Oil Industry Attempting to Recreate Natural Gas Successes in Shale Drilling

August 20, 2010

With the monetary success of United States shale gas companies over the last 3 years, the oil industry is working to recover billions of barrels of oil contained in shale, even though many geologists question the profitability of their efforts.

Advanced technologies have allowed natural gas companies in recent years to acquire gas from shale where it was previously uneconomical.  The result of this increase in production has been to drive down prices in the U.S. energy market, and consequently has encouraged the oil industry to follow suit.

To date, the only proven success story for profitably extracting oil from shale has been in the Bakken shale formation in North Dakota.  Over the last 3 years, oil production from the Bakken region has climbed from 135,000 barrels per day last year to nearly 4 billion barrels a day currently – an increase of 20 times.

The Bakken oil boom has encouraged other oil companies to explore large shale deposits such as the Niobrara region in Colorado, and the Barnett & Eagle Ford formations in Texas.

Industry analysts estimate that the cost per barrel to extract oil from shale is approximately $50, which is quite profitable given the current market prices of $70 to $80 a barrel.

Unlike drilling in the deep water of the Gulf of Mexico, which requires years of planning expenses that can be calculated into the oil prices in advance, shale oil comes from many small wells which can produce quickly.  This ability to produce oil with little notice can drastically affect oil prices in the blink of an eye, much like the natural gas produced from shale caused a drop in prices in 2008.

For example, oil production from North Dakota’s Bakken region increased immensely from 85,000 barrels per day (bpd) in 2004 to 218,000 barrels per day in 2009.  In the year of 2009 alone, the increase was 46,000 bpd, bringing the Bakken formation to 8.3% of total U.S. oil production, which was 5.36 billion bpd in 2009.

The Bakken shale formation, which spreads over Montana and North Dakota, was originally estimated to contain only 150 million barrels of profitably-attainable oil.  Now the estimate is at 3.65 billion barrels, mainly due to an increase in horizontal drilling and hydraulic fracturing technology which drastically increased profitability.

The average cost of a well in the Bakken region ranges from $4 million to $7 million.  Combined with a breakeven price of $50 per barrel, the Bakken region has proven to be extremely profitable for businesses drilling in the area.

In an effort to create other profitable shale centers, oil companies are now drilling in the Barnett and Eagles Ford formations in Texas, which contain crude oil, natural gas liquids, and residue gas resources in addition to natural gas.

However, many geologists don’t believe that these areas can replicate the success gained by drilling in the Bakken region, mainly because the geology of the area does not closely resemble that of the Bakken formation.

Additionally, oil production from the Eagle Ford and Barnett shale formations has not been overly-profitable due to Texas’ existing infrastructure focused on crude oil production.