The Bakken oil formation and national security

Yesterday, Bloomberg News published a story about some young oil developers and their rush to bring the Bakken oil formation, located in eastern Montana and western North Dakota, into major production.

The Bakken Formation has been a minor producer of crude oil for over a half century. What has increased this formation’s potential is the arrival of mature horizontal drilling technology, now combined with water fracturing recovery techniques. These techniques could turn the Bakken Formation from an inconsequential dud into perhaps the largest oil field on the planet.

How large? In an unpublished research paper he wrote while working as a geochemist at the U.S. Geological Survey, Mr. Leigh Price (who died in 2000) calculated a mean estimate of recoverable oil from Bakken at a stupendous 413 billion barrels. This compares to Saudi Arabia’s proven reserves of 267 billion barrels.

Mr. Price’s report did not receive a complete peer review and was not published as an official USGS study. As it happens, in April the USGS did publish an official estimate of Bakken’s potential. Based on recent exploratory efforts and current recovery technology, the current USGS mean estimate of recoverable oil from the Bakken Formation is 3.65 billion barrels, less than 1% of Mr. Price’s estimate from nearly a decade ago.

Isn’t this USGS report a severe letdown? Perhaps not. The USGS last studied the Bakken Formation in 1995. Using recovery technology in existence at that time, the USGS estimated Bakken’s potential at a mere 151 million barrels. With such low potential and crude oil prices relatively depressed at that time, it is easy to understand why Bakken was ignored.

The combination of data from new test wells and new recovery technology has caused the USGS to expand its estimate of Bakken’s potential by 25 times between 1995 and 2008. In its April report on Bakken, the USGS admitted that it has collected only very limited data from assessment areas surrounding the center of the Bakken Formation. There is a potential here for upside revisions as more test wells are drilled.

More importantly, Bakken’s expansion has been tied almost completely to improvements in drilling and recovery technology. Absent a breathtaking plunge in global crude oil prices, it is reasonable to assume that horizontal drilling and water fracturing recovery techniques will continue to advance in the years ahead, making recoverable even more of Bakken’s crude oil. Another 10-20 fold upgrade of Bakken’s potential would make it a peer of Saudi Arabia’s Ghawar field, currently the world’s largest.

Bakken has many other merits. Bakken’s crude is easy to refine. Unlike the Gulf Coast, Bakken is not vulnerable to weather or terror disruptions. Unlike Alaska, there are no geographical problems getting Bakken’s oil and gas to refineries and markets. Local politicians are enthusiastic backers of development and support plans to expand supporting infrastructure in the area.

Should Bakken live up to this hypothetical potential, the economic and national security implications would be significant. Production from the Bakken Formation could create a large positive swing in the U.S. balance of payments. This would open up decision-making flexibility for U.S. economic policymakers. And in the national security realm, future U.S. presidents would have more policy options available for their consideration as they contemplate problems such as Iran.

Long ignored, the Bakken Formation is now the hottest development in U.S. domestic oil exploration. Will it be the next Saudi Arabia? That remains hard to say. But it would take a tremendous oil price crash to prevent Bakken from being a significant development.