The Next Bakken Home Run

Jan.17.12 | About: Lightstream Resources (LSTMF)

Oil was first discovered in the Bakken as early as 1951. Unfortunately for almost the next 60 years there was no way to recover that oil at economically viable production rates. As oil prices rose in the last decade companies continued pushing the boundaries of technology in an effort to get more of that black gold. Experimentation with horizontal drilling and multi-stage fracturing led to the right combinations of technology and technique that "cracked the code" code in the Bakken.

Companies that moved in quickly and locked up the acreage containing the Bakken have since made billions and billions of dollars.

Despite all of this wealth and shareholder value creation, I believe there are billions more to be made in the Bakken. The companies that are going to make these billions of dollars are the ones who today already have the acreage. As the majors are learning, the unconventional oil business is being won by the independents who moved first and locked up the key land positions. Once that land is gone, it is gone.

There are two Canadian producers who have most benefitted from the unconventional revolution in the Bakken. These companies are Crescent Point Energy and Petrobakken. And these companies believe that the Bakken is a gift that is going to keep on giving.

Petrobakken (PBKEF.PK)

Petrobakken was one of the true innovators in the Bakken on the Canadian side of the border. The company had exposure to the Bakken play early on through a prior incarnation inside of parent company Petrobank.

Early efforts at fracing wells that Petrobakken was involved with were very unsuccessful. But despite this the company continued to accumulate land participate in ongoing operations. That is when you want to be buying land, before anyone believes oil exists in it that can be recovered. Petrobakken noticed that the concept of using a single massive frac was not ideal and came up with the idea of using Packers Plus technology to use a series of multi-staged fractures.

Without using multi-stage fracs a Bakken well would produce 20 barrels per day. A well with multi-staged fracs came on at more than 200 barrels per day. At these rates given the costs involved the Bakken was economical.

Currently Petrobakken is producing over 23,000 barrels per day from the Bakken and has booked 90 million barrels of proved and probable reserves. There is more to come.

On land that Petrobakken controls in the Bakken are 1.8 billion barrels of oil in place. Current reserve bookings assume that only 5% of this oil (90 million barrels) is going to be recoverable. Petrobakken believes that the ultimate recovery will be 25%.

For a company with 90 million barrels of booked reserves, increasing recoveries from 5% to 25% would mean that 450 million barrels of oil will be recovered. I'm not a genius, but I believe that might be a positive influence on the Petrobakken share price.

Some of this increase will find its way into Petrobakken's reserve bookings as undeveloped land is drilled and the company is allowed to book reserves. Of the 750 drilling locations Petrobakken has remaining only 237 have been recorded in the proved and probable reserve figures.

The true step change in recovery will come through enhanced oil recovery techniques.

Petrobakken's preferred method of enhanced oil recovery in the Bakken will be accomplished through the injection of natural gas. The natural gas injection is injected in order to increase pressure which typically falls as oil is produced. The increase in pressure lessens the naturally occurring declining rates of production. Petrobakken has already tested the concept using Co2 and the results in wells offsetting the injection well demonstrated vastly improved recoveries in 2010.

Natural gas is now being tested and is preferred to Co2 because it is readily available in the area, the components of natural gas can be modified to increase recoveries and it is much less expensive and less corrosive than Co2.

The really nice part of natural gas EOR is that it also works as a way to store the natural gas for recovery later at what will hopefully be much higher prices (the injected natural gas can be produced later).

For detail on Petrobakken's EOR program investors can check out this presentation.

Crescent Point Energy (CSCTF.PK)

The other heavyweight in the Canadian portion of the Bakken is Crescent Point Energy. And much like Petrobakken, Crescent Point believes that it can ultimately recover almost 30% of the oil in the ground in the Bakken.

Crescent Point's approach to enhanced oil recovery is a more traditional waterflooding. The objective however is the same, and that objective is to greatly lower decline rates and keep Bakken production rates higher for longer, greatly improving economics.

Crescent Point started its Enhanced Oil Recovery much earlier than Petrobakken, with 2008 marking the year that waterflood testing was started. So far the company has drilled 17 water injector wells and is pleased with results. The waterflooding is expected to increase recovery rates from the 19% expected under primary recovery to over 30%.

For Crescent Point this increase in recovery rates could mean up to 200 million barrels of additional oil reserves. That would create billions of dollars of shareholder value.

For detail on Crescent Point's EOR programs investors can check their latest presentation.

Everyone Wins

The important thing to note is not whether natural gas injection or waterflooding is the better secondary recovery method. The important thing to be aware of is that whichever method creates the best economics will be adopted by everyone.

If one company figures out how to squeeze more oil out of the Bakken, then every company that has Bakken land will increase in value. Not just the company that made the breakthrough.

That is why I have a lot of my portfolio dedicated to these unconventional producers. There are thousands of people working every day on increasing recoveries from these resources. If I can buy pieces of these properties today while Mr. Market prices them for 5% recovery, I'm going to be very happy if the ultimate recovery turns out to be 30%.

The next home run in the Bakken is going to be created by continued improvements in recoveries. I don't think Mr. Market knows this yet as he sees to price these unconventional producers based on existing production and ignores the years of growth in front of them.

Disclosure: I am long CSCTF.PK, PBKEF.PK.