It looks like the biggest winner from the boom in natural gas production from shale formations in the United States will be the U.S. onshore oil industry.
Thanks to techniques pioneered in the late 1970s to extract natural gas from tight shale formations in such places as Wyoming, Texas, Arkansas, New York and Pennsylvania, onshore U.S. natural gas production has soared. From 2007 to 2008, a period when production from shales took off, natural gas production from these formations increased by 71%, according to the Energy Information Administration.
Thanks to that booming U.S. supply, and an abundance of cheap natural gas on international markets and a deep economic recession, that surge in natural gas production hasn't resulted in huge profits for natural gas producers. NYMEX settlement prices on gas futures have plunged to less than $4 per million BTUs (British thermal units). That's down from a high of almost $14 in late 2005, and from more than $9 as recently as August 2008.
Producers such as Chesapeake Energy (CHK, news, msgs) and Ultra Petroleum (UPL, news, msgs) fell into the red in 2009.
That's a lot of oil in terms of U.S. production, but it's not enough to drop the global price. With oil at about $70 a barrel, producers in the Williston Basin are quite profitable, thank you.
Let me dig a little deeper into the oil shale story and then suggest some ways to invest in it.
Locked in the rock
The oil industry discovered oil in the Bakken formation way back in 1951. But until the natural gas industry pioneered technology to tap natural gas trapped in dense shale formations, oil companies couldn't get at the oil.The Bakken formation consists of two layers of shale with a middle layer of dolomite, another sedimentary rock. The shale has natural vertical fractures, and early drilling tried to run conventional vertical wells into these fractures. That didn't turn out to be very effective in extracting oil, because the shale swells when exposed to drilling fluids, sealing the fractures. Iron pyrite in the shales also caused irreparable well damage in some cases.
New technologies borrowed from natural gas wells in other shale formations use horizontal drilling to tap into oil. Horizontal wells can reach thousands of feet of oil reservoir rock that may be in a layer no more than 140 feet thick. Using hydraulic fracturing technology can increase the flow by creating fractures that let the oil seep toward the well.
All this certainly seems to work. For example, on Oct. 4, Brigham Exploration (BEXP, news, msgs) announced the completion of its Rough Rider Three Forks well with an early 24-hour peak flow rate of about 2,356 barrels of oil equivalent. The company has now completed 36 Bakken and Three Fork wells in North Dakota, with an average 24-hour peak flow rate of about 2,684 barrels of oil equivalent. Those are high rates of flow.
Problem? It's the water
This isn't to say that everything is going to be smooth sailing in the Williston Basin for oil producers. The big problem is water -- or actually, the lack of it. Producing oil from shale requires about four barrels of fresh water to produce a barrel of oil, compared with one barrel of water required from conventional sources. That requires oil producers in the Williston Basin to employ a constant caravan of trucks to supply millions of gallons to each well site, where it is then pumped down the well bore at pressures high enough to fracture the shale. The Bismarck (N.D.) Tribune estimates that producing oil and gas from the Bakken shales will use up to 5.5 billion gallons of water a year.North Dakota isn't exactly swimming in water. Average annual rainfall in the state ranges from 13 to 20 inches a year. That's a lot in comparison to the 5 inches that fall in the Mojave Desert each year. It's roughly equal to the 15 inches that fall on Los Angeles in a year. New York City gets an average of 43 inches.
