How Much Oil Does the U.S. Have in the Ground - What Does It Mean for Investors?

by: The Patient Investor

How Much Oil Does the US Have and How Much Can It Produce?

The US Geological Service (USGS) prepares estimates on how much oil the US has in various oil and gas plays, how much original oil was in place, and the amount of producible oil in place. According to the USGS website, with current technology, the US has approximately 50 billion barrels of producible oil in place; this also includes Alaska. Most of these assessments were made before the current horizontal drilling and fracing procedures were developed. If you look this up in Wikipedia, they give you a formula to calculate the amount of oil in place. Not being a geologist and a little rusty on my math, I didn't do the calculation.

However, being a retired CPA, I naturally started trying to figure things out. The first thing I noticed when I did this was that the USGS figures seemed very low. I did some calculations on the amount of potential oil that Brigham Exploration Company (BEXP), in which I own some shares, has in the ground. The company has a presentation, see their latest presentation (.pdf) - pages 33 through 51. In this presentation, they state the estimated equivalent barrels of oil reserves is 600 thousand barrels of oil per well. They also stated that they will get 4 wells per unit - 1,280 acres or two sections (square miles) per unit.

Their work indicates that they will probably get 5 wells per unit, but they are only claiming 4 wells per unit at the present time for the Bakken and slightly less for the Three Forks formation. These formations are of a similar size and actually overlap for a large area. If I take their estimate of 2,132 drilling units and increase it to 5 wells per unit, it comes to 2,715 wells. If I multiply this by the 600,000 barrels times 85%, which is the amount that is oil, it comes out to 1.629 billion barrels of oil. Now, if I multiply BEXP's average barrels per well by 12,500 square miles of Bakken area and do the math, this comes out to 31.875 billion barrels of oil in the Bakken and Three Forks formations that can be produced.

This is probably a high figure since Brigham appears to be the highest producer per well in the play (large area of active drilling for oil) and probably has one of the best land positions in the play. There is also some debate as to whether the Three Forks formation has as much oil as the Bakken, but I think it gives us a ball park idea of the amount of oil. Also, one of the Bakken's biggest producer's CEO's has stated publicly that he thinks the Bakken has 25 billion barrels of oil that is recoverable with current technology. Now, if we go to slide 50 of BEXP's presentation above, they consider 9 other formations that are prospective for oil, and they have drilled 4 wells in the Red River formation and have 4 producers. At least six of these other formations are producing substantial oil in Canada.

In the Canadian Bakken, they are about three to four years ahead of the Bakken development in North Dakota. At least two companies, Petrobakken Energy Ltd (PBKEF.PK) - see their latest presentation (.pdf) - pages 10 through 14 and Crescent Point Energy (CSCTF.PK) company presentation (.pdf) - see pages 18 through 26, are doing waterfloods and/or CO2 floods. These will increase the recoveries of oil by at least 20 to 25 percent and may work in the North Dakota Bakken. Also, new drilling and fracing techniques are increasing the amount of oil being recovered by Brigham, Petrobank, and others as shown in their presentations above. Once these plays are delineated, there are almost no dry holes, because the oil is in the rock and not in oil pools.

All these techniques are increasing the amount of recovered oil in the Bakken. In 2008, the USGS made a projection of 3.645 billion barrels of oil in the Bakken and Lodgepole formations. It is obvious to me that there is significantly more recoverable oil in these two formations than the USGS predicts. How much actual oil is there in the Bakken and the other formations? It is impossible to tell; only time will tell.

I did this same type of analysis in another article I wrote regarding SandRidge Energy (SD). When I did the same type of analysis as Brigham, I came up with 1.5 billion potential oil reserves in the land they held and 10 billion barrels of potential oil in Mid Continent Mississippian Play in Kansas and Oklahoma. When I looked at the USGS information, I couldn't find any estimate of reserves on this specific oil play, but they had a low estimate for a basin that overlays part of this play.

Then I started looking at 5 or 6 other oil companies I owned that had projects in the Eagle Ford Shale (GEOI), Monterey Shale (VQ), Alberta Bakken (ROSE), Permian Basin (SD), Anadarko Basin and various other areas. In all cases, when I looked at the various oil company projections and extrapolated these amounts and compared these amounts to USGS estimates of producible oil, it was from 0% to 20% of what the oil companies projected in these plays. My reaction was, "What's up Doc?" as Bugs Bunny used to say. It became quite clear to me that the figures the companies were using in their company presentations were much closer to actual amounts of oil in place than what the USGS has developed.

Then I came across this report from a USGS employee; this paper was never released by the USGS, because Leigh Price passed away before it could be finalized. Leigh Price's paper is, in my opinion, the definitive study on the amount of oil in the Bakken shale formation. He estimated that there was 400 to 500 billion barrels of oil in the Bakken. There is a summary of the various Bakken estimates of oil in place (.pdf) on the North Dakota state website. If you figure the industry could produce 4% to 6% of this oil that is in place, this would put the producible oil at 16 billion to 30 billion barrels of oil just in the Bakken.

Therefore, after going through all this data and assigning estimated barrels of oil to various basins and shale oil plays plus including an estimate of yet to be discovered shale oil, I came to an estimate of oil in place. This estimate was also influenced by Leigh Price's paper on the Bakken. My estimate of oil in place in the continental US is from about 3 trillion to 5 trillion barrels of oil not including the 3 trillion barrels of oil shale. See this shale play website for a partial list of Shale oil plays and basins in the US. I know this seems very high, but it was only a few short years ago that we were going to need to import huge amounts of liquefied natural gas to meet our demand for natural gas, and now we have a glut of natural gas in the market place because of all the shale natural gas.

We should be able to produce at least 150 billion barrels of oil to maybe 1.0 trillion barrels of oil if the majority of these plays can be water flooded and CO2 injected as in the Canadian Bakken. I used 5% for the low estimate of 3 trillion barrels and 20% of the high estimate 5 trillion barrels figuring they could do some water flood and CO2 tertiary treatment to a large part of this land. For this oil to be recovered, it will require that the oil price stays above $70 a barrel so the economics are in place to fully develop these areas. We need to have some university professors in geology do some research instead of a retired, former CPA on this matter, because it becomes very important for the nation to determine what is a good projection of possible oil production.

What can be produced is another matter; most of these companies have the ability to produce a substantial amount of oil. However, most of these companies appear to have 6 to 20 years of drilling sites available. So even if I am right about production capability, it will be constrained by the amount of assets these companies have and the amount of drilling rigs available. It will take at least 10 to 15 years, if ever, before we could produce all the oil we need. It should also be noted that most of these oil plays are in over pressured reservoirs, which means the 24 hour initial production amounts decline by 80% to 90% the first year, 30% to 40% the second year of the first years ending production, and then much smaller rates after that.

The one thing that concerns me is why the major oil companies - Shell (RDS.A), Exxon (XOM), Chevron (CVX), and others, and with a few exceptions the mid majors are not in these plays. What are the majors worried about - the price of oil, the cost of production, or some other thing? Have they just missed these opportunities, or are they just waiting to buy up these smaller producers? These companies could really move the needle as far as getting these oil plays into full production much sooner. The majors could move 25 to 100 drilling rigs into many of these plays and reduce the time to develop these plays to 5 years or less in some cases; of course, in some cases the newer plays are not yet ready for this number of rigs. This would also help the trade deficit balance, since we are spending at least 300 billion to 400 billion a year on imported oil.

Reducing this deficit could boost our economic growth rate by at least 2 or 3 percentage points if this money were reinvested in our economy each year instead of the oil producing countries' economies. This would also help reduce the price of oil and future inflation. Thirty eight years since the first oil shortage and what has the federal government done about getting us energy independent - really nothing. It gives you great confidence in our government officials.

In my opinion, there is a great opportunity to invest in oil exploration companies for the next 7 years. However, with the current environment in the Middle East and worldwide governmental economic problems, who knows what will happen for sure.

Disclosure: I am long BEXP, GEOI, VQ, ROSE, SD.

Additional disclosure: I may buy or sell at any time some or all of these companies' shares mentioned in this article based on world events or specific news about the company.