News:
of Saudi-Sized Reserves Make Farmers Drillers
2008-06-03 02:26 (New York)
By Anthony Effinger
June 3 (Bloomberg) -- John Bartelson, who smokes Marlboro
Lights through fingers blackened with tractor grease, may look
like an average wheat farmer. He isn't. He's one of North
Dakota's new oil barons.
Every month, he gets a check for tens of thousands of
dollars from a company in Houston called EOG Resources Inc.,
which drilled two oil wells on his land last year. He says the
day his first royalty check arrived was one to remember.
''I smiled to beat hell, and I went to town and had a
beer,'' Bartelson, 65, says.
His new wealth springs from the Bakken formation, a
sprawling deposit of high-quality crude beneath the durum wheat
fields of North Dakota, Montana and southern Saskatchewan and
Manitoba. The Bakken may give the U.S. -- the world's biggest
importer of oil -- a new domestic energy source at a time when
demand from China and India is ratcheting up the global
competition for supplies and propelling average U.S. gasoline
prices to almost $4 a gallon.
And unlike the tar from Canada's oil sands, Bakken crude
needs little refining. Swirl some of it in a Mason jar and it
leaves a thin, honey-colored film along the sides. It's light -
-almost like gasoline -- and sweet, meaning it's low in sulfur.
Best of all, the Bakken could be huge. The U.S. Geological
Survey's Leigh Price, a Denver geochemist who died of a heart
attack in 2000, estimated that the Bakken might hold a whopping
413 billion barrels. If so, it would dwarf Saudi Arabia's
Ghawar, the world's biggest field, which has produced about 55
billion barrels.
Thin Deposit
The challenge is getting the oil out. Bakken crude is
locked 2 miles (3.2 kilometers) underground in a layer of
dolomite, a dense mineral that doesn't surrender oil the way
more-porous limestone does. The dolomite band is narrow, too,
averaging just 22 feet (7 meters) in North Dakota.
The USGS said in April that the Bakken holds as much as
4.3 billion barrels that can be recovered using today's
engineering techniques. That's a fraction of the oil that Price
said should be there, but it's still the largest accumulation
of crude in the 48 contiguous U.S. states. North Dakota, where
Bakken exploration is most intense now, won't become Saudi
Arabia unless technology improves.
''The Bakken is the biggest thing in oil in the lower 48
right now,'' says Jim Jarrell, president of Ross Smith Energy
Group Ltd., a research firm in Calgary. ''And among the least
understood.''
Delaying the Peak
Some oil, like the 10.4 billion barrels estimated to be
recoverable in Alaska's Arctic National Wildlife Refuge,
remains off limits -- as a nature conservation measure -- even
as President George W. Bush renews his calls for drilling
there. North Dakota, already crisscrossed by farm roads, is
open for business.
As traditional oil fields become scarce, exploration
companies must tackle trickier ones to stay in business. Their
success will determine when the world reaches peak oil -- the
high point in production after which new supply will no longer
be there to slake new demand. It's a gloomy concept. Peak oil
theorists predict the mother of all oil shocks, complete with
famine and wars for energy.
These days, big new oil deposits often come with caveats.
Brazil's Petroleo Brasileiro SA says its offshore Tupi field
contains as much as 8 billion barrels of oil, which the company
hopes to start pumping next year. But the field is under more
than four miles of water and rock, where pressure can crush
drilling equipment.
Hedge Bus
The Bakken dolomite is hardly an obstacle, by comparison.
And even if Price was too optimistic, the Bakken is big enough
to make investors rich. Some have made fortunes already.
In April, a busload of hedge fund managers drove by
Bartelson's land, ogling the metronomic pump jacks and the
devilish orange flares of excess natural gas that are making
parts of North Dakota look more like west Texas.
''There's nothing that can stop this play,'' says Mike
Reger, chief executive officer of Northern Oil & Gas Inc., a
five-person company near Minneapolis that has leased the
mineral rights under 32,000 acres (13,000 hectares) in the
North Dakota Bakken.
Reger, 32, brought the hedge fund managers up to see the
oil field. Some, like Ryan Zorn of Houston-based investment
management firm Saracen Energy Advisors LP, are investors in
Northern already. Northern shares have risen 61 percent since
being listed on the American Stock Exchange on March 26.
Fool's Gold
For decades, the Bakken was the fool's gold of the oil
industry. The name describes a geological formation that looks
like an Oreo cookie: two layers of black shale that bleed oil
into the middle layer of dolomite. It's named after Henry O.
Bakken, the North Dakota farmer who owned the land where the
first drilling rig revealed the shale layers in the 1950s.
All of the layers are thin -- about 150 feet altogether --
and none of them give up oil easily. In older, vertical wells,
oil would often flow for a month and then fizzle.
Now, companies like Austin, Texas-based Brigham
Exploration Co.; Denver-based Whiting Petroleum Corp.; and EOG
are drilling horizontally. They go straight down 10,000 feet
and then put a slight angle in the mud motor, a 30-foot piece
of tubing that drives the bit, so they hit the Bakken sideways,
making a horizontal tunnel 4,500 feet long through the
dolomite.
That exposes more of the oil-bearing rock. Then they pump
pressurized water and sand into the hole to fracture the
dolomite, making cracks for oil to seep through.
It eventually winds up in a pipeline that runs east to
Clearbrook, Minnesota, and then south to Chicago.
Where Billionaires Roam
Several billionaires are at work in the Bakken. Harold
Hamm's Enid, Oklahoma-based Continental Resources Inc. has
leases on 487,000 acres in Montana and North Dakota. Hamm, who
started out driving a truck, owns 73 percent of Continental,
worth $7.9 billion. Philip Anschutz, 68, founder of Qwest
Communications International Inc. and Regal Entertainment
Group, is there, too.
So are two sons of billionaire H.L. Hunt, the 1930s
wildcatter. Petro-Hunt LLC is owned by the trust estate of
William Herbert Hunt, who was convicted in a civil trial with
his brothers Lamar and Nelson Bunker of trying to corner the
silver market in 1979. Hunt Oil Co., another Bakken operator,
is owned by their half brother, Ray L. Hunt.
The big winner so far has been EOG, formerly a subsidiary
of bankrupt energy trader Enron Corp. It drilled a horizontal
well in western North Dakota just north of Parshall --
population 1,028 -- in April 2006. The well came online a month
later and kicked out 1,883 barrels in the first seven days.
Unlike the older vertical wells, it's still going. In March, it
produced 2,305 barrels, according to the North Dakota
Industrial Commission.
No Slam Dunk
EOG has eight rigs running on 320,000 acres of mineral
leases in the North Dakota Bakken. The company said in its 2007
annual report that the area has the highest return of all the
places in which it operates -- including Texas's Barnett Shale,
the Gulf of Mexico coast and the Permian Basin of New Mexico.
The Bakken isn't foolproof. Far from it. Drilling there is
expensive -- about $5 million a well, according to EOG -- and
takes experience. Dallas-based Petro-Hunt's first well in the
North Dakota Bakken didn't make money, company geologist Steve
Bressler says. Brigham's Bergstrom Family Trust well came
online at 277 barrels a day -- viable at today's high oil
prices but not a gusher.
''There will be variances,'' says John Gerdes, an oil and
gas analyst at SunTrust Robinson Humphrey Inc. in Houston.
''The rock matters. The people matter.''
Oil Rush
The success of EOG's Parshall well set off a land grab in
North Dakota's Mountrail County. Land men -- the experts who
move from boom to boom leasing mineral rights -- swarmed,
paying ever higher prices for ground that for decades grew
crops and concealed Cold War missile silos.
On private acreage, land men negotiate with mineral owners
like Bartelson. They offer a bonus upfront to hold the mineral
rights for three to five years, and they agree to pay a
fraction of the revenue from any oil produced each month --
often from 1/8 to 3/16. On land with a producing well, the
mineral lease lasts as long as the well does. On government
land, the bonus is set at auction.
Bartelson in 2004 granted a five-year lease on 1,400
acres, under which he owns half the mineral rights. He got a
bonus of $25 per mineral acre, or $17,500, plus one-sixth of
any oil revenue. Times have changed since then. In November,
Sinclair Oil Corp. of Salt Lake City paid $16,500 an acre at
auction for half the mineral rights on 320 acres of government-
owned land in the Parshall Field, according to the U.S. Bureau
of Land Management.
'No Acreage'
''That's a record for Montana and North Dakota,'' BLM
spokesman Greg Albright says.
Among the biggest companies punching holes in the North
Dakota Bakken are Houston-based Marathon Oil Corp., the fourth-
largest U.S. oil company, and Hess Corp. of New York, which is
No. 5. No. 1 Exxon Mobil Corp. isn't active in the Bakken. John
Freeman, an analyst at investment bank Raymond James &
Associates Inc. in Houston, says Exxon is looking for bigger
deposits overseas.
''Now, there's no acreage left,'' he says.
The truest believer in the Bakken might be Reger, the CEO
of Northern Oil. He's certainly the loudest promoter.
Reger is a fourth-generation oilman. His great-grandfather
managed operations for Mobil Oil, now part of Exxon Mobil, in
the Williston Basin, the 110,000-square-mile (285,000-square-
kilometer) geological formation in the northern plains that
holds the Bakken and other deposits. Reger's grandfather leased
land atop all of them. His father, uncle and brother are in the
business, too.
''It's our basin,'' Reger says.