The Niobrara Shale Formation

U.S. Oil Production: Don't Abandon Ship Just Yet

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Editor's note: For a highlight on the difference between shale oil and oil share, read Keith Kohl's updated explanation here...

Peak Oil has become a grim reality in the United States... And for Alaska, it's downright scary.

2010 was a heart-wrenching year for Alaska.

Oil production averaged less than 600,000 barrels per day. It hasn't been that low since 1977 — more than thirty years ago!

Take a look for yourself:

alaska oil production

As if that weren't enough for the burliest oilman to shed a tear, do you remember when the USGS revised its estimate for the state's conventional, undiscovered oil in the National Petroleum Reserve... by 90%?!

The new estimate stands at approximately 896 million barrels — compared to the previous projection of 10.6 billion.

The low-hanging fruit is indeed gone. But instead of drowning your sorrow in an Anchorage pub, things aren't all bad out there...

Last week, I mentioned some of the best oil formations in the now-famous Williston Basin.

Here's the problem for many investors: The Bakken boom is more than five years old.

Yes, production is expected to surge to more than half a million barrels per day within the next few years — a feat previously scoffed at by skeptics...

But now they're singing a different tune. And you can't blame them.

About 20% of all the active drilling rigs in the United States are located in the Bakken.

In other words, the secret is out. Now, those drillers are looking to expand their horizons...

The Niobrara Formation

Haven't heard of it yet? Don't worry, you will.

In fact, most shale plays across the United States tend to take a backseat in the media to areas like the Bakken, Marcellus, and even Haynesville formations.

Within the next few years, however, I have a feeling investors will feel differently.

Located in the Denver-Julesburg basin, the Niobrara shale formation is one of the up-and-coming shale plays beginning to get some attention. The formation encompasses Northeast Colorado, as well as parts of Wyoming, Nebraska, and Kansas.

The Denver-Jules Basin isn't the smallest shale play in the U.S. The Wattenberg field is actually the seventh largest in the country when it comes to proved gas reserves, and ninth on the list in terms of production.

Also, like every other shale formation, producers are taking advantage of horizontal drilling and fracturing techniques to tap into the rock. These wells don't come cheap; wells can cost several million dollars apiece.

Although we shouldn't be expecting to see the same kind of activity right now compared to North Dakota, there's no doubt that it's on the rise in the Niobrara. During 2010, Weld County, Colorado, approved more than 200 drilling permits. By the end of the year, about one-third of those wells were drilled and started production.

At their current pace, Weld County could issue more than 400 permits in 2011.

Of course, it all began with Jake. That was the name of EOG Resources' wildcat well that pumped out 50,000 barrels of oil in the first three months in 2009.

The company currently has a three-rig drilling program in the play on their 300,000 net acres and plan to drill another 40 wells into the Niobrara this year.

New Ways Play the Shale Boom

Last week, my colleague Chris DeHaemer mentioned that CNOOC ponied up $570 million for a 33% stake in Chesapeake Energy's Niobrara project. They aren't the only ones taking an interest...

Not surprisingly, you are going to recognize a few of the tickers operating in the area:

niobrara shale stocks

Then again, you might want to keep on an eye on the lesser-known companies targeting this relatively new shale formation: Synergy Resources (OTC Bulletin Board: SYRG).

Two weeks ago, the company released its latest drilling results from six of its Niobrara wells. The stock has jumped 50% so far in 2011.

Believe me, drilling these shale formations isn't going to cool off any time soon. Remember — approximately 57% of the wells being drilled in North America are horizontal.

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Of course, there are other ways to invest in this surge in shale drilling...

In fact my latest shale pick doesn't even own any land. Instead, they're offering an alternative to hydraulic fracturing.

And we both know that if there's anything dragging the shale boom down, it's the environmental issues emerging over the hydraulic fracturing process.

Although 99% of the fracturing fluid is made up of water and sand, that 1% is what's causing concern for the public. There's enough of an outcry that groups are taking it to the steps of Congress, looking to curtail the procedure... and we all know how convoluted things get when the government gets involved.

Using this fracturing technology, a small, relatively unknown company is threatening to quiet the whole uproar.

Until next time,

kpk

Keith Kohl
Editor, Energy and Capital


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