Dar & Company

Will the Bakken Be as Inspiring as the Barnett?
(First published on www.SeekingAlpha.com on January 18, 2011)

The Barnett shale play has not only inspired one of the fastest growing energy industries ever created in North America, but is on the verge of propelling a multinational industry.

By the end of this decade a small industry that started in an obscure basin in Texas-- and was dismissed by Government and Big Oil alike-- will likely be multicontinental in scope and strategically impressive in scale. Independents saw what Government is incapable of seeing and still cannot comprehend and Big Oil could afford to wait and see.

The Barnett has inspired not only a dry gas industry but a sub industry based on the unsuspected liquids window in the gassy shales. The production of gas liquids and oil from the liquids windows is spreading across several basins in North America, and most likely will lead to US liquids production being higher at the end of this decade than it is now-- again contrary to the confident pronouncements of Government and Big Oil.

The logical question independents and investors who like these companies and plays are asking:

Will the dry gas (relatively low value per Btu at the moment) shale to gas plus liquids (higher value at the moment) shale to oil shale (highest value at the moment) progression continue as the industry gains more knowledge and experience with shale basins?”

This translates into speculation whether the Bakken shale play prefigures a much larger set of global oil shale opportunities, just as the Barnett did a decade ago for gas shales but no one, of course, knew at the time.

Kerogen Shale Is Not Oil Shale
It is important (and for investment reasons, essential) to distinguish between the carelessly and unfortunately misnamed oil shales of Colorado and the oil shale of the Bakken in North Dakota and Western Canada. The former are kerogen shales and their production is a water and energy intensive mining and retorting industry. The latter are true oil shales and their production is a drilling (horizontal, multi stage, fracking) industry. There is almost nothing in common in terms of process and economics between these two shales. Kerogen shales have been well studied and analyzed for decades; oil shales have not.

Kerogen shales are found in over 40 countries with the US, Russia, China, Jordan, Israel, Morocco having very large resources. There is commercial kerogen shale production in Estonia (direct combustion of pulverized rock to produce power and steam by the company Eesti Energia), China and Brazil (Petrobras) but the aggregate amount is equal to 20,000 barrels per day.

There are proposals to produce kerogen shale in Israel (although the recent enormous offshore gas finds in Israel will obviate the need for this) and Jordan (concessions have been granted to Royal Dutch Shell (RDS.A) and Eesti Energia). Morocco has granted or is negotiating concessions with 3 companies, including Petrobras.

Kerogen shales, in their most economic use are substitutes for coal, not crude. They are a central power plant fuel, not a transportation fuel.

It makes more commercial sense to convert natural gas and coal to liquids than kerogen and the former conversions hardly makes business sense anywhere, except as a technology hedge. The crack spread between kerogen or natural gas or coal values and gasoline, diesel and jet fuel values perhaps has to be as much as 1 to 10 on a per Btu basis to justify the very expensive conversion black box based on currently knowledge and practice. This spread does not exist, and in the absence of massive and sustained disruptions to the global oil supply chain, is highly unlikely to exist. The best substitute for conventional crude is unconventional crude.

The Next Bakkens?
The importance of the Bakken, of course, is that it is propelling rapid growth in oil production and hence jobs, income and wealth creation in North Dakota (and across the border). Drilling now is at an all time high. The State of North Dakota projects that by 2017 North Dakota’s oil production will have risen to around 600,000 barrels per day (bpd) from about 325,000 bpd at present, compared with only 450,000 bpd in onshore Alaska (according to the US Government) in 2017 and about 525,000 bpd onshore Alaska at present.

An initial study by the US Geological Survey (notorious for its miserable record in grossly underestimating oil and gas reserves over decades) claimed that the North Dakota Bakken had 4.3 billion barrels of recoverable oil. The latest official estimate is already 11 billion barrels. Continental Resources (CLR), a leading Bakken producer, says that at current economics and with current technology the North Dakota Bakken has 24 billion barrels of recoverable oil.

The US Government claims that total US crude reserves at the end of 2009 were only 21 billion barrels.

There are almost 170 billion barrels of oil in place in North Dakota according to industry estimates, so that as new generations of technology appear and business experience accumulates, the ultimate recoverable reserves may be scores of billions of barrels.

Even France?
It is not Australia, however, but France-- where the greatest industry anticipation and activity is building in the search for the next Bakken; in the well known Paris basin.

The Paris basin (current production of less than 15,000 bpd of conventional oil) covers the northern half of France and extends into neighboring countries. It is a vintage oil and gas basin. Over 2 thousand wells have been drilled and 52 fields discovered. It has extensive oil and gas shale deposits. The 3 oil shale formations are the Lower Lias, Amaltheus and Schistes Carton. The current focus of excitement is the Lower Lias with estimated oil in place resource base of a few billion to tens of billions of barrels. The estimates (guesses) for the oil in place in the other 2 formations are much higher.

Vermilion Energy is one of 10 companies positioning themselves in the Lower Lias. Vermilion reactivated a 25 year old ExxonMobil (XOM) well using drilling techniques tried and refined in the US shale industry. Vermilion is the largest conventional oil producer (8,500 bpd) in France. Vermilion plans to spend $160 million to develop shale oil reserves in the Paris Basin.

Realm Energy International (RLMXF.PK) (it has a shale oil and gas development partnership with Halliburton (HAL)) has also applied to be a significant explorer in the Paris Basin. The company has identified 17 potential oil and gas shale plays in Europe. It is already active in Poland. The company has also been awarded shale concessions in Lower Saxony, Germany.

Toreador Resources, an E&P headquartered in Paris, has perhaps the most ambitious plans for the Paris Basin in partnership with Hess (HES) which has invested $120 million (the figure could be $265 million with contingent payments) with Toreador to explore 1.7 million gross acres in the Paris Basin. Hess has invested $1 billion in the Bakken and plans to invest another $1 billion there over the next 5 years. In addition to the Paris Basin, Hess thinks it has found a basin analogous to the Bakken in China.

Toreador asserts that an estimated 100 billion barrels of oil have been generated from source rocks in the Paris basin, of which 30 billion are in the Lower Lias. Its gross acreage position makes it, at present, the largest player there.

Toreador plans to drill 6 wells in the Paris Basin in 2011. Of these 2 each will be vertical, vertical / horizontal combination and horizontal. The first 4 wells have been permitted and a drilling contractor secured. The first well will be completed in February 2011 and the 6th in October 2011. By the end of this year the company expects to complete well evaluation and design phase 2 of its program.

Why it Matters
We will know in less than 2 years whether other Bakkens exist and in 5 years whether the Bakken model is as globally scalable as the Barnett. Enough oil and gas independent E&P companies appear to believe that it is for us to pay close attention. If the expectations materialize then hundreds of new independents will be formed to pursue the Bakken analogs all over the world. As the Barnett is the archetype for shale gas across the world, the Bakken may be for shale oil.

A few American independents with imagination, skill and courage pursued the Barnett and the Bakken while Government sneered and the integrated majors and mini majors either dismissed the potential or decided to wait until the opportunity was proven; knowing that they could buy their way in.

In shale natural gas the majors and mini majors are already spending many billions to buy their way in; they will do the same for shale oil.

Given how widely dispersed shale gas (and other forms of tight gas) is across the planet and shale oil (and other forms of tight oil) may also be, there are likely to be many more countries producing oil and gas 20 years from now than there were 20 years ago.

The true globalization of oil and gas E&P is perhaps just starting.