Record high world oil prices, along with new drilling methods, are driving a boom in the oil fields of North Dakota, Montana and Wyoming, and to a lesser degree, northwest South Dakota, industry officials say.
A few years ago, world oil prices pushed past $50 a barrel, helping rejuvenate the regional oil industry.
Now, world oil prices approaching $100 a barrel have spurred new drilling and have made possible the use of expensive new technologies, including horizontal drilling and injection of air, water and carbon dioxide to help get more oil out of the ground.
North Dakota, Montana and Wyoming all have seen big increases in oil production in the past few years.
In Harding County in far northwestern South Dakota, the increased prices aren't causing a big boom, but there is a trickle-down effect from the boom elsewhere, according to Fred Steece, oil and gas supervisor with the state Department of Environment and Natural Resources.
Steece, based in Rapid City, said the two major companies in Harding County's oil fields, Continental Resources and Luff Exploration, are drilling some new wells and have gone back into old wells to drill horizontal laterals to get to wider areas of underground oil.
After a peak of 129 oil-drilling permits in 1982, South Dakota's oil industry went into a long lull.
The number of permits had dropped to 16 in 2001 and 10 in 2002 - the lowest number ever in South Dakota, Steece said. In 2005, with oil prices rising, South Dakota issued 53 drilling permits. Last year, the state issued 40 permits, and this year so far, it has issued 37, with more pending, Steece said.
Oil production and state oil severance taxes have also shown steady increases.
Continental Resources, which has been in Harding County for decades, has drilled three new wells in the past year and re-entered all of its existing vertical wells to drill horizontal laterals, according to Continental field manager Gordy Carlson in Buffalo.
In horizontal drilling, crews push the drill bits down thousands of feet in the existing vertical well and then, using a computerized geological guidance system, direct the drill laterally thousands of feet into the oil-bearing formation.
Continental in the past has operated mainly in northwestern Harding County but now has drilled new wells into a field farther east, along U.S. Highway 85. The company plans to drill more wells in that field and to re-enter more of its existing wells to the west, Carlson said.
Continental is now producing about 2,000 barrels of oil a day, about 700 barrels a day more than it was five years ago, Carlson said.
Most of the increase so far is due to re-entry into old wells, he said.
Continental has used injection wells to put high-pressure air into the fields to push more oil from the formation into its production wells.
The increase in production has allowed Continental to add a few employees to its operation. It now has 15 production workers and seven who work in its air compression facilities.
And it's added contractors.
Drilling costs rise
But those contractors are charging more for their services, taking some of the profits from the higher prices Continental and other companies are getting for the oil, Carlson said.
The other big player in Harding County, Luff Exploration of Denver, also has drilled new wells and plans more, according to company president Ken Luff.
But Luff said the higher prices were not a major factor. Luff said drilling companies and other service contractors charged dramatically more for their services. "They just pass it all on to us."
He said four or five years ago, it cost him about $1.5 million to drill a new well. Now, that cost is averaging more than $2.5 million.
Luff, like Continental, has been working the "Red River B" oil field, which straddles the South Dakota-North Dakota border, for decades.
Now, with the use of horizontal drilling technology, what appeared to be separate fields are proving to be part of a larger field.
He is drilling new wells in the same area also being worked by Continental, along Highway 85 near the North Dakota border.
Luff said production in many of his existing wells had dwindled. But since 2004, Luff has drilled 18 new wells, all of them horizontal, and re-entered six existing wells to drill laterals.
Last year, Luff drilled seven new wells and plans to drill up to nine new wells next year in that area. All but one likely will be on the South Dakota side of the border.
In 2004, Luff had 19 operating wells producing about 1,500 barrels of oil a day. Now, he has 30 wells producing more than 2,000 barrels a day.
However, Luff, like other oil companies in the region, isn't getting the full world price. Their oil is discounted because of its distance from pipelines to refineries.
For example, when oil was at $85 a barrel on the world market earlier this fall, Luff and others in the region were getting only $66 to $71 a barrel.
Luff now sends most of his oil via the Enbridge pipeline to Clearbrook, Minn., and the rest to a terminal near Guernsey, Wyo.
The South Dakota activity, although small compared with oil fields elsewhere in the region, has helped the local economy with jobs and equipment purchases.
And area landowners are getting royalties from oil pulled from under their property. Luff said 11 families in northwestern South Dakota received more than $350,000 in total royalty shares in October.
Farther north, the oil patch is experiencing a full-scale boom in west central North Dakota and eastern Montana, where rigs are drilling many new wells into the Bakken Formation.
The number of rigs drilling new wells in North Dakota has doubled in the past 18 months, according to Lynn Helms, director of the Oil and Gas Division of the North Dakota Industrial Commission. Most of the 55 rigs are working in the area between Dickinson and Minot.
High prices and new technology are combining to spur the boom, Helms said.
Crews now can drill 10,000 feet horizontally from the bottom of vertical wells and inject water to fracture the formation, releasing even more oil. "That is extremely expensive, and so high prices are required to support that kind of work," Helms said.
It costs an average of $4 million to $6 million each to drill such high-tech wells - about four times what wells cost to drill a few years ago, Helms said.
Production in North Dakota has increased from 100,000 barrels a day two years ago to about 127,000 barrels a day now.
Helms said the break-even price is approximately $50 a barrel. "We crossed that threshold in June of 2005."
But North Dakota, too, must take a price discount because of distance to refineries and lack of pipeline capacity. "We're busy building pipeline to try to catch up with our production," Helms said.
The booming oil patch still faces a labor shortage, Helms said. There are probably more than 100 unfilled jobs, including truck-driving and service-company jobs, in North Dakota, he said. Many of them pay more than $50,000 a year.
Just to the west in Montana, the high prices continue to fuel a boom that began a few years ago near Sidney.
"It was busy to start with. I'm not sure it could get any busier," said Tom Richmond, administrator for the Montana Board of Oil and Gas Conservation.
Oil production in Montana has doubled since 2000, when prices were $25 to $27 a barrel, but is probably now close to peaking, Richmond said.
Production last year was 36.2 million barrels statewide, with nearly 19 million barrels of that from the Bakken Formation near Sidney.
Many oil companies in Montana also use the expensive new methods of extracting oil, including fracturing the rock with a high-pressure gel.
Other oil production in the state includes some from the Cedar Creek Anticline, the tail end of which sticks down into Harding County, Richmond said.
In Wyoming, oil production had steadily declined for years, according to Don Likwartz, oil and gas supervisor with the state Oil and Gas Conservation Commission.
But, in 2006, Wyoming had its first increase in oil production in 21 years, Likwartz said. That production includes both crude oil and condensate. Condensate starts out as gas from conventional gas wells but liquefies once brought to the surface.
Much of the increased production came from additional condensate, Likwartz said. The remainder came largely from Anadarko's use of carbon dioxide flooding in Wyoming's oldest oil fields north of Casper.
Expensive technology
"CO2 technology has been around for a long time. But you need price to make it work," Likwartz said. "You have to have higher prices to pay for the CO2 you're putting in the field. You have to lay pipeline to put in the fields. It wouldn't have happened with $25 oil."
But Wyoming oil, too, is not getting the full crude price because of discounts due mostly to a lack of pipeline capacity.
Likwartz said the major pipeline through the state is owned by Enbridge, a Canadian company, so Canadian oil has first preference. "It's effectively squeezed Wyoming, South Dakota, North Dakota, Montana and Colorado."
Likwartz said Enbridge is now talking about laying some large crude oil pipelines, including the proposed Keystone line through eastern South Dakota.
That line, if built, would take pressure off the line through Wyoming, he said. Opposition has developed to the Keystoneline, including from the WEB Water Development Association in eastern South Dakota.
Oil future outlook
Likwartz said if oil prices stay high, they will keep condensate development going in the western part of Wyoming and give Anadarko incentive to flood the rest of the big Salt Creek field.
North Dakota's Helms said $20 to $25 of the current price is a premium caused by problems in the Middle East and fears about weather. "I think it's due for a significant correction but I don't anticipate it being large enough to drop us below that $50 level," Helms said.
"With just normal supply and demand, it should be more in that $70 and $75 range."
Luff, who has been working the oil field straddling South Dakota and North Dakota for decades, said the oil market volatility and the price discount make drilling more wells risky.
He said bigger operators can take more chances than small independent operators like his company.
"Am I comfortable enough to go out there and schedule to drill 15 wells assuming our net is going to be $70 to $80 a barrel? No," he said.
Contact Steve Miller at 394-8417 or steve.miller@rapidcityjournal.com
