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Bakken Oil Could Significantly Improve U.S. Economic and Political Strength

     By Fulcrum Inquiry Damages, Appraisal, Accounting & Economics Expert Witnesses

PhoneCall David Nolte at (213) 787-4100

Expert Witness: Fulcrum Inquiry
Worldwide oil discoveries have been less than worldwide annual production since 1980. U.S. oil reserves are quite low. We review a hopeful U.S. oil discovery that could be huge. Ironically, sharply increased oil prices could make the U.S less foreign-oil dependant.
Polices to address the U.S. use and supply of oil is one of the most important economic and political issues of the day. The U.S has long been the largest energy consumer in the world. Currently, the U.S. faces increased competition for the oil that does exist, at the same time that U.S and world production of oil is starting to peak. Throughout the first two quarters of 2008, in a harbinger of things likely to come, there was evidence that the U.S recession was made worse by record oil prices.

Worldwide oil discoveries have been less than worldwide annual production since 1980. Optimistic estimations of peak production forecast the global decline will begin by 2020 or later, and assume major investments in alternatives will occur before a crisis. Pessimistic predictions of future oil production operate on the thesis that either the peak has already occurred, we are on the cusp of the peak, or that it will occur shortly.

Widespread fossil fuel use has been one of the most important stimuli of economic growth and prosperity since the industrial revolution. Absent development of a replacement technology, when oil production decreases, modern society will be forced to change drastically. If alternatives are not forthcoming, energy and products produced with oil (which include plastics, fertilizers, solvents, medicine, and adhesives) would become considerably more expensive. At the very least, this would lower development and living standards everywhere in the world, which in turn would cause increased tension between countries over dwindling oil supplies.

The following data from the U.S. Central Intelligence Agency shows 2007 oil consumption of the six largest oil-consuming nations:

County /Region 2007 consumption in billions of barrels
United States 7.5
European Union 5.2
China 2.9
Japan 1.8
India 1.0
Russia 1.0

A relatively small per capita increase in oil use in China and India would challenge the current balance between production and demand. These Chinese and Indian increases are occurring. As countries develop, industry, rapid urbanization and higher living standards drive up oil and other energy use. China has seen oil consumption grow by 8% yearly since 2002, doubling from 1996 to 2006. In 2008, auto sales in China were expected to grow by 15 to 20 percent, resulting in part from economic growth rates of over 10 percent for 5 years in a row. For similar reasons, India's oil imports are expected to more than triple from 2005 levels by 2020.

Many oil producing nations do not reveal their reservoir engineering field data, and instead provide unaudited claims for their oil reserves. The numbers disclosed by national governments are also sometimes manipulated for political reasons. Most commentators suggest that the amounts reported by the OPEC countries are materially overstated. In addition to political bragging rights, one motive for overstating reserves occurs because OPEC production quotas are based on reported reserves, thus allowing countries that overstate amounts to accelerate production.

The U.S. has theoretical reserves totaling only 21 billion barrels. To put these amounts in perspective, in 2008, the following are the counties with the largest oil reserves:

County 2008 Reserves in billions of barrels
Saudi Arabia
United Arab Emirates

The U.S. sorely needs a new major oil discovery. The best possibility for such a breakthrough in the United States is a large area in North Dakota and Montana (but also continuing northward in Saskatchewan, Canada) called the Bakken area. The Bakken oil area is shown in the following map from the U.S. Geological Survey (USGS):

The Bakken oil is unusual because it is land-based, and in a climate that is relatively hospitable. In contrast, most of the remaining undiscovered oil lies under either permanent ice or deep water depth. These physical challenges create costs that prevent the oil from being economically viable. In 2008, the USGS estimated that areas north of the Arctic Circle have 13% of the estimated worldwide undiscovered oil. Another 84% of the undiscovered oil and gas is thought to be under the ocean.

USGS geochemist Leigh Price in 1999 estimated the total amount of oil contained in the Bakken ranged from 271 billion to 503 billion barrels, with a mean of 413 billion barrels. In 2006, Flannery and Kraus estimated the Bakken hydrocarbons at 300 billion barrels of oil using a computer program with extensive data. In April 2008, a report issued by the state of North Dakota Department of Mineral Resources estimated that the North Dakota portion of the Bakken (which does not include additional amounts in Montana and South Dakota) contained 167 billion barrels of oil.

While these numbers indicate an enormous reserve, much of this oil might not be recoverable using current technology. Because the Bakken shale has generally low porosity and low permeability, estimates of the Bakken's technically recoverable oil are as low as 1%. On the other end of the spectrum, before his untimely death in 2000, Leigh Price estimated 50% of the available oil was recoverable.

Even at recovery rates of ten percent of the amounts believed to exist, the Bakken would double the U.S.’s oil reserves. At the high range of estimates, the Bakken could make the U.S. energy independent for decades.

The USGS does not share this optimism. Reports issued by the USGS in April 2008 indicate the lower range of recoverable estimates is more realistic with current technology. The USGS stated that the recoverable oil was 3.65 billion barrels (with a 95% confidence). This considerably smaller estimate would make a large dent in the U.S oil challenge, but it would still be just a dent. In understanding this statistic, the USGS requires that oil be both technically and economically viable. Technically recoverable resources represent that proportion of assessed in-place petroleum that may be recoverable using current recovery technology, without regard to cost. Economically recoverable resources are technically recoverable petroleum for which the costs of discovery, development, production, and transport, including a return to capital, can be recovered at a given market price.

Bakken oil reserves have been known for quite a while. Early wells were often dry, and capped off as losses. Current thinking is that the fractures in the oil-bearing shale run vertically, which makes it easier to miss the oil with conventional drilling. Recent technological advances allow oil to be drilled horizontally, which may address drilling challenges posed by this area’s unique geology. The following picture from the USGS demonstrates this.

This drilling is significantly improved with water injections, which forces the oil to where it can be retrieved. The availability of water to be injected into the wells is a major issue. The North Dakota Petroleum Council explained the issue in this way:

“Frac water is freshwater that is used to pressurize and fracture oil-bearing formations to increase permeability and enhance the flow and recovery of oil. As much as 1.0 million gallons of water per well to [are needed to] fracture the Bakken Formation. Typically transported to well site in 7500- to 8000-gallon tanker trucks, transportation costs for long haul distances can be excessive. … Recovery/treatment/reuse of frac flow back waters may be an attractive economic alternative.”

Ironically, sharply increased oil prices could make the U.S. less foreign-oil dependant. According to a 2009 North Dakota Petroleum Council presentation, Bakken production becomes economically viable once crude prices reach the $50 to $60+ range. At higher oil prices, investment in the Bakken allows the U.S. to produce its own oil, vs. importing foreign oil.

Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials: CPA, MBA, CMA and ASA.

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