There's $118 Billion in Future Riches Still Trapped in North Dakota

Photo credit: Flickr/Lindsey G

Oil and gas companies from around the world are planning to spend $15 billion to drill new wells in the Bakken shale this year. This money is being spent in an attempt to unlock even greater riches. In fact, according to oil and gas industry analyst Wood Mackenzie the Bakken and Three Forks formations still hold $118 billion in remaining value. That value will be realized as energy companies unlock the nearly 20 billion barrels of oil that are expected to be recovered over the life of the play. 

Staking a claim
Energy companies like Continental Resources  and Oasis Petroleum  have amassed incredibly large land positions in the Bakken. Continental Resources currently possesses the top land position in the play with more than 1.2 million net acres. Meanwhile, Oasis Petroleum has aggressively been growing its own land position, which now sits at more than 500,000 net acres after Oasis made a large acquisition last year. These two companies have staked some of the largest claims of the Bakken's future riches. 

That doesn't mean that smaller Bakken shale focused drillers like Kodiak Oil & Gas  or Triangle Petroleum  will be left on the outside looking in. Kodiak has staked its claim to 173,000 net acres, while Triangle Petroleum controls just shy of 94,000 net acres. Both of those positions will be used as a base to unlock the oil riches beneath. 

 

Photo credit: Flickr/Lindsay G

Spending money to make money
This year Continental Resources plans to spend just about $2.2 billion to develop its land position in the Bakken, with another $355 million spent to explore to see if there's even more oil riches on its land. A bulk of those funds will be used on developmental wells that are expected to cost about $8 million each, however, that investment should yield a rate of return of more than 40% as long as oil prices stay over $90 per barrel. 

Meanwhile, Oasis Petroleum's 2014 plan calls for it to spend about $1.4 billion this year on exploration and production activities. While most of that money will be spent to unlock the oil riches it knows are below its acreage, a portion of it will be spent to figure out ways to extract oil that many believe will never be recovered. In fact, while Wood Mackenzie and others think the industry will eventually extract 20 billion barrels of oil, there's up to 900 billion barrels of oil that's believed to be saturating these rocks. This is why Conteniental Resources CEO Harold Hamm thinks that some day new technology will eventually enable the industry to extract 45 billion barrels of oil from these formations. 

If the industry can figure out how to extract more of the oil that's trapped in the rock formations it could make the $118 billion in future profits look like pocket change. That's why we're seeing Continental Resources, Oasis Petroleum, and Kodiak Oil & Gas all spend money to do density tests. These projects test how close wells can be drilled. In Kodiak's case it's drilling its wells 600 feet apart by drilling up to 16 wells in a drilling unit. That's enabling it to extract more oil per section, which is pushing up the net present value of each drilling section as the following slide shows.

Source: Kodiak Oil & Gas Investor Presentation

Triangle Petroleum is also working on downspacing tests of its own. It currently sees potential for 8-12 locations per drilling spacing unit. However, it has noted that peers drilling close by including Oasis, Kodiak, and Continental are all undergoing 12 and 16 well density tests. This suggests that it has the potential to recover more oil from its land as well.

Investor takeaway
The bottom line here is that there's a lot of value that will be extracted out of the Bakken in the decades ahead. With at least $118 billion in future profits still to be recovered in the Bakken, its no wonder companies from around the world are flocking to the region. However, with so much oil still saturating those rocks that number could be just the beginning, which is why it's still a good time for investors to consider parking a portion of their portfolio in the energy sector.