The Bakken formation is a large unconventional resource that underlies most of the western portion of North Dakota and Eastern Montana. This oil shale formation is located in what is called the Williston Basin. This formation is a rich deposit that the U.S. Geological Survey calls the largest continuous oil accumulation it has ever evaluated. There are currently over 6,617 oil wells in North Dakota, and that number is anticipated to increase as more oil is extracted.
The Bakken Formation consists of three levels: Upper shale, Lower Shale, and the Middle Member, which is a dolemetic sandy layer. The Middle Member of the Bakken is flooded with oil and gas at high pressures.
Montana oil production dates back to the 1950s. By the year 2000, the entire state of Montana produced 18 million barrels of oil. Four years later, this figure doubled to 36 million barrels due almost entirely to the application of horizontal drilling in the Bakken, most particularly in the Elm Coulee Field in Richland County Montana.
For years, geologists believed that there were copious oil reserves in the middle Bakken. However, attempts to drill to this layer were stymied by technological barriers that simply made the oil economically unextractable. Technological improvements with respect to horizontal drilling techniques (spurred by the high price of oil) have finally made the middle Bakken economically viable. Once large-scale drilling commenced, these wells became the largest, most productive wells in Montana, North Dakota, and in the Williston Basin.
The Bakken controversy lies with how much oil has been generated, what it has sourced, and how much is ultimately recoverable. Since 2000, the predictions have been staggering. Some experts suggested that the Bakken may harbor the greatest discovery of oil in the United States since Prudhoe Bay. A draft study conducted by the late organic geochemist Leigh Price provides estimates ranging from 271 to 503 billion barrels (mean 413 billion) of potential resources in place. He believed that as much as 50% of it is recoverable, an important consideration since there are vast oil reserves in the world which are not calculated into any projections because their recovery is beyond the reach of technology and economics. To give that some perspective, all recoverable oil in the U.S. is estimated at 21.4 billion barrels. In Saudi Arabia it's estimated at 264 billion barrels. Dr. Price's study was conducted while he was working for the U.S. Geological Survey (USGS), but it did not receive a complete scientific peer review by the USGS and was not published as a USGS product.
In April 2008, the USGS released its official assessment of oil resources in the Bakken, and although it reported a 25-fold increase in the amount of oil that could be recovered from that area compared to its 1995 estimate, the 2008 estimate was still far short of the 503 billion barrel volume cited by Dr. Price in his study. According to the assessment, North Dakota and Montana have an estimated 3.0 to 4.3 billion barrels (mean value of 3.65 billion barrels) of undiscovered, technically recoverable oil in the Bakken Formation. Currently the North Dakota Industrial Commission estimates 6.5 billion barrels of recoverable oil from the Bakken and Three Forks formations of which only 244 million barrels have been recovered to date.
According to the EIA, North Dakota's oil production averaged 660,000 barrels per day (bbl/d) in June 2012, up 3% from the previous month and 71% over June 2011 volumes. Driving production gains is output from the Bakken formation in the Williston Basin, which averaged 594,000 bbl/d in June 2012, an increase of 85% over the June 2011 average. By combining horizontal wells and hydraulic fracturing (the same technologies used to significantly boost the nation's shale gas production), operators increased North Dakota's Bakken oil production from less than 3,000 bbl/d in 2005 to over 594,000 bbl/d in June 2012, a CAGR of 141%. The Bakken now accounts for 90% of North Dakota's total oil production.
Recent Bakken Transactions
The Bakken has been a hotbed of transactions over the past 12 months. Some of these, listed by date, include:
ExxonMobil (NYSE:XOM) is acquiring Denbury Resources' (NYSE:DNR) shale assets in the Bakken region, increasing its Bakken holdings there by approximately 50%. Denbury will receive $1.6 billion in cash as well as Exxon's interests in the Hartzog Draw field in Wyoming and Webster field in Texas. These regions produce roughly 3,600 net oil equivalent barrels per day of natural gas and liquids, according to Exxon. The deal by Exxon and subsidiary XTO Energy will bring the company 196,000 net acres in North Dakota and Montana, expanding the company's entire Bakken holdings to approximately 600,000 acres. Exxon expects more than 15,000 oil equivalent barrels per day from the assets in the second half of 2012.
In August 2012, QEP Resources Inc. (NYSE:QEP) agreed with multiple sellers, including Black Hills Corp (NYSE:BKH), Sundance Energy (OTCPK:SDCJF) and Unit Corp. (NYSE:UNT), to acquire significant crude oil development properties in the Williston Basin. The acquisition will increase QEP's net acreage in the Williston Basin to approximately 118,000 acres. The properties are located in Williams and McKenzie counties of North Dakota, approximately 12 miles west of QEP's existing core acreage in the Williston Basin. The assets have aggregate current net production about 10,500 barrels of oil equivalent per day with aggregate net proved and probable reserves of approximately 125 million barrels of oil equivalent. QEP paid approximately $1.38 billion (implies $25,000/net acre when adjusted for the 10.5 Mboe/d of production). This price per acre may set the bar significantly higher for other Bakken stocks that currently trade at approximately $10,000 per acre adjusted for production.
Emerald Oil f/k/a Voyager Oil and Gas
In July, 2012, Emerald Oil, Inc. was acquired by Voyager Oil & Gas, Inc. (VOG) for 11.6 million shares of Voyager stock and the assumption of $19 million in debt. Subsequently, Voyager oil & Gas changed its name to Emerald Oil, Inc. (NYSEMKT:EOX) announced the acquisition of Emerald Oil, Inc. At the time of the acquisition Voyager shares were trading for $1.77 per share valuing the stock used to purchase Emerald at $20.5 million and the total purchase price at just under $40 million. Emerald Oil's main assets are 10,600 net Bakken acres in Dunn County, North Dakota and 45,000 net acres in the Sandwash Basin Niobrara in Northwest Colorado and Southwest Wyoming. Voyager on a combined company basis following the acquisition of Emerald Oil controls approximately 200,000 net acres in the following areas, including approximately 43,600 core net acres targeting the Bakken and Three Forks shale oil formations in North Dakota and Montana.
Continental Resources, Inc. (NYSE:CLR) acquired Enid, Oklahoma-based Wheatland Oil, Inc. assets for $340 million. Wheatland's assets include 37,900 net acres in the North Dakota and Montana Bakken play and interests in more than 1,000 gross wells, with net proved reserves of 17 MMBoe as of year-end 2011 and production of 2.5 Mboepd in December 2011 and net proved reserves of 17 MMboe, as of year-end 2011. The implied transaction value is approximately $9,200 per acre or $136,000 per flowing barrel.
Statoil and Brigham
In October 2011, Statoil (NYSE:STO) and Brigham Exploration Company (BEXP) announced a merger agreement for Statoil to acquire all of the outstanding shares of Brigham for $36.50 per share through an all-cash tender offer. The total equity value is approximately $4.4 billion, reflecting an enterprise value of approximately $4.7 billion,based on June 30, 2011 net debt. The transaction will provide Statoil with more than 375,000 net acres in the Williston Basin, which holds potential for oil production from the Bakken and Three Forks formations. Brigham also holds interests in 40,000 net acres in other areas. Current production is approximately 21,000 boe per day, and the acreage has potential to ramp up to 60,000-100,000 boe per day production over a five year period. At the current deal value of $4.4 billion, Statoil is paying $11,733 per acre ($12,533 per acre based on enterprise value).
Kodiak Oil and Gas
In October 2011, Kodiak Oil & Gas Corp. (NYSE:KOG) closed an agreement with a private oil and gas company to acquire additional producing properties and undeveloped leasehold in the Williston Basin for approximately $245 million in cash. Included in the acquisition are approximately 13,400 net mineral acres located primarily in Williams County, N.D. Kodiak assumes operatorship of 15 drilling units on the contiguous leasehold acquired. The purchase price for the asset package, which was paid in cash, was $245 million. Earlier in the summer, Kodiak Oil completed its acquisition of 25,000 net Williston Basin acres in McKenzie County, North Dakota, for approximately $87 million in cash and stock.
Estimated net oil and gas production included in the most recent acquisition is projected to be approximately 3,000 barrels of oil equivalent per day. The transaction will expand Kodiak's acreage position in the Williston Basin to nearly 110,000 net acres. The transaction includes a working interest in seven gross (5.1 net) operated producing wells; four gross (2.2 net) wells that are waiting on completion or drilling; and four permitted and built locations. Two of the four wells waiting on completion are scheduled for completion work in November 2011. Once the four permitted wells are drilled, nearly all of the acquired leasehold will be held by production. Kodiak projects an average per-well estimated ultimate recovery of 650,000 boe from the Bakken formation.
Recent Trends Create Bakken Crude Premium Relative to WTI
Due to a number of factors, Bakken oil production growth has begun to slow more than expected. According to the North Dakota Industrial Commission, the rig count has dropped to 194 rigs, which is the lowest level since July of 2011 and below the all-time high of 218 reached in May. In July 2012, daily oil production for the state averaged 674,000 barrels per day, which is was less than expected and only marginally higher than June. One of the reasons for this rig count decline are rising costs. Well costs are estimated to be close to double compared to 2009 levels.
One of the contributing factors to rising costs is a lack of in-place infrastructure, such as housing, in Western North Dakota to support the frenetic drilling activity. Housing scarcity is driving up rental prices, forcing drilling companies to pay higher salaries. Many companies in the area are now focused on reducing costs and not just on as rapid as possible growth.
In addition, for the first time, due to a new rail system, there is more shipping capacity for oil than oil production in the Bakken. As a result of these two factors (slowing production growth and greater shipping capacity) combined with the fact that oil shipped to the storage hub for West Texas Intermediate ((NYSE:WTI)) at Cushing, Oklahoma is currently land locked, Bakken spot crude prices are trading at a premium to WTI spot crude prices. However, this premium of Bakken over WTI
will likely dissipate in 2013 once a pumping station is completed at Cushing in early 2013, driving carrying ability from 150,000 barrels of oil per day to 400,000 barrels of oil per day.
In the short term, this premium should benefit Bakken oil companies with heavy Bakken exposure, including as Northern Oil and Gas (NYSEMKT:NOG), Kodiak Oil and Gas, Oasis Oil and Gas (NYSE:OAS), Triangle Petroleum (NYSEMKT:TPLM).