That News That There is a New Oil Formation in North Dakota -- NOT!

The Associated Press published a story yesterday that is now making the rounds on the net and the blogosphere (including mine). The headline: ND Study: New Oil Formation Rivals Bakken.

I am one of the most inappropriately exuberant observers and commentators on the North Dakota oil industry, and on first glance, "appreciated" this headline.

But I think this is a misleading headline and will be used by investment newsletters to lure the uninformed into making possibly wrong decisions on investing in the oil business in North Dakota.

The AP story refers to the Three Forks Sanish formation. This is not a new formation. I don't know when oilmen first determined that the TFS was an oil-producing formation but I do know that the US Geologic Survey (USGS) accomplished in 2008 was a survey of the Bakken pool which included the Bakken formations (yes, plural) and the Three Forks Sanish.

After that study, there were some oilmen that opined that the Bakken and the TFS were separate formations. Well, geologically, they were always separate formations. What the oilmen meant was this: that the Bakken formations did not communicate with the TFS formations. The first derivative of this theory, was that oilmen could drill into either the Bakken formations or the TFS formations and not disturb the other, or "drain" oil from the other.

[Before going further, this is why I refer to these formations in the "plural": the Bakken has an upper, middle, and lower formation. Early in this boom the wells were reporting production from the upper Bakken, but now the majority -- probably 99% -- of "Bakken wells" are targeting the middle Bakken. Likewise, the Three Forks or the Three Forks Sanish, used interchangeably, has an upper and a lower formation. These five formations are part of the NDIC administrative designation called the "Bakken pool." But even with that it is confusing: on the NDIC website they separate cumulative oil totals from the Bakken and the Bakken/TFS. I assume the latter is the TFS formation, part of the Bakken pool. For complete discussion and additional links to interesting discussion threads, click here.]

The bottom line is this: the AP story headline is incorrect -- this is not a new formation. It has always been there. And the USGS survey in 2008, by its very nature, included both the Bakken formations and the TFS formations.

But and this is a huge "but": the USGS survey is based on production from existing wells, informed scientific input from geologists, likely available technology, etc., in completing their survey. At the time of the survey, almost all of the the Bakken pool wells were in the upper and middle Bakken formations.

Had there been an equal number of wells in the upper and lower TFS formations at the time of the USGS survey, it is likely that their estimates of total and recoverable reserves would have been greater.

One might look at it this way:

2008: based on USGS survey, conservative estimate that 3.0 billion barrels are recoverable from the Bakken pool.

2010: based on above information, conservative estimate that 5.0 billion barrels are recoverable from the Bakken pool.

By the way, one way I look at the "value" of E&P companies working in the Bakken or "value" of their shares: if the value is based only on Bakken formation production, the shares are undervalued; if the value includes conservative -- repeat, conservative -- estimates of TFS formation production, the shares are more likely fairly valued, all else being equal.

Grand Forks Herald story, same subject.
Bismarck Tribune story, same subject.
Minot Daily News story, same subject.
Williston Herald story, same subject.
Discussion thread on Bakken and TFS, read through the entire discussion but be sure to read Teegue's comments on February 25.

ADDED

Some companies estimate that the total estimated ultimate recovery (EUR) from a good "Bakken" well in the better oil fields in North Dakota could be in the range of 700,000 barrels.  Adding a "TFS" well at the same location could add about 400,000 barrels. This is based on published reports late last year (2008) but obviously there are many, many variables. Based on this information, some companies are now placing stacked dual laterals at a single wellsite / single pad, drilling one lateral into the Bakken formation and one lateral into the TFS formation. In the 1Q 2010 conference call, Hess stated that their dual laterals cost them $10 - $11 million and produce, on average, 500 bbls of oil/per lateral, or 1,000 bbls per site. At $10 - $11 million I am not seeing the cost savings I had hoped would be there. A single horizontal well in North Dakota costs anywhere from $4.5 - $6.5 million based on published comments by oil companies working in North Dakota. Efficiencies are pushing the price down, but as the price of oil increases, oil service companies can charge more, pushing prices back up.

Elsewhere I questioned the rates of production that Hess said in their conference call based on the IPs that Hess has reported on their wells, but that's another story.