Forget Shale Gas: Shale Oil is the New Energy Boom in the United States

Forget Shale Gas: Shale Oil is the New Energy Boom in the United States

by David Fessler, Investment U Senior Analyst

Tuesday, November 8, 2011: Issue #1638

The natural gas industry in the United States finds itself in a bit of a quandary of late. For the last four or five years, it rapidly developed shale gas plays like the Barnett, the Marcellus and the Haynesville.

Horizontal drilling and hydraulic fracking technology transformed the entire sector here in the United States. It allows natural gas extraction from tight shale plays that were once thought to be uneconomical to develop.

But the big drilling spree in the aforementioned plays has come with an ironic price. It created a glut of gas, keeping prices so low as to make it nearly unprofitable to continue to expand production in the plays.

Changing Horse in the Middle of the Stream

The good news is that many of the natural gas exploration and production companies quickly adapted. They transformed themselves into oil exploration and production companies.

Oil prices, unlike those of natural gas, have remained relatively high, driven by continuing strong demand from India and China, and uncertainty regarding supplies emanating from the Middle East.

It turns out the same hydraulic fracking and horizontal drilling can be used on shale oil deposits, like the Bakken formation in North Dakota and Montana, and the Eagle Ford deposit in Texas. But there's another, rapidly developing shale oil play.

From Cattle Ranchers to Oil Barons

It all started "Home on the Range," as the classic western ballad goes. Back in the late 1800s and early 1900s, Colorado's El Paso County was prime ranchland for grazing cattle. Ranch houses were at least three to four miles apart.

Going to town was an all day affair. It entailed several hours driving on dusty pothole-filled roads. And oilrigs? They were something you saw in a picture book on Texas at the local library.

Fast-forward 100 years or so. The quiet windswept prairies in Colorado, Wyoming, South Dakota and Nebraska are now humming with drilling rigs.

Oil lease negotiators are swarming all over El Paso County in Colorado, and just about everywhere else in the region. They're all snapping up land in one of the newest oil shale plays, the Niobrara. It's a good bet some of the cattle ranchers' descendents are suddenly finding themselves with millions in the bank from oil leases.

The Niobra Shale Formation Geography

The Niobrara Shale formation covers parts of four western states - Wyoming, Colorado, South Dakota and Nebraska:

Geologists have known about the oil in Niobrara for about 80 years. But no one ever thought it could be recovered economically... until now. Like the Barnett, Fayetteville, Marcellus, Haynesville and Bakken - the Niobrara is another shale play that's been known about for some time.

But it's only recently that some of the major exploration and production companies shifted capital and drill rigs to explore the Niobrara.

And it's only since the advent of hydraulic fracking and horizontal drilling that it's possible for this formation to be exploited for the oil and natural gas it contains.

According to El Paso County assessor Mark Lowderman, there have been over 2,200 leases signed with oil companies since 2009.

Ranchers Welcoming Oil Companies

The Niobrara geology offers some challenges for oil companies looking to develop the play. Many areas are especially environmentally sensitive, adding to the difficulties in the development.

But with the prospect of receiving several thousand dollars per day from a well with decent flows, many ranchers are welcoming the oil companies with open arms.

Oil drilling fever has been spurred on by all the enthusiasm over the more well-established Bakken play in North Dakota and Montana, and parts of the Eagle Ford in Texas.

Shale Oil Reserves "Larger Than Previously Thought"

All the drilling seems to be paying off. In 2010, the United States saw the highest domestic oil production since 2004. Much of the increase to the current level of 5.5 million barrels per day has come from shale oil with North Dakota (Bakken) posting the largest increase in oil production last year.

A September report from the U.S. National Petroleum Council (NPC) said that U.S. shale oil reserves are "proving to be much larger than previously thought." The NPC indicated that shale oil production could rise to as much as three million barrels per day "depending on access to new plays and continued technology development."

That's significant, but still nowhere near enough to wean the country off foreign oil. But it'll provide a significant chunk of our current consumption of 19 million barrels per day.

While there are a number of majors like EOG Resources, Inc. (NYSE: EOG) and Chesapeake Energy Corporation (NYSE: CHK) drilling in the Niobrara, many smaller operators are signing leases and drilling wells, too.

Keep an eye on the Niobrara. It's another hot new play in shale oil, and could be a significant contributor to U.S. oil production in the years ahead.

Good investing,

David Fessler