The Other Side of the Bakken
By Keith Kohl | Tuesday, April 7th, 2009
It was late afternoon when my beaten-down Chevy crossed the Canadian border at Portal, North Dakota. I had just come off the tail end of a nine-hour driving shift when my cohort took the wheel. Only a few minutes passed before I drifted off to sleep.
And I have regretted it ever since.
If we were cruising through southern Saskatchewan today, our arrival in Fort McMurray would have been delayed by several weeks, at the very least. At the time, however, we put thirty straight hours and more than 1700 miles of road behind us. Our eyes were fixed on the Alberta oil sands.
By the time I awoke, we were well past Saskatoon.
Fortunately, the way back proved better. It was stunning to watch the rigs that dotted the Saskatchewan landscape.
Last week, I mentioned there was another way to play the Bakken. Many of you already knew where I was headed. That's why I was pretty surprised when several readers wrote-in, asking questions about the 'other side of the Bakken'. They were still in the dark when I mentioned that the formation stretched into Saskatchewan.
Well, it's only fair we open that door for them, right?
The Other Side of the Bakken
Although we've been talking about the potential of the Bakken oil formation for a while now at Energy and Capital, I'd wager most of you started focusing your attention on the area when the USGS reported last year that the Bakken held up to 4.3 billion barrels of recoverable oil.
That was a significant increase over 151 million barrels in 1995.
At the time, oil prices were well under their record highs, and companies were scrambling to grab land. And although the Bakken was good news for U.S. domestic production (which peaked three decades ago, as you know), it wasn't the only option open to investors.
Approximately one-quarter of the Bakken formation is in southern Saskatchewan and holds up to 1.3 billion barrels. I know it's easy to get lost in the huge numbers. Sure, it would be great if Bakken production reached 20 million barrels per day, but that simply won't happen. If Saudi Arabia, OPEC's leading producer, were pumping as much as it could, it would barely be over half that amount.
Throughout this economic downturn, Canada has remained our largest source of oil. While the Saudis shipped us a little over one million barrels every day in January, Canada sent over 2.5 million bbls/day.
Think about that for a moment.
If you remember from last week, we're going to be forced to make up the oil lost from Mexican imports over the next several years.
Can you tell me the last time you heard about public outrage from Canadian oil? Now compare that to how many times you've read about ending our addiction to Middle Eastern oil.
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Drilling the Canadian Bakken
It's no surprise that drilling in the U.S. has taken a hit. And although last week's U.S. rotary rig count was up by a whopping 4 rigs, that's 43% lower than a year ago. Furthermore, you also need to remember that only 224 of those rigs (approximately 21%) are drilling for oil. The rest are going after natural gas.
Rig counts are understandably lower. After all, oil prices aren't exactly in triple digits nowadays.
Drilling activity in Saskatchewan, however, is a bit more optimistic. Saskatchewan is only expecting a 25% drop in the number of wells drilled in 2009.
If oil prices can remain above $50 per barrel, I think we're going to see even better results in Saskatchewan's side of the Bakken. The reason is simple enough, many of the producers see $50 per barrel as economical for their Bakken wells.
The Canadian Bakken Vs. the Alberta Oil Sands
This is how one of my readers phrased a recent comment sent to me:
"When it comes down to it, I can't help but lean toward Saskatchewan. Until oil prices push higher (past $80 per barrel in some cases), the oil sands are going to keep getting hit hard."
But don't think Alberta won't pull through this. If the oil sands producers can survive oil prices under $20 per barrel, they will certainly weather this storm. You see, only 20% of the bitumen in Alberta can be mined at the surface. That's means a large amount of the oils sands production will involve in-situ recovery techniques, which can get expensive for producers.
Investing in the Canadian Bakken
There's no doubt about the growing importance the Bakken will have in future North American production. In fact, it's one of the areas where production will actually increase. This includes both the U.S. and Canadian side.
There are several ways for investors to take advantage of the Bakken. If the latest buyout of Reece Energy taught us anything, it's that many of the smaller players could get swallowed up in a heartbeat. In order to keep production numbers up, those trusts are always looking for ways to keep their attractive distributions steady. Ignoring some of the quality Canadian energy trusts would be a mistake.
Even if the Canadian trusts give you pause, there are still a number of smaller producers with strong production rates and the land to back it up.
Until next time,