feet below the surface. It requires a skilled and very expensive horizontal rig to navigate through this 150 ft deposit for 10,000 to 15,000 feet in order to have a commercially viable well. The permeability of the Bakken is very poor with porosities that range from near zero to maybe 10% in the sweet spots. This prevents the oil from flowing any great distance. There are numerous reports of completely dry holes being drilled right next to producing wells. This is because the permeability is so low that the failure to exactly hit a sweet spot kills the entire well and your $5 million investment.
The depletion of a Bakken well is very fast with production falling to 50% or less within 5-years. Depletion rates of up to 60% per year have been reported. The decline rate of the field after first horizontal wells were drilled from 1993 to 1997 was roughly 25% per year. Had there not been a flurry of new horizontal drilling activity during that period the decline rate would have been much worse. The constant addition of new production supported the decline rate but could not eliminate it. The first wave of horizontal wells in the 1990s averaged 71 bpd per well with 142 wells producing. By 1994 as new wells came online the number producing wells rose to 235 but the average production per well dropped to 22 bpd.
In August 2005 after the second wave of horizontal drilling arrived and with 433 wells producing the average per well rose to 116 bpd. This was with the new horizontal drilling technology and the new hydraulic fracturing. How long does it take to pay off a $5 million well at 116 bpd at $75 oil? If you only had to pay off the drilling costs, land fees and taxes it would take about 3 years. Since oil wells are not maintenance free and every barrel has fees attached the real payout is around 4 years at that rate. However, factor in a 25% to 50% decline rate per year after the first year and you are looking at 5-6 years to break even. It is any wonder that oil companies are not beating a path to the Bakken to drill for oil?
As of October 2007 the Bakken was producing around 75,000 bpd and holding that rate due to the constant addition of new wells. That equates to about 27 million barrels per year and a decent amount of oil despite the high cost and high number of wells needed to accomplish the feat. Current estimates for total recovery are now in the range of 300 million barrels without some new technological breakthrough. Over the last 50 years the Bakken has produced 111 million barrels of oil to date. The current production rate of 75,000 bpd is not likely to increase significantly in future years. That 75,000 bpd rate is 0.4% of U.S daily oil consumption. The peak in average production per well was 116 bpd in 2005 and despite the rapid addition of new wells over the last three-year the current average per well production is only 79 bpd.
The wild claims by Stansberry bear no relation to the actual activity and production capability of the Bakken.