America’s E&P Mojo is Back!

America’s domestic E&P mojo is Back thanks to American technology and our potential for E&P domestic energy growth from unconventional oil and natural gas plays here at home.  The question is whether the Government will tolerate such an unqualified success without smothering it in new regulations.

North Dakota is currently the fourth largest producer of oil in the United States and has been setting new production records almost every month. At the end of 2010 oil production had grown to 342,000 barrels of oil per day (BOPD). The key impediment to even faster growth is the oil pipeline and transport infrastructure limits.

The North Dakota Department of Mineral Resources updated its estimate of recoverable oil in 2008 and 2010 based upon better E&P data and now believes there are 4.0-6.3 billion barrels of recoverable reserves in North Dakota’s Bakken and Three Forks formations alone. And there are additional oil plays including the Lodgepole, Tyler, and Spearfish that are yet to be explored for development.

Stop and think about that for a moment.  At the current actual oil production rate of 350,000 barrels of oil per day (BOPD) at the current price of WTI Cushing oil of $112.43 per barrel (4/27/11) North Dakota alone is reducing oil imports by $39.3 million per day or more than $14.4 billion per year annualized.

Energy security we can believe in!

We know from experience with unconventional oil and gas production that it will not always be this way in North Dakota and pother plays as the horizontal drilling technique is effective in extracting the ribbons of oil and natural gas but the size of the plays is typically smaller than the huge conventional oil play pools found in the Gulf of Mexico or Alaska.  But studies done by the North Dakota Industrial Commission and Mineral resources Department suggest the Peace Garden State has an undeveloped resource base as large again as that found in Western North Dakota suggesting at least an additional ten to twenty years of intense drilling and development, followed by several more decades of continued petroleum production.

America’s Unconventional Oil and Gas Transformation Underway

Combine the resource potential of North Dakota with those of similar oil plays in other states and it adds up to enough domestic energy production potential to fuel America’s energy transformation. The US EIA reports that US oil production declined in all but one year from 1986 to 2008 and increased in both 2009 and 2010 caused primarily by the increase in deepwater developments in the Federal Gulf of Mexico in 2009 and by the growth in horizontal drilling programs in U.S. shale plays in North Dakota portion of the Bakken formation in 2010. In the Bakken and other shale formations horizontal drilling and hydraulic fracturing have refocused on oil production instead of shale gas production because of higher oil prices and low gas prices thus increasing oil production. Baker Hughes rig count data shows a pronounced trend toward oil horizontal rigs from less than one-third of oil-directed rigs in September 2008.  Since then horizontal oil rigs have tripled to about 46% of all rigs.

And then there is Unconventional Gas

US EIA’s Annual Energy Outlook 2011, says there is 2,552 trillion cubic feet (Tcf) of potential natural gas resources in the US. Unconventional natural gas from shale resources are 827 Tcf of this resource estimate, more than double the EIA estimate published last in the AEO2010. Based upon the 2009 rate of U.S. consumption (about 22.8 Tcf per year), that is enough natural for 110 years of use.  EIA expects these unconventional gas estimates to grow and other potential oil and gas plays are explored and validated.

Higher oil prices reflect the global tradable market for oil as a commodity.  Lower domestic natural gas prices reflect the reality that natural gas trades primarily as a regional commodity.  There was a time not long ago when energy experts expected LNG to transform natural gas into the same globally priced commodity as oil.  Russia, Qatar and others even considered forming an LNG cartel like OPEC to fix prices for natural gas.

What changed?

American technology demonstrated the potential for horizontal drilling and hydraulic fracturing to unlock the potential of previously uneconomic shale oil and gas plays.  North Dakota and Texas were the laboratories for these new technologies and now they are the domestic powerhouses of unconventional oil and gas production.

But the success of this disruptive technology could be undermined by NIMBY restrictions out of fear of groundwater contamination or government restrictions on unconventional oil and gas from the piling on of new regulations.  The oil and gas industry needs to ‘get real’ about fracking fluid disclosure and best practices to reduce the risks and mitigate the need for Federal intervention.

But the government also needs to get it priorities straight and recognize that the potential from unconventional oil and gas is a game changer that gives America a competitive advantage today.  If the US restricts the use of horizontal drilling or fracking the rigs and expertise working at home today in America will just go elsewhere in the world and America will be stuck with higher imports, higher prices and a weaker economy.

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