IHS: Niobrara Resource Potential Not Yet Proven

Despite enthusiasm by exploration and production (E&P) companies and investors, successful development efforts to unlock the Niobrara horizontal oil play's resource potential has been limited, and more time is needed to further delineate its true potential as a resource play, according to a special report by IHS.

IHS studied the performance of a few modern horizontal oil wells present in the Niobrara and compared initial production rates of these wells against initial production rates for median-producing oil wells in the core of the Bakken/Three Forks shale play.

According to IHS, the median Bakken horizontal well completed since 2009 in the play's core averaged about 230 b/d of oil in its six month online. Two modern Niobrara horizontal wells matched or exceeded that oil production level, with the remaining 10 wells producing between 10 b/d and 190 b/d. In their sixth month, five of these wells produced 70 b/d of oil or less; three produced between 100 b/d and 125 b/d; and the remaining two wells produced approximately 185 b/d.

While enthusiasm for the Niobrara is likely tied to the success of the Bakken/Three Forks play, study author and IHS principal energy equity analyst Sven Del Pozzo noted that definitive conclusions of the Niobrara potential can't be made at this early stage, since fewer than 20 modern horizontal Niobrara wells in the DJ and North Park basins have 365 days of IHS production history, "and just 10 of those have a meaningful oil cut."

The author said he doesn't necessarily disagree with the expectations of E&P companies that experience will enhance both well performance and predictability in the Niobrara. However, Del Pozzo said those who have cited the Niobrara play's best wells as indicative of future results are being a bit premature due the variability and lack of production data.

"The Niobrara is situated at various depths and has diverse rock properties as it spans multiple basins, making it very risky to generalize about its prospectivity at this stage," Del Pozzo said. In comparison, the Bakken's production is predictable over a wide area, compared with the Niobrara, where well performance still varies considerably, even in the same field.

The Niobrara play extends from Wyoming and Colorado into Nebraska and Kansas.

Horizontal Drilling Boosts 2010 Oil Production

Horizontal drilling activity in the Bakken and other U.S. oil shale formations helped boost U.S. oil production. The U.S. Energy Information Administration (EIA) reported this week that U.S. oil production grew in 2009 and 2010 after experiencing declines in all but one year from 1986 to 2008.

While the 2009 production increase resulted from deepwater Gulf of Mexico activity, EIA attributed the 2010 growth to oil shale drilling. "Operators are combining horizontal wells and hydraulic fracturing – the same technologies used to significantly boost shale gas production – to do the same for oil," EIA said.

Total oil production in North Dakota has approximately tripled since 2005 thanks to development of the Bakken play, which extends into Montana and parts of Canada. North Dakota Bakken production has increased from less than 3,000 b/d in 2005 to over 230,000 b/d in 2010, and the Bakken's share of North Dakota oil production rose from about three percent to about 75 percent during the same period of time.

Shale plays known primarily for gas production also are seeing an acceleration of oil-focused drilling as strong oil prices has prompted producers to switch their focus from shale gas to shale oil. In Texas, oil production from the Barnett shale play has more than tripled from 2005 to 2010, while Woodford shale oil production in Oklahoma passed the 4,000 b/d mark in 2010, up 42 percent from 2009 and nearly three times 2008 volumes.

The Eagle Ford oil shale play in Texas, which had negligible production in 2005, approached 30,000 b/d in 2010. Oil production from Appalachia's Marcellus shale more than doubled in 2010 from a year earlier and has grown nearly thirteen-fold since 2007.

The Baker Hughes rig count currently shows more active oil-directed rigs than gas-directed rigs. Natural gas rigs generally accounted for between 80 percent and 90 percent of the total weekly rig count during most of the 2000s. However, the number of rigs targeting oil deposits climbing began climbing significantly in mid-2009.

The importance of horizontal drilling to increasing oil production is also underscored by the Baker Hughes rig count data, EIA noted. Horizontal rigs comprised less than one-third of oil-directed rigs in September 2008; since then, the number of horizontal oil rigs has tripled, increasing that share to about 46 percent.

The increase in crude oil prices relative to gas prices is one factor responsible for the shift towards oil-focused drilling. The crude oil-to-natural gas price ratio, which through mid-2009 averaged over eight from 2000 through mid-2009, has since risen considerably. EIA noted that, when the Brent crude spot price in dollars per barrel is divided by the Henry Hub spot price of gas in dollars per MMBtu, oil is five times more valuable than gas on an energy-equivalent basis.