Bakken Emerges as Contender for US Oil Drilling Crown
In the resurgence of US energy production, one spillover effect has been to put relatively obscure places on the map. One of those is Bakken, an oil hub that some believe could challenge the Gulf Coast's prodigious crude output.
Bakken, a region stretching through swaths of North Dakota and Montana, has transformed itself into a major site of US crude production.The formation is now seen as the future of oil drilling in the U.S., and is an epicenter of pipeline expansion projects designed to capitalize on production. Estimates say the region's oil output has more than doubled over the last two years.
According to official data cited by North Dakota's Department of Mineral Resources and the Energy Information Agency, Bakken crude production surged from 274,000 barrels per day in January 2011 to 673,000 in January 2013.
Yet private estimates put that figure even higher, stating Bakken generates more than 800,000 barrels per day — with the potential to top one million barrels within the next few years. Analysts expect some 33,000 wells will be drilled there over the next 20 years, with more than 5,000 coming by 2015.
Bakken is now one of the largest sources of crude production in the US, and is teeming with international investment capital. Although the state currently lacks the refining capacity and advanced infrastructure of Texas and Louisiana, some say isolated North Dakota stands a solid chance of taking the Lone Star State's crown for drilling and production.
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With U.S. crude oil hovering above $90, drilling in Bakken "is like printing money. Capital is coming from all around the world, even Europe and Asia," said Fadel Gheit, an energy analyst at Oppenheimer. "It has single-handedly changed the outlook for oil production."
The excitement surrounding Bakken's production is due in large measure to the fact that its crude is now making its way beyond the borders of the Midwest, to the US coasts. In a comprehensive report written this month, Platts said some of the region's blends are now being used in the NYMEX crude futures contract.
"The outlook for Bakken crude production over the next few years is promising, and many of the government reserve estimates could be understating the potential" of Bakken and some of its surrounding formations, Platts said.
Oppenheimer's Gheit calls Bakken's crude "one of the purest oil plays "because it is comprised of 90 percent oil and 10 percent natural gas. Better technology and capital investment will only ramp that up, he added.
However, "the only challenge for the Bakken is that it's in a state that has no infrastructure," Gheit said. "Everything has to be built from scratch."
All of which means Bakken has a long row to plow if the region plans to displace the Gulf Coast. North Dakota's isolation and what many observers say is woeful infrastructure is a barrier to its ability shake up the entrenched oil production apparatuses in Texas and Louisiana. Both states refine more than half of the US's oil, with West Texas Intermediate serving as the unchallenged benchmark for U.S. crude.
Aside from the state's business-friendly bonafides and decades-long dominance in energy production, Texas also has a booming region of its own, in Eagle Ford.
A booming south Texas oil hub, Eagle Ford produces somewhere north of 750,000 b/d, and the US Geological Survey estimating the region having a whopping 853 million barrels in undiscovered reserves.
For that reason, John Hummel, CIO of investment advisory firm AIS Group, is not as bullish on Bakken as others are. He cites the relative attractiveness of Eagle Ford, as well as what he argues is the rapidly diminishing returns from drilling in the Bakken formation.
"You've got this rapid depletion rate," Hummel said, calling the hopes for Bakken "pie in the sky." He said most of the new wells drilled in the region over the last two years have only sustained current rates of production.
"It's like being a runner on a treadmill," he said. "Somebody keeps turning up the speed on you and eventually you fall off," he added.