Friday, May 10, 2013

The Bakken and its Impact on the Local Economy

Over the past twelve to eighteen months, we've seen increasing resistance by various groups throughout the United States and Canada to hydraulic fracturing.  One of North America's largest plays that requires hydraulic fracturing (or fracking) to produce economic volumes of oil is the Bakken Formation in the Williston Basin located in the northwestern United States.  Since the Bakken is a relatively low permeability and porosity formation (in areas where is does not produce oil in a traditional manner), wells are drilled horizontally into the formation and various materials (i.e. sand and other chemicals) are pumped down the hole to create open fractures and increase permeability so that the oil will flow.  Think of oil reservoirs as a sponge; microscopic and macroscopic pores or holes are either connected or they are not.  If they are not connected, fracking is required to connect the pores so that the oil will flow.

Let's open by looking at a map showing the rough outline of the Williston Basin of Montana, North Dakota and South Dakota:

Here is the entire stratigraphic section typical of the Williston Basin showing which formations contain petroleum:

Here is a map showing production by geological age in the Williston Basin noting that the red dots show Bakken production:

A recent assessment by the United States Geological Survey (USGS) found that the Bakken shales, siltstones, sandstones and clastic carbonates have an estimated mean total oil resource of 3.65 billion barrels and the underlying Three Forks shales, dolomites, siltstones and sandstones contain an additional mean resource of 3.73 billion barrels of oil.  To put these numbers into perspective, in 2012, the United States consumed an average of 18.55 million BOPD or 6.77 billion barrels of oil over the year.   The drilling of 4000 additional wells in the Williston Basin since 2008 has given the USGS a clearer picture of the total oil reserves for both formations, raising their 2008 estimates by a wide margin.  In addition to oil, the formations are estimated to contain an additional 6.7 trillion cubic feet of natural gas and 530 million barrels of natural gas liquids.   In all cases, the hydrocarbons are sourced from the radioactive, organic shales of the Upper and Lower Bakken

Here is a schematic diagram showing the formations involved in a typical Bakken pool:

Production statistics from North Dakota show just how quickly the Bakken play has grown.  Back in January 2000, there were 192 Bakken wells in the state producing an average of 10 BOPD with an average well producing 318 barrels per month.  By January 2013, there were 5162 Bakken producers, producing an average of 130 BOPD per well with an average well producing 4045 barrels per month, a nearly thirteen-fold increase over the period. 

While all of the negative publicity about the impact of fracking on the environment continues unabated, so does drilling.  Here is a graph showing the rig count for the Bakken play since 1997:

The Bakken play has a huge impact on the local economy in the area surrounding the current production operations.  How big is that impact?  According to a recent Minneapolis Federal Reserve study, the Bakken oil boom has led to both record low unemployment and much higher wages in the counties surrounding the core of the Bakken play.

Here is a map showing how the authors of the study correlated wage growth and unemployment levels with distance from the Bakken activity:

Each dot represents a county's centre point and each circle represents a 100 mile increase in distance from the Bakken play.

Here is a chart showing the index of average weekly wages since 2001 as the Bakken play was developed by distance from the key area noting that the Bakken counties are in orange:

Here is a chart showing the unemployment rate since 2001 by distance from the Bakken play again noting that the Bakken counties are in orange:

Average weekly wages in the counties immediately adjacent to Bakken activity rose by 140 percent since 2001 and unemployment has fallen to under two percent, one-quarter of the national rate.  As one works outwards from the core of the Bakken activity, wage growth appears to dissipate at a distance of more than 100 miles whereas, unemployment levels are lower than the national average at distances as far as 300 to 400 miles away.  Note that wage growth in the core area accelerated in the after 2007 and continue to multiply at an increasing rate after 2009.

From the Minneapolis FRB study, we can quite quickly see how significant the impact of a large oil resource play can be on a local economy.  It is also apparent that wherever oil companies are exploiting hydrocarbon resource plays, there is likely to be strong opposition to any reduction in the use of enhanced production techniques like fracking since the local economies of these areas rely strongly on the oil industry for their higher standard of living.  It will definitely be an uphill battle, particularly when one looks at how much better this area did during the Great Recession than the nation as a whole. 

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