At the end of May, I visited Williston, North Dakota for several days to see and experience the prolific Bakken oil fields firsthand. As a guest of Continental Resources (“America’s Oil Champion”), I was able to visit a drilling pad and see two amazing, modern drilling rigs in operation on the first day, and then visit a drilling pad the next day right outside Williston where 12 shale oil wells had previously been drilled and fracked, and will now be pumping shale oil almost 24 hours per day possibly for the next 40 years. I’d like to thank Continental Vice-President of Investor Relations and Investor Relations Warren Henry for arranging my rig tour, and Continental’s field superintendent in the Bakken, Kevin Mishke, for being my “rig tour guide” for two days!
In a series of two blog posts, I’ll present my Top Ten list for the most interesting things I learned on my summer trip to the Bakken, here are the first five items in Part I, with the next five to follow later in Part II.
1. The Geology of the Bakken Formation. What is called the Bakken Formation (or the Bakken oil fields) actually contains three different layers of shale formations (or “members”) at different depths: the Upper Bakken, the Middle Bakken and the Lower Bakken (see top graphic above and the right side of the bottom graphic). Most of the shale oil and gas to date have been recovered from the Middle Bakken (at depths of between 4,500 feet below the surface on the eastern edge of the basin to 11,000 feet in the southwest corner of North Dakota), although the Upper Bakken and Lower Bakken are now being successfully targeted for shale oil resources.
Below the Bakken formation lies an entirely separate shale formation: the Three Forks Formation, which has four different layers at increasing depths (see upper graphic above and right side of bottom graphic). Shale resources (oil and gas) are being recovered from the Three Forks 1 layer, while the Three Forks 2/3/4 zones are largely exploratory at this point. Together, the Bakken and Three Forks formations are part of the greater Williston Basin area that covers western North Dakota and parts of Montana, South Dakota and Canada.
The bottom graphic above (left side) shows the geographical areas of the Williston Basin (orange dashed line), the slightly smaller Three Forks Formation (blue dashed line), and then the slightly smaller Bakken Formation (green dashed line). The right side of the graphic shows a geographical cutaway of the three Bakken layers and the four Three Forks layers. Notice that none of those layers of shale assets are parallel to the Earth’s surface, and I’ll discuss that in the next section.
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2. Horizontal Drilling. What is called “horizontal drilling” is actually somewhat of a misnomer, since the lateral, or horizontal section of the targeted shale assets are never actually parallel to the earth’s surface (see graphic above and the second graphic from the top in Item #1 above). “Directional drilling” is probably a more accurate term for what actually happens – the horizontal drilling is guided through the shale formations by a geologist in real time with advanced computer techniques to stay in the optimal part of the shale reservoir, a technique called “geo-steering.” In some cases, the well is being drilled at 90.5 degrees (or more) and other times at 89.5 degrees (or less). It’s really a marvel of petroleum engineering that the drilling process can be guided by a geologist sitting in a trailer on the drilling pad using sophisticated computer equipment to guide the drill path to maximize the shale resources that will be extracted over the 45-year average period that the wells are producing shale oil.
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3. Frac Sand. Sand is a very important part of the hydraulic fracturing process and there’s lots of frac sand all over the Bakken oil fields. The frac sand gets transported to Williston by rail from sand-rich areas of Wisconsin and Minnesota and then gets delivered to the drilling locations by truck. The sand used for fracking is different from traditional industrial sand that is used for cement and other applications, you can see the difference in the photo above. Frac sand has certain desirable characteristics that make it ideal for fracturing open pores in oil-saturated shale rock formations, and then keeping those pores open for 40 years or more: it has a very uniform grain size, nicely rounded grain shapes, a uniform composition, and is usually mined from high purity sandstone that is extremely tough, and allows it to resist compressive forces in the shale formations of up to several tons per square inch.
Here’s how frac sand is used as a “proppant,” meaning that it is used to “prop open” the fractures (pores) in shale oil and gas reservoirs.
Subsurface rock units such as organic shale formations are saturated with large amounts of oil and natural gas that will not flow freely to a well because the rock formation either lacks permeability (interconnected pore spaces) or the pore spaces in the rock are so small that these fluids cannot flow through them to a well. The hydraulic fracturing process solves this problem by generating fractures (or “pores”) in the rock by drilling a well into the rock, sealing the portion of the well in the petroleum-bearing zone, and pumping water under high pressure into that portion of the well. This water is treated with chemicals and thickeners such as guar gum to create a viscous gel that facilitates the water’s ability to carry grains of frac sand in suspension.
Large pumps at Earth’s surface increase the water pressure in the sealed portion of the well until it is high enough to exceed the breaking point of the surrounding shale rock formations. When their breaking point is reached they fracture suddenly and water rushes rapidly into the fractured pores, inflating them and extending them deeper into the rock. Billions of sand grains (a few thousand tons) are carried deep into the fractures by this sudden rush of water. When the pumps are turned off, the fractures (pores) deflate but do not close completely – because they are propped open by billions of grains of frac sand. This only occurs if enough sand grains to resist the force of the closing fractures have been delivered into the rock. The new fractures in the shale rock, propped open by the durable sand grains, form a network of pore spaces that allows petroleum fluids to flow out of the shale rock and into the well, and then up to the surface.
There are actually at least 8 different sizes and gradations of frac sand according to the American Petroleum Institute, although two of them are the most popular and used most frequently. However, depending on the specific characteristics of an individual shale formation, and even in different parts of the same shale formation, the size of the frac sand used will be varied to maximize the flow of petroleum fluids out of the shale rock. If the frac sand grains are too large, they might hold the fractured pores open but block the petroleum fluids from flowing out, in which case, they have to switch to a smaller size sand. It’s another example of the amazingly complex and advanced engineering that is at the core of today’s shale oil and gas industry.
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4. Housing Costs. Market fundamentals for housing are coming back into balance in the Bakken area, as the growing supply of housing options seems to have finally caught up with the demand for housing, which has fallen recently as a result of the temporary slowdown in the oil business in response to falling oil prices. As the chart above shows, housing construction has exploded in the Williston area in recent years, measured by the number of building permits issued. In 1999, when Williston was just a sleepy town in western North Dakota, there were only two building permits issued during the entire year, both for single-family homes. Until 2007, there hadn’t been a building permit issued for an apartment building in Williston for decades. Once the Bakken oil boom took off about 7 years, demand for housing started to skyrocket and that sparked a construction boom that continues to today. Over the last four years (2011-2014), permits have been issued for a total of nearly 6,300 new housing units, 5,145 for new apartment units and 1,127 for new single-family homes. The building boom and significant increase in housing units has now started to moderate home prices and apartment rents in the Williston area.
For example, a recent headline in the Williston Herald announced that “Rents are beginning to plummet in Watford City,” which is 45 miles from Williston. The article says that “In Watford City and Williston, rents tumbled 20 percent since the beginning of the year,” and that supports something I heard from a frac sand truck driver I met in Williston. The Tennessee native told me that he shares a 3-bedroom apartment with two other oil field workers, and when their rental contract came up for a one-year renewal recently, the monthly rent dropped by one-third, from $2,700 to $1,800!
As further evidence of falling rents in the Bakken, here’s an example of a brand new, 931 square foot, 2 bedroom, 2 bathroom apartment home in Williston that is listed on Craigslist for a rent of $1,800 per month. Here’s a listing for 3 bedroom apartment in Williston for $1,550 per month. As recently as early 2014, some luxury two-bedroom apartments in Williston were renting for $3,200, but are now going for $2,600 per month.
Exactly as economic theory would predict, the supply of housing in Williston has increased significantly (see chart), the demand has stabilized and has been falling in recent months, and therefore lower rents and home prices are the inevitable result. Pretty much exactly like the market fundamentals that have resulted in falling oil prices!
5. International Jobs Mecca. The gold-rush-like energy boom in North Dakota’s oil patch has attracted workers from all over the world, and it’s now increasingly common to see workers in Williston from African countries like Sierra Leone, Liberia, Angola, Senegal, Tanzania, Guenia and Kenya who have jobs at McDonald’s, Fuddruckers, KFC, Walmart and the city’s convenience stores, hotels, and gas stations. According to this Aljazeera news report, “Before the boom, Williston was in no way diverse, but there are now native Spanish speakers and a Turkish community as well as immigrants from numerous African countries.” CNN reports that it’s not only Africans who have moved to Williston looking for jobs, there are now workers from Brazil, Peru, Australia and Germany. “You want to meet people from all over the world, this is the place to do it,” a local resident told CNN.
According to a 2012 WSJ article (“North Dakota City Draws Foreign Workers”), “With the nearby oil boom draining Williston of many of its service workers, businesses here are relying on a cultural-exchange program for foreign college students to keep the local economy humming. More than 500 foreign students—from Thailand, Jamaica and about a dozen other countries—are staffing nearly every hotel, car wash and fast-food place in town, tending to the troops of roughnecks from the oilfields.”
I noticed it more on my trip to Williston this year than my visit there in 2014 that the small city in western North Dakota has become as internationally diverse as many large metropolitan cities like Minneapolis-St. Paul. It’s a fascinating development that the recent boom in the Bakken oil fields producing an internationally-traded, global commodity – crude oil – has transformed a small, remote town on the North Dakota prairie into an internationally diverse community with a new global character. Exhibit A: There’s now an Asian fusion restaurant and sushi bar – Basil – in downtown Williston as just one example of the increasingly internationalization of the city.
Bottom Line: Overall, I think what impressed me the most about visiting the Bakken oil fields is the amazing technical sophistication involved in drilling for shale resources in reservoirs miles below the Earth’s surface, and then drilling out laterally (horizontally) for several more miles to extract oil from saturated shale rock formations that were previously inaccessible with the traditional drilling and extraction technologies. We can thank American petropreneurs like Continental’s Harold Hamm who preserved for decades until they finally “cracked the shale code” with revolutionary, breakthrough drilling and extraction technologies that have transformed America in an energy superpower. More than most people think, the oil and gas business is a very, very high-tech industry that uses cutting-edge, advanced engineering, geological and drilling technologies that continually advance and improve. The technological innovation that unlocked the nation’s oceans of shale resources hasn’t stopped but instead has actually intensified. New ideas, technologies and ways of cracking the shale code emerge daily, as America’s “petropreneurs” get better and better at what they do all the time.
I’ll write more about the technological sophistication of shale oil drilling and extraction in my next post, but will conclude for now by saying that the advanced drilling and extraction techniques used in the Bakken oil fields (and elsewhere) are truly marvels of modern engineering and the shale revolution is truly a “free market triumph” (to quote Harold Hamm).
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