“It’s all about the rock”
The Bakken Shale, an accumulation of oil in North Dakota and Montana, is being hailed by some
as a savior to the U.S. dependence on foreign oil. While this new found resource is exciting it is
far from a solution to our oil dependence. Currently the USGS (United States Geological Survey)
estimates the Bakken Shale contains 4.3 Billion barrels of recoverable reserves; I would say this
is conservative and think it’s probably closer to 10 billion barrels of oil. While this is a large
number its impact is diminished when considering in 2009 U.S. oil consumption was a staggering
7 Billion barrels.
More important than total resource potential are the challenges and costs associated with the
extraction of this oil. A quick lesson on oil and how it’s formed. Traditionally (read Conventional)
oil exploration was focused on large structures beneath the earth. These structures were formed
by faults and the movement of tectonic plates. The faults were supplied with oil from source rock
typically found several thousand feet deeper than the faulted structure. Over millions of years the
pressure above the source rock (10,000 feet of rock and soil) coupled with the internal heat of the
earth's core have cooked this source rock which in turn releases oil that then migrates both
vertically and horizontally until it hits a fault/trap and is contained within. Over millions of years
the oil keeps seeping and pressure continues to build. Once a drill bit is stuck in the ground and
drills through the fault, it hits this overpressured zone of oil resulting in what is commonly referred
to as a gusher. We often use the analogy of a soda can that has been shaken, put on a table,
pull the tab and about a 1/3 of the soda will naturally flow out of the opening and all over your
table. This is the equivalent of what we call primary recovery in the oil and gas business.
For 100 years conventional exploration has ruled the industry. In the late 1990’s a small private
company in Dallas Texas was drilling for deeper faulted conventional targets when they kept
intersecting this shale rock (read denser rock) at shallower depths than its planned target. At the
same time, offshore drillers were starting to use Frac technology. A Frac is when you inject
millions of gallons of water down the well bore and into the hydrocarbon formation. The water
also has sand or proppant with it and when the water hits the rock formation at 10,000 PSI
(pounds per square inch) coupled with the proppant, its like shooting a cement brick with a
shotgun, it blast the hell out of it and creates small holes throughout the rock.
Hydrocarbon bearing rocks have two key technical terms to determine quality. Permeability and
Porosity. The permeability of a rock is the measure of the amount of hydrocarbon flow through
within the rock. Porosity is the measure of a rocks ability to hold hydrocarbons. Best analogy
is to think of a brand new sponge versus an old sponge. One will soak up water and release
water with ease, the later takes time to soak up the water and releases it slower.
How does this all relate to the Bakken? The Bakken is a shale, meaning its permeability and
porosity are extremely low (read tight rock). Therefore when you drill through it vertically, the
ability of oil and natural gas to release is extremely limited and uneconomic. (An uneconomic
well is when the cost to drill the well exceeds the value of recoverable reserves.)
Engineers realized that Frac technology could unlock the tight rock’s hydrocarbons. However a
vertical well would still only encounter 50-100 feet of shale rock, thus limiting the ability of the
Frac. The next step in the technological revolution and hence the term “unconventional
exploration” was the use of horizontal drilling. This innovation has single handedly changed the
business of oil and natural gas exploration. The following diagram demonstrates a horizontal
well.
Now with horizontal drilling, the drill bit can intersect 50-100 foot of rock and then drill horizontally
for several thousand feet. Some Bakken wells now have horizontal laterals in excess of 5,000
feet. That’s one mile! This results in more fracture stimulations over more source rock which in
turn unlocks more hydrocarbons and turns an uneconomic mess into liquid gold.
The negative to this type of exploration is what we refer to as the treadmill. Traditionally a
conventional well would come onto production and then decline year over year by 10% in a linear
fashion. Unconventional wells tend to come on at higher rates but experience first year decline
rates in excess of 50%. This is called a hyperbolic decline curve. This steep decline curve
means more wells have to be drilled in order to increase production. The Bakken Shale in 2009
averaged 222,000 barrels of oil per day. That means at a 50% decline rate, hundreds of new
wells need to be drilled just to maintain that level of production.
In closing the key take away of the Bakken Shale is yes it’s a great thing for the U.S. But don’t let
politicians and/or the press dupe you into believing that this is an easy solution to a problem that
every president since Carter has unsuccessfully tried to solve. From a capitalist stand point,
there are a plethora of public companies exploring for the Bakken Shale. Not all acreage is
created equal but those in the right place with the right balance sheets will make their
shareholders a ton of money. However be warned if someone is touting how great their acreage
is, as it could just as easily be a goat path to nowhere.