The Bakken Trend: Lost Dutchmen Mine of the Oil Patch?

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Includes: CPG, ENY, EPG, ERF, KOG, MRO, PENFF
by: Steven Ward

Where to drill? The ultimate factor in any oil company's success or failure.

Stories abound about great oil riches in faraway places yet undiscovered; the foot of the Himalayas, the Spratley Islands, the Atlantic Rockall volcanic peak. These stories have become legend with ever increasing speculation on the estimates of recoverable reserves. Fact or fiction - or partly both?

Such a legend exists in the continental U.S. and Canada. The Bakken Trend, located in the giant Williston basin that covers a part of South Dakota, most of North Dakota, at least a third of Montana, a smidgeon of Manitoba and the Southeast corner of Saskatchewan. The Bakken is truly huge.

Oil companies, including the majors, have known for some time that oil exists in the Bakken, but the problem was getting it out. The few wells that were drilled in the years prior to 1996 produced some oil but soon “Gave up the Ghost”, so to speak. The majors, such as Shell (NYSE:RDS.A), left and put their money into the Gulf of Mexico. Geologists had come to believe that the Bakken oil had migrated elsewhere and where was anyone’s guess.

Then the stuff of legends came, along with one geochemist by the name of L. C. Price. Mr. Price, working for the US Geological Survey [USGS] performed extensive chemical analysis of abandoned oil wells, primarily in North Dakota and came away with an astonishing conclusion—The Bakken trend contains up to 200 billion to 500 billion, yes that is with a “B”, of original oil in place.

Here is where the story starts to take on the likeness of the Lost Dutchman Mine of the Superstition Mountains.

Price turned in his report to the USGS in 1999 and the USGS started its own review of Price’s work. Price died in 2002 with the USGS still holding onto his report and refusing to release the findings of Price and the USGS Review.

Like the German immigrant miner, Jacob Walz, who claimed he had found the legendary gold of the Supersticion Mountains, Price died without vindication of his fantastic claim, like the Lost Dutchmen mine itself, the Bakken oil remained elusive and to some illusory, the stuff that makes a good story around bars filled with oil men.

To add to the legend, the USGS, 9 years later, still has refused to release Price’s report and their review of Price’s work citing, “Price’s unorthodox approach”. Even Federal Senator Byron Dorgan of North Dakota couldn’t pry the USGS loose with a demand for release of the two reports.

But then comes along oil geologist Richard Findley. Now the seeds of legend grow stronger. Findley, a highly competent geologist with a strong penchant for independent work, suffered for years scrimping by financially unable to interest anyone with money to invest in his ideas. Financial matters were so bad for Findley that Findley came close to leaving the oil business entirely.

True to the stuff of legends, he didn’t.

Findley reviewed old drilling logs and old seismic data from abandoned wells and fields in the Bakken. Findley, in a moment of true inspirational genius came to the conclusion that all other attempts at the Bakken had missed the oil source entirely and had drilled right through it bypassing the oil that lies between two shale layers. Findley got Lycos Energy of Houston interested in the theory and Lycos brought in Halliburton to try at that time new techniques of horizontal drilling and fracturing.

What Findley, Lycos and Halliburton discovered is the Elm Coulee Field in eastern Montana. Elm Coulee now pumps 45,000 to 50,000 barrels a day of light sweet crude, real Texas T, at a 40 to 42 degree API.

Further research reveals that other analysis by geochemists and geologists not associated with the USGS confirm that Price was in essence correct. The estimates range from a low of 10 billion barrels to confirmation of Price’s 200 to 500 billion barrel estimate. After Findley and company’s 1997 discovery of the Elm Coulee one would think the rush would be on, but It wasn’t and didn’t in the U.S. But Canada was a little different story.

In Manitoba, Canadian oil companies drilled in the Daley/Bakken field and came up a winner with small but commercially viable oil production. In Saskatchewan, Canadian companies came up with the same only larger pools of oil. For the last several years Southeast Saskatchewan has been the only growth business for oil rig and drilling companies in Canada. The drilling activity is hot and will get hotter with infill and step out drilling alone as well as exploration drilling.

But finally, it now appears that the Bakken Rush is finally on in the U.S. as well as in Canada.

In Canada, there have been new entrants such as Petrobank (OTCPK:PBEGF), Pennant Petroleum (OTC:PENFF) and heavy consolidation with larger companies such as Crescent Point Energy Trust (CPGCF.PK) buying up the smaller players such as Inova.

In the U.S., the buying spree has spread as well. Canadian Energy Trust, Enerplus (NYSE:ERF), purchased 9,000 plus barrels a day of production and large unexplored land areas in the Bakken. Canadian firms such as Paramount Resources and micro companies such as Primary Petroleum have now entered the fray with land purchases and scheduled exploratory drilling.

Where are the Americans? They finally arrived in the last 2 to 3 years. EOG Resources (NYSE:EOG) is now producing from the Bakken and Bakken production has boosted the bottom line handsomely. Marathon Oil (NYSE:MRO) is the only American integrated company in the trend and has set up an office in North Dakota solely to exploit the Bakken. Small juniors such as Kodiak (NYSE:KOG) are recent arrivals there as well.

For the investor, a pure Bakken play is tough. My research indicates there aren’t any pure plays yet. All the companies mentioned have only a portion of their total production coming from the Bakken and the rest have just arrived and are scheduling exploration.

My suggestion to the investor is to use a barbell investment approach. Purchase the larger companies currently achieving production from the Bakken as one end of the barbell. These companies will have the financial power to explore, exploit and acquire fields and other companies working in the Bakken as is their current strategy.

The other side of the investment barbell is the junior and micro companies engaged in the exploration process. This will give the investor the potential of large maybe huge upside gains.

At this juncture I am advocating to the investor the Bakken play itself and not any particular company or companies. There are plenty of companies to choose from and in all sizes. Clearly my emphasis is the entire Bakken Trend. I believe large amounts of pools of oil in place will be found. If a standard 10 percent is used to measure the extractable reserves then the prize is in the billions of barrels. Do your homework, pick a big operator in the Bakken and pick up a couple of small ones.

Still doubting? Again, like the Lost Dutchman Mine that had several people clearly “re-discover” the treasure only to keep it secret and die with that secret, the Bakken also has its “new discoverers”. Only this time it’s not a secret.

As recently as 2006, geologists J.Flannery and J. Kraus presented a paper using even more sophisticated computer modeling and extensive data input from The North Dakota Geological Survey and Oil and Gas Division. The model and data estimated initial barrels in place at 200 billion and prior to the paper’s release in 2006 estimates were refined upwards to 300 billion barrels of oil in place in North Dakota and Montana alone.

And there is more.

Petroleum geologist Julie Lefever, who originally assisted L.C. Price in his initial report, has published a paper estimating that in North Dakota additional barrels of oil maybe found in other strata of the Bakken other than Findley’s absolute middle layer zone with a larger oil bearing zone in North Dakota than the one in Montana.

The rush for The Bakken is finally on; investors should catch it if they can.