by David Fessler, Investment U Senior Analyst
Tuesday, September 27, 2011: Issue #1609
On Monday, West Texas Intermediate (WTI) crude oil rose above $82 as traders showed faith that European leaders are finding a way to address the region’s financial instability.
The macroeconomic situation around the world is certainly concerning. Falling crude inventories, a shortage of energy carriers, uncertainties in production expansion and the European economy will all play a role in supporting crude prices.
But regardless of what the day-to-day markets are doing, the long-term outlook for oil remains bullish, particularly in light of a continued, steady increase in global demand…
Natural Gas Drillers Shifting to Liquid-Rich Shale
It’s especially true here in the United States, where most of the large natural gas drillers have shifted over to the liquid-rich areas of shale plays.
As evidence of that, take a look at the following graph from the Energy Information Administration (EIA).
It clearly shows the dramatic rise in crude oil and condensate production, particularly from the Barnett and Bakken shale formations.
The most interesting part of this graph is that the 2009 number of about 55 million barrels is going to seem very small in just a couple of years.
All of the plays listed in the graph – plus a few more not shown – have acreage that’s rich in liquids. Some more than others. That’s where the drillers have moved their rigs to, and they’re actively drilling there.
Why? With natural gas prices around $4.00, there’s a lot more money in the liquid part of the plays for the drilling companies, and that’s what they’re targeting.
- North Dakota’s Bakken formation is a very rich oil play, with a small percentage of natural gas. Liquid production there increased 150 percent since 2005.
- Drillers are using the same horizontal drilling and fracking techniques used for shale gas formations to produce oil from the Bakken.
- Annual output from the Bakken has increased from about one million barrels annually in 2005 to over 146 million in 2011. That’s over 400,000 barrels per day.
Its recoverable reserves keep rising, too. Continental Resources (NYSE: CLR), the top producer in the Bakken, estimates recoverable reserves of as much as 24 billion barrels of oil buried there.
Right now, the Bakken is limited to about 800,000 barrels per day, but new designs for increasing the pipeline infrastructure will raise overall capacity to about 1.1 million barrels per day in just a few years.
What About Other Shale Oil Areas?
While the Bakken is certainly a hot area right now for liquids, other shale plays previously known for natural gas production are now producing significant volumes of liquids:
- The Barnett in Texas saw overall liquids production double from 2005 to 2009.
- The Woodford Shale in Oklahoma saw liquids production surpass one million barrels in 2009, an increase of 83 percent from the previous year, and eight times the volume of 2007.
- Eagle Ford, another Texas formation, saw 2009 liquids production increase five-fold over the previous year. Current output is about 71,000 barrels per day, and that number should increase to about 421,000 barrels per day by 2015.
- Liquids production from the Marcellus Shale in Pennsylvania quadrupled in 2009 and is on track for similar increases this year.
Chesapeake Energy (NYSE: CHK) expects 50 percent of its increase in revenue in 2011 to come from increased liquids production in the Marcellus shale formation.
Drilling for shale oil is big business. Baker Hughes, Inc (NYSE: BHI) indicates in their weekly rig count that there are currently 1,099 rigs drilling horizontal wells in the United States. That’s an increase of 19 from the prior week and 221 from the year before.
While Hughes doesn’t break out rigs that are specifically drilling horizontally for oil, its U.S. oil rig count is up 420 from a year ago. We can certainly infer that a lot of those rigs are horizontal units operating in the shale plays.
With natural gas prices still near historic lows, the best profitable plays will be in companies who are and will continue to be drilling and producing in the liquids-rich shale plays in North America. They include, but aren’t limited to, the two companies mentioned above.