Oil and Gas Evaluation Report : Oil & Gas Evaluation Professionals : Obsidian Energy Company : · Seismic Interpretation, Petroleum Engineering

When gas prices are high so is activity in the Rocky mountain basins.  When gas prices drop activity and excitement subsequently drop in the western half of the U.S.  This is primarily due to the low BTU content of most Rocky Mountain gas and its distance from U.S. markets.  The Bakken thrives because it's an oil play. 

In April, EOG announced that a successful horizontal well was drilled in northern Colorado that has produced an average of 555 barrels of oil per day.  This production is from the Niobrara Shale.  The Jake 2-01H is located in Weld County in the Denver-Julesburg Basin.  At a depth around 7,000 feet this would compare favorably to the Bakken if reserve size are similar.  Since the discovery EOG has leased more than 400,000 acres in northern Colorado and southern Wyoming.  Furthermore, other players such as Anadarko, MDU resources, St. Mary Land & Exploration, Chesapeake, and others have also amassed sizable acreage positions.

The importance of this find is that the Niobrara is present in 5 western states.  So the reserve volume could be huge as well as the economic impact to the Rocky Mountain states and the U.S. in general.  We'll continue to watch production and other activity to see if the Niobrara is a close relative or a distant pretender to the Bakken.

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I drilled my first Bakken horizontal well back in 1990.  We had so many problems with well bore integrity we gave up after drilling only a handful of wells.  In fact, we were getting cuttings the size of hockey pucks at the shale shaker.  Fast forward twenty years and the Bakken is the most successful horizontal oil play in the world.  We knew there was oil and gas in that shale we just didn't have the technology to get it out. 

Bakken economics compare favorably to other horizontal plays. The table below compiled by Stephen Berrman from Pritchard Capital Partners, LLC illustrates this fact.  Notice the Haynesville play has a higher Gross EUR (Estimated Ultimate Reserves) but the F&D (Finding and Development) cost is higher.  At a 10:1 (gas to oil) conversion the advantage of an oil shale play is seen in F&D costs that are almost half of the Barnett and Haynesville. 

 Mr. Berman also reveals in the next table that lower F&D costs are a result of operational advancements.   Well costs have nearly doubled since 2006 yet EUR has increased 5.5 times.  This is typical of a shale play as the operators start to figure out the play.  In this instance, it's both hydraulic fracture technology and using super extended laterals that account for increase in EURs.

Rising acreages costs are a direct result of the lowering of F&D costs.  Below you can see that from January 2008 costs were below $1000 per acre.  Late 2009 saw over a 6-fold increase of acreage costs exceeding $6.000 per acre.  As the economics of the play improve, the operators can afford to pay more for acreage.

The above tables and graphs provide an excellent example of how the economics change as operators climb the learning curve of a shale play.  Not all plays are as dramatic as the Bakken, but with perseverance and a smart technical team these types of results can be expected.  It took close to 15 years to figure out the Bakken using horizontal technology.  I wish I knew then what I know now.

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