The Alberta Bakken Oil Play

The Bakken formation is a 350 million-year-old layer of rock occupying 520,000 km2 of the subsurface of the Williston Basin covering parts of Saskatchewan, Manitoba, North Dakota and Western Montana.  The formation was discovered in 1953 and as early as 1974, it was postulated that vast amounts of petroleum (up to 500 billion barrels) were contained in the formation itself but it was not economically viable as the oil was trapped in shale (fine sedimentary rocks).

With the development of new drilling techniques, it became possible to horizontally drill right into the flat shaped deposits and collapse the oil rich rocks by fracking (pumping sand and liquids at high pressure into the well bore) in order to allow the oil to flow back up.

Applying new drilling techniques alongside higher oil prices made it economically viable to exploit the oil trapped in the Bakken shale as well as other formations such as the Cardium in Alberta and the Viking in Saskatchewan. The new drilling techniques bumped up GDP significantly, owing in large part to higher net exports of goods and services.

Armed with the same proven technology, the industry has now set its eyes on the Southern Alberta Basin. With its similarities to the Williston Basin, the companies are excited about the potential of this new emerging light oil play dubbed: The Alberta Bakken.

The Alberta Basin Bakken is a Devonian Shale light oil play stretching from Southern Alberta into Montana covering a large land area (>100 miles).  Although the Bakken is the targeted zone, there is multi-zone oil potential (deepest to shallowest):

• Nisku/Arcs

• Bakken group (BigValley, Exshaw(lower Bakken)/Bakken and Banff (upper Bakken))

• Swift/Reirdon

• Mannville

• Barons

• Second White Specks

The Bakken group constitutes the heart of the play as the reservoirs are deep, over-pressured and highly saturated with oil. The Alberta Bakken play shares a lot of geological characteristic with the original Bakken. Horizontal multi-fracced wells will be targeting light 35-42 degree API oil at a depth ranging from 4500 feet deep up to 7000 feet. Those deep wells are going to be expensive starting at $4 million each.  High initial production rates are expected to be followed by high decline rates after the first year. Estimated ultimate recovery (total amount of oil to be recovered) is potentially about 185,000 barrels per well. In terms of economics, it will come close to North Dakota Bakken wells i.e. it will be very profitable especially with current oil prices.

In the Alberta Basin Bakken, the companies are scrambling to secure as much land as possible. After doing deep calculations on whether the project will exceed its hurdle rate, it seems that financial viability has been established. It’s all systems a-go.

Millions of dollars are being spent on land sales and leases. Joint Venture agreements are being announced and the major players are following it closely. Even though several exploratory wells have been drilled on both sides of the border, data is being held tight until everybody has finished positioning himself. Rosetta Resources (NYSE:ROSE) was one of the few to report significant oil hydrocarbons in place and over‐pressured reservoirs. The company estimates that there are 13–15 million barrels of oil in place per section. What that means is that a junior company holding 100 net sections with a theoretical 10 mmbls per section and a 15% recovery factor is sitting on 150 million barrels of light oil.

I am sure many amongst us missed the opportunity a few years ago to invest in the emerging Bakken oil play which turned out to be extremely lucrative for oil investors. This is potentially a repeat of the Bakken play and the good news is it’s still in its early stages. I suspect that the play will help bolster the companies’ earnings before interest after taxes (EBIAT).

Obviously, don’t expect every company to hit it big. Sweet spots will emerge in the Alberta Bakken based on varying production rates and recovery factors which will prove the play profitable for some companies but not for others. Also, this play should be considered a company-specific decision. There are just as many companies staying out of the play altogether. Thus, you can expect that this would raise unsystematic risk for these companies just as much.

See the following articles for further details on a number of companies that have the potential to be richly rewarded for their positions in the Alberta Bakken: the Southern Alberta players and the Montana players.