Harold Hamm and Continental Resources and the Bakken

Since Harold Hamm is the face of Continental Resources and Continental Resources is probably the company most closely identified with the Bakken boom, I dug into the archives for some material on Hamm and the path Continental took from Oklahoma to North Dakota. This post is meant to be a portrait of Hamm and Continental, a story about the Bakken, and a look at the nature of the oil and gas industry; and along the way give a sense of how North Dakota’s boom came to happen.

The Oklahoma City Journal Record sat down with Hamm for a long interview that was published on November 3, 2008, as the center of a profile of him. Here are some key remarks by Hamm:

The youngest of 13 children, Hamm left the family farm in Purcell at 16 to strike out on his own in Enid. Shortly after graduating from high school, the entrepreneur secured $1,000 and a cosigned note to start up Hamm & Phillips Service Co., a one-truck oilfield service business that would serve as his entry into the industry. Last year [2007], Hamm took his company, Continental Resources, to the stock market with an initial public offering that raised more than $440 million.

Hamm grew up in a sharecropper’s one-bedroom home, without paint on the walls or indoor toilets. He grew up in the cotton fields, working for others. When he moved to Enid, Hamm decided to change direction and finished high school working nearly any job he could so that some day he could be his own boss. At about the same time, the town of Hennessey was booming with exploration and drilling. Hamm had never been around an oilfield before, but once exposed, he was hooked.

“Suddenly I saw another side of folks,” he said. “These were charismatic people and were the movers and shakers of the area. Those were exciting times. Hennessey had boomed and northeast Enid field was close to being drilled. The whole Sooner Trend production, from Oklahoma City to the north and west, was on the cusp of being drilled.”

When the industry was in full swing in the late ’60s, he said, “You could count 28 drilling rigs from the crest of a hill near Ringwood, without moving. Those were exciting times. We drilled our first well in 1971 as a wildcat, and we found a nice little field, which prepared me. I got out of school and finally got into the business on the service side after working for a contractor for about three years. I worked for Champlin for a short stint and was able to get into business for myself.”

The “small fortune” Hamm said he earned at the time gave him even more freedom – “I quickly realized I didn’t need that much freedom,” he said. Realizing he would never be able to get oil out of his blood, Hamm decided to take some of his hard-earned money and invest in his education. He took several classes at Phillips University in the mid-’70s, focusing on mineralogy, chemistry and petroleum geology. But getting a degree wasn’t as important as the knowledge itself, he said.

“I did a thesis in my class on oil exploration because I was interested in it. I guess the thought there was that there was ancient wealth unfound. The thought of that grasped my young mind. I wanted to learn as much about the business as I could. Of course I was working all the time I was going to college. I started my own company again and enjoyed the very exciting times of the late 1970s. Finally got to the time when prices were where you could make a living.”

Hamm sensed that the landscape was about to change in a big way. “I was committed to staying in the business,” Hamm said. “I started with one rig and basically was drilling my own leases. By the time of the height of the boom we wound up the builder of the biggest and best rigs. We had 13 rigs and it just got too good to be true,” he said. “Of course, I was working almost 24 hours a day with that thing and I’ve never really seen anything like it. It was really kind of illogical to me. I just finally got scared.” So he sold the appropriately named Trend Drilling Co.- a trend in time as well as a geological trend – which had successfully been drilling not only its own leases, but also contract work for other companies.

Although he missed out on the maximum profit potential, his timing was still fortuitous. “If I’d sold it earlier I would’ve gotten all my money,” he said. “I had to carry some of the deal. I came out really well. . . . The deal closed April 7, 1982. Penn Square Bank went down in July. That’s how close it was.”

When Oklahoma City Penn Square Bank shut down because of a gross imbalance of speculative loans in the oil and gas industry, it started a nationwide ripple that took many other banks with it. The petroleum industry also spiraled into a severe recession: Gas prices fell off from $9 per thousand cubic feet to 95 cents by 1987; oil went from $40 a barrel in 1981 to $10 a barrel in 1986.

“It put half the people out of business and destroyed half the infrastructure that existed at that time in our industry,” Hamm said. “People were cutting up drilling rigs for scrap iron by the end of the ’80s. Chopping them up, one right after the other and melting them down. It was terrible to see.”

But it also provided an opportunity to step back, assess the new environment, pick up some assets, and appreciate the wealth of industry wisdom he could tap into. Hamm was at least two steps ahead of the economic rebound.

“In about 1983, I retrenched as an oil and gas operator. At that time we had about 100 wells we drilled and operated, and I wanted to find oil and gas, so that’s what I started to do – concentrated and focused on building my company. And from that point on, the last 25 years, my focus has been exactly on that.

“I was very young. They helped me because of that. Our industry is so unique in the fact that there’s always someone out there helping someone else or mentoring someone else. Oil people are generous. . . . People gave to me. A lot of people mentored me for 30 years, and it was more so in the field than in any classroom. There were several that took me under their wing. Ask questions, they’ll help you. It’s another entire level of professionalism.”

Hamm’s first major oilfield development was the Cedar Hills Field in North Dakota in 1995, which was the largest onshore discovery at the time in more than two decades. It was also the first field drilled strictly with horizontal wells. The Department of Energy still ranks it as the 13th-largest onshore field in the lower 48 states. Hamm refers to it as a legacy field and “elephant” that helped the company reach the point where he could take it public. Finding the field is still a benchmark he remembers fondly.

“You know it exactly when it happens. With this field, we had it all mapped out and thought we knew exactly where it was from tests. Our guys thought it was small in some different places; I thought it was gigantic in proportion,” he said. “We started with two rigs at the same time and I really realized the size of the field and the potential prospect. When we went up there on the ground after the rigs were on the ground drilling, and you couldn’t see one rig from the other.”

The latest elephant in which Continental has had a leading role is the Bakken Shale Field in North Dakota, delineated as the Elm Coulee Field and other holdings. It also is a horizontal drilling operation.

“In 2003 we took a large lease position in North Dakota along the Nessen Anticline, where we knew the Bakken existed,” he said. “We felt it would be productive and now we’re running about 30 rigs and 14 of which are drilling in the Bakken of North Dakota and Montana. This is a huge play. The U.S.Geological Survey came out and did an assessment on this and gave it over 4 billion recoverable at the current level of technology and methods. Actually it confirmed what we doing,” he said. “It gave it credence. . . . Absolutely the greatest find in my career, without a doubt.”

“I could sit here and find bread-and-butter deals readily in Oklahoma and make a good living. But as an explorationist, I wanted to go to the Rockies. I felt like the opportunity was there to find some good deals and I wanted find elephants – fields with 400-500 million barrels.”

He said the discoveries of unconventional plays, particularly in natural gas, will be a boost [for the U.S.]. “Very few people know there are about 15 companies or resource players in America and all are independent producers – not a major in the bunch,” Hamm said. “These are the ones that embraced this technology of horizontal drilling, high-pressure fracs, multi-state high-pressure fracs and other high-tech. It’s a paradigm change from conventional to unconventional. What it’s done is unlock an almost unimaginable amount of resources for this country.”

He said the last five years of exploration have unlocked the gate to abundant resources such as the Bakken Shale in the northern U.S. and Barnett Shale in Texas. “The majors thought the deals were too little,” he said. “They didn’t want to get involved. Today the Barnett Shale is the biggest thing in America. It’s going to produce mainly natural gas. The Bakken is an anomaly. It’s an oil producer. The rest is natural gas.”

With a world short on transportation fuels, and the technology to harness wind energy, the country will be back on the right track, he said. “What it does is open up the door to an almost unlimited supply of natural gas to America. It’s my belief that we need a national energy policy as soon as we can. And this is coming from an oil producer, OK? My company is 80 percent oil. We need a policy as quickly as we can to retool vehicles to handle natural gas. This is an abundant, cheap fuel.”

Natural gas must be used in a form that will power vehicles. “I think we do it very quickly, and like [T. Boone Pickens] said, we’re going to have to drill, drill, drill until then,” Hamm said. “We have to open up ANWR, offshore, and make it possible to get access to federal lands in the Rockies and other places that are off-limits today.”

Hamm said that although it seems bleak at times, there is no national emergency today. “We haven’t had one supply disruption, the strategic petroleum reserve is full and it hasn’t been drawn out of,” he said. “There are no lines at service stations. The thing that’s got everyone’s attention is the price shock. They look down the road and see how expensive it’s going to be. The switch to natural gas cars is not going to be easy. But neither was the car when it first came out. You have to get ready for it. We can do it, and natural gas is going to be here for as long as we’re here.”

Harold Hamm: Position: Chairman and chief executive officer, Continental Resources. Born: Dec. 11, 1945, in Lexington, Okla.

Education: Honorary master of laws degree from Northwestern Oklahoma State University; studied geology at Phillips University; graduated from Enid High School. Family: Wife, Sue Ann Hamm; children Deana Cunningham, Shelly Lambertz, Tom Hamm, Jane Hamm and Hilary Hamm; and 10 grandchildren. Hobbies: Game bird hunting, fishing, golf and flying – he has a private pilot’s license.

Favorite movie: Secondhand Lions. Favorite president: Ronald Reagan. Favorite radio station: 96.1 FM, country music. Favorite meal: Chicken fried steak. Favorite car: 1960 Chevrolet Corvette. Car driven most often: Mercedes 500 SL.

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Two Illustrations of Booms and Busts in North Dakota’s Oil Industry

This article, written at just about the very start of the current boom, is from the Bismarck Tribune of Tuesday, February 22, 2005, by Lauren Donovan:

WATFORD CITY — Watford City knows the good, the bad and the ugly.
The good is steady oil production, like now.
The bad was the bust after the ’80s oil boom.
The ugly was sloppy, unsafe operators and the mobile home courts and businesses abandoned in the receding tide of intense development.
The McKenzie County community is catching a new tide and the oil ride is on again.
Oil prices are high, old wells are being put back into production — or re-entered with new technology — and new wells are being drilled in the region.

Mineral acres in McKenzie County are fetching the highest-known prices ever paid in North Dakota’s oil history. That’s primarily because a very rich but thin layer of oil called the “middle Bakken formation” is within reach of known drilling technology.
The middle Bakken play from Belfield to the state line at Sidney, Mont., is poised for a wave of drilling that could bump the state’s daily production over 100,000 barrels.
These are exciting times, but hopefully not, in the immortal words of Yogi Berra, “deja vu all over again.”

Townspeople and ranchers haven’t forgotten.
Gene Veeder heads up economic development for McKenzie County. When he went back home 12 years ago, “Everything was empty and we’ve spent 10 years trying to fill it up.”
Nice and steady is better than a boom any day, he said. Oil production, not exploration, has been Watford City’s bread and butter.
The past year, with more production from new and old wells, was a dandy for the county, Veeder said.

Lynn Helms, director of the State Oil and Gas Division, predicts that between 200 and 400 new and re-entry wells will be drilled annually over the next several years. The prediction hinges on continued high oil prices and whether producers figure out how to successfully pierce the oil-rich middle Bakken with horizontal drills.
Helms’ prediction falls wide of Veeder’s “nice and steady,” but far short of the calamitous drilling frenzy of 20 years ago.

About a decade earlier, in May 1994, Carter Wood of the Grand Forks Herald wrote an article headlined “N.D. OIL WON’T RECOVER SOON COMBINATION OF FACTORS MEANS BUST MAY BE HERE FOR GOOD”:

North Dakota’s oil bust may be here to stay.
Oil once shone brightly for North Dakota, bringing thousands of jobs and millions of dollars to the state. Then prices collapsed and the boom busted.
Workers and their families left, Main Street businesses shut down, and trailer parks stood empty. The impact spread beyond western North Dakota ‘s oil patch, as plummeting revenues forced sharp cuts in state spending.
Now, unless a world crisis erupts — and continues — the industry’s prospects for revival slim.
Industry executives and experts hold out little hope of recreating the boom years of the early 1980s. Even a modest resurgence returning oil to a more important role in the state’s economy seems unlikely.
“In order for those conditions to go back to that level again, we’d be looking at another import embargo that we had in `73 and `79, and we basically had the Persian Gulf War to stop anything like that,” said Lynn Moser, president of the Inland Oil and Gas Corp., a small, family-owned exploration and production company based in Bismarck.

Crude not so sweet
Prices of sweet crude appeared to bottom out earlier this year at about $12 per barrel, jumping last month to above $14.
Nevertheless developments worldwide show few indications that prices will return to $25 to $30, the level needs to revive the petroleum industry in the United States and North Dakota.
“North Dakota in particular has an additional rough row to hoe, because the exploration and development and producing costs are much greater in the Williston Basin than they are in many of the other oil and gas producing basins in the United States, ” said Ken Wagner, region production manager for Amerada Hess in Williston, N.D. . . .
North Dakota’s average rig count stood at 119 during the boom year, it dropped to six. During several weeks this year, only three rigs we’re operating.

“That means right now we’re just producing as we were before (the boom), gradually coming down and as reserves are used up, the industry is just going to continue to decline,” said David Ramsett, chairman of the economics department at UND.
Even if an Armageddon closed off world supply, the domestic industry is ill-equipped to react quickly. A decade of decline meant oil field workers got out of the business, and petroleum engineers switched to other professions. The domestic industry lost 400,000 jobs in the past decade, an estimated 14,000 since November.

Average oil price (per barrel):
1990 — $22.58
1991 — 19.61
1992 — 18.74
1993 — 16.05
1994 — 12.00

Average rig count:
1981 — 119
1982 — 70
1983 — 43
1984 — 51
1985 — 37
1986 — 14
1987 — 14
1988 — 14
1989 — 15
1990 – 20
1991 — 13
1992 — 12
1993 — 10
1994 — 6

Average oil field employment
1985 — 5,186
1986 — 3,297
1987 — 2,583
1988 — 2,775
1989 — 2,467
1990 — 2,750
1991 — 3,050
1992 — 2,400
1993 — 2,200

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North Dakota’s Oil Bust in the 1980s

For Christmas 1989, Jeff Meyer of the Associated Press wrote a summary of the state’s economy in the 1980s:

Drought and low prices in the energy and farm sectors made the 1980s a decade of despair for some North Dakotans. . .

The decade began with great promise for the energy industry. Prices for oil reached an all-time high in 1990 at more than $40 a barrel, sparking a frenzy of drilling and residential development in the Williston Basin.

But those prices began to slip in 1984, and they hit a low of $9 a barrel two years later. The boom went bust and hundreds of oil workers and their families moved out of communities like Williston and Dickinson.

The basin has experienced a slow comeback in the last half of the decade. Oil prices increased steadily in 1989 and should be in the $18.50-a-barrel range at year’s end.

The price gains and the success of a new horizontal drilling technique have given the oil industry and state officials hope for a bright future.

“We are very optimistic, excited about what horizontal (drilling) may hold for the future of the Williston Basin,” said Lowell Ridgeway, executive director of the North Dakota Petroleum Council.

Despite the roller coaster his industry rode in the 1990s, Ridgeway is proud of the contribution it made to the state’s economy. Oil and gas company paid $1.1 billion in state severance taxes during the decade, he said.

“It was during the ’80s that we feel the industry because a very vital cog in North Dakota ‘s economy,” Ridgeway said.

Years later (1996), the Bismarck Tribune wrote a broader overview of the history of the state’s oil industry that split it into three cycles:

Wes Norton, director of the Oil and Gas Division of the state Industrial Commission, said the industry has seen many gradual changes in safety and environmental areas.

Although the Williston Basin never became the oil producing area oilmen dreamed of in the 1950s, it is again drawing nationwide attention from oil companies.

It is one of the few areas in the country with active leasing, Norton said. Stark and Bowman counties are the major areas of development.

Norton, who has been working in the state oil and gas regulatory system since 1960, has seen the impact of oil on the state.

“”It has been significant to the economy of western North Dakota,” Norton said. “”A lot of people subsidized their farms and ranches with mineral income and working on rigs. A lot of North Dakota people found a living in the state from oil and gas.”

Norton said the state has seen three cycles in oil production.

“”The first cycle peaked out in the mid 1960s,” he said. Calling it the Discovery Cycle, Norton said it was a time comparable to a gold rush fever, hoping North Dakota ‘s oil production would be as prolific as that in Texas.

The second cycle — the Price Cycle — was influenced by the high prices of oil in the 1970s.

Drilling peaked in 1981 and production peaked in 1984.

“Oil production in the state steadily decreased until last year,” Norton said.

He describes the present cycle of increased oil activity as the Technology Cycle. The increased drilling and production is being influenced by 3-D seismic, horizontal drilling techniques and enhanced recovery methods.

Norton anticipates the Technology Cycle will be steadier, longer and better than the previous two, providing long-term security for the state’s industry.

In 1995, Steve Foss of the Grand Forks Herald had looked back on the boom years of the late ‘70s and early ‘80s:

Bucky Wolf has been there before.

Wolf, Dickinson chief of police, saw the city swell from a sleepy agricultural and stock-raising center of 16,000 in the mid-1970s, to an oil boom town of 22,000 in the early 1980s. And that’s not counting workers who lived outside the city limits.

During the boom years, Dickinson was a cop’s nightmare, as oil rig workers swarmed into town to celebrate their new-found wealth. Often, that meant heavy drinking and fights.

In those days, Wolf said, while officers were answering one call, there was always another one waiting for them.

Dickinson residents were nervous. City Auditor Doug Jaeger said an uneasiness existed most of the time.

All because of oil. . . .

City Auditor Jaeger said the city worked like mad to build apartments, expand its schools and upgrade sewer and garbage systems when the population exploded 20 years ago.

Jaeger said the city couldn’t upgrade and build fast enough to meet people’s needs, and by the time they finally caught up, the boom was over. People moved away. The city was left with an infrastructure to support 24,000 residents, but a population of 16,000.

Dickinson languished in the depression after the boom, but not for long.

The city carried a debt of $28 million in 1981. That debt has been reduced to $6 million, well below the $10 million a city of Dickinson’s size can effectively carry.

As important, Dickinson retains the schools, sewer and garbage service, and housing to support 24,000 people. And in 1994, for the first time in eight years, the city sold more lots than it took back for delinquent taxes — 44 lots sold, 22 taken back.

“We are in a position to deal with things far better than last time. Everyone tells me this is not a boom that will bring in a lot of people. There may be more wealth involved than people.” . . .

Western North Dakota ‘s oil industry saw its last great year in 1984. State petroleum council figures show that 52.6 million barrels of crude oil were produced that year, resulting in $160 million in oil and gas production and oil extraction taxes.

But in 1993, the last year for which the council has figures, 31.1 million barrels were produced, with tax revenues of only $46.4 million.

Finally, in late 2000, a Bismarck Tribune editorial surveyed the landscape and offered some thoughts on the past and possible future of North Dakota’s “boom-and-bust cycle of energy economics”:

North Dakota may be heading into an era of higher energy prices. If so, this is both a burden and an opportunity.

It would be unwise to suggest that the boom-and-bust cycle of energy economics has ended in North Dakota. It hasn’t been all that long ago that North Dakota went through a real roller coaster ride. But there’s a difference between the world and national energy situations today and those of a generation ago.

In the 1970s, when U.S. energy prices were low, they were held down artificially, by government controls. The main reason that North Dakota went through such a roller coaster ride in the 1970s and 1980s was the deregulation of energy prices. Once the price controls went off, production surged. That broke the grip of the oil cartel on worldwide energy prices. So, prices came back down. That rocked the oil economies of western North Dakota, notably in Dickinson and Williston. . . .

Meanwhile, as State Geologist John Bluemle has noted in his forecasts for the future, nation after nation, including even Saudi Arabia, is expected to see oil production peak in the current decade. That’s not to say there will be energy shortages. There’s plenty of fossil fuel energy left, and higher prices should finally spur the development of alternatives. The point is that energy will cost more.

In North Dakota, we’ll suffer. We drive a lot of miles per capita, so we’ll be poorer after we pay our gasoline bills. Because they rely on fossil fuels at every step of their production cycle, farmers will face a further squeeze on profits.

In North Dakota, we’ll prosper. Higher prices will, over time, revive the oil patch. . . .

No doubt the economics of energy still will resemble the boom-and-bust cycles of the past. It may be, though, that the cycle will start at higher points on the chart, so that the highs will be higher than ever and the lows won’t be so low as the lows of the past.

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The Start of Horizontal Drilling in North Dakota in 1987

Julie LeFever explains, in a paper called Oil Production from the Bakken Formation: A Short History (available as a pdf from North Dakota’s Department of Mineral Resources), how the first horizontal well in the Bakken, dug in 1987, changed things for the state:

Drilling activity along the “Bakken Fairway” changed greatly after Meridian Oil, Inc. drilled and completed the first horizontal well in the Bakken Formation. The #33-11 MOI, was initially drilled vertically. It was cored, logged, and drill stem tested, all of which indicated that the formation was tight. Meridian then backed up the hole and kicked off at 9,782 ft. Horizontal drilling was attained at 10,737 ft (measured depth) with a resulting radius of 630 ft. The well was completed on September 25, 1987 for 258 BOPD and 299 thousand cubic feet (MCF) of gas. The well had a horizontal displacement of 2,603 ft and is now producing in the upper Bakken shale that is 8 ft thick. The decline curve for the #33-11 was remarkably stable for the first two years until additional nearby wells came online. The well has produced 357,671 BO and 6,381 barrels of water (BW) through December 2003.

The success of this well set off the previous notable play dealing with the upper Bakken shale. Operators were eager to use horizontal well technology to encounter more fractures and thus produce more Bakken oil. As in any play, there was a learning curve. The #33-11 MOI took 57 days to drill and complete; 27 days to drill the vertical borehole and 12 days to drill the horizontal section at a cost of $2 million. The third set of ten wells drilled by Meridian, further down the learning curve, had an average cost of $1.08 million and took 35 days to drill. By the end of the play, Meridian Oil, Inc. was touting the fact that they could drill and complete a horizontal Bakken well for essentially the same price as the drilling and completion of a vertical well, around $900,000. Successful wells were capable of producing high volumes of oil (IP’s in excess of 1900 BOPD).

Here is a follow-up report from the Associated Press in June 1989 on how horizontal drilling had already changed the landscape:

Horizontal drilling an oil recovery method pioneered in western North Dakota two years ago, is helping to spur activity in the state’s oil patch.

During the past week, Pacific Enterprises Inc. of Denver was granted 16 permits to drill horizontal wells in the shale-like Bakken formation in McKenzie County.

It is the highest number of drilling permits taken by one company in a single week since 1981, said Jack Wilborn of the oil and gas division of the state Industrial Commission.

More oil companies are expected to adopt horizontal drilling when attempting to recover oil in the Bakken formation, which is found in several oil-producing counties, including McKenzie, Billings, Dunn and Golden Valley, said Wes Norton, also of the oil and gas division.

“It will be interesting to see if they get drilled,” Norton said.

About 1 1/2 years ago, Meridian Oil of Billings, Mont., completed the first successful horizontal well in the state in northern Billings County. Through April, that well had produced more than 146,000 barrels of oil.

Meridian Oil has since drilled 10 horizontal holes that produce 30 to 300 barrels a day.

“None of them have been plugged as dry hole,” Norton said.

Five of the 15 active rigs in the state are drilling horizontal wells.

To date, Conoco Oil Co., is the only other company to try horizontal drilling.

But state officials say interest in the drilling method is increasing rapidly and interest played a key role in the success of the state’s spring oil lease auction.

The Land Department held its most successful sale in five years this spring, when it leased 65,000 acres of $3.5 million. A year ago, the state only leased 15,000 acres for about $400,000.

In February 1990, Greg Booth of the Grand Forks Herald added:

In western North Dakota, billions of barrels of oil lie some 10,000 feet underground, held in fractured shale known as the Bakken Fairway or Bakken Formation.

The formation is only about 10 feet thick. The oil lies in vertical planes, separated by 20 to 200 feet of rock that doesn’t produce or contain oil.

In conventional, vertical drilling, a well must hit one of these pockets to produce oil. If it misses, drillers are stuck with a dry well or one that doesn’t produce enough to warrant leaving it open. In horizontal drilling, the well passes through many fractures, allowing oil otherwise separated, by impenetrable rock to flow into a single pipe. The odds of a dry well are greatly reduced.

Consider this: In vertical drilling, as many as three quarters of the wells drilled in North Dakota are unsuccessful, and that’s considered a good rate. On the other hand, of 42 horizontal wells completed since 1987, only two have been dry, according to John Bluemle, assistant state geologist in Bismarck. That’s a 95 percent success rate, which he characterizes as “unusually high.” . . .

To go from vertical to horizontal, drillers use an angled motor in the well hole, said Bruce Hicks, staff petroleum engineer for the state Geological Survey in Bismarck. The motor is lowered into the vertical hole, and starts drilling at a predetermined angle to reach the oil reserves. When the desired angle is reached, an “angle hold assembly” is put in the hole so the rest of the well can be drilled horizontally along the oil-producing formation.

In a typical North Dakota horizontal well, it takes about 800 feet to go from vertical to horizontal, Hicks said.

In the Bakken Formation, there are two types of fractures, [Julie] LeFever said. Regional fractures are widely spaced. Within the regional fractures are smaller fractures, called microfractures.

Temperature and pressure combine to form oil from the organic material in rock, called “source rock.” The resulting liquid occupies more volume, forcing the rock to break up. The high pressure can force oil up to the surface when a well is first drilled, resulting in a flowing well that doesn’t require a pump in its initial stages.

Oil companies look for the fractured shale as a sign of a promising well. “The more busted up the rock is, the more oil you’re going to get,” LeFever said. . . .

The Bakken Formation is capable of forming as much as 92.3 billion barrels of oil, according to a paper written by geologist and UND graduate Rick Webster. Oil produced in the Bakken also can migrate to other rock formations underground. In all, about 10 billion barrels might be recoverable through horizontal and conventional techniques, some geologists estimate.

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The North Dakota Oil Production Slump and Turnaround in the 1990s

Despite production growth in the Bakken formation around 1990, at that time North Dakota’s oil industry was in the midst of a 11-year decline, from 1984 through 1994. In March of ’94, the Associated Press reported:

Despite lagging production, North Dakota’s oil patch is far from dry, says a new report that concludes the state has realized less than half of its oil potential.

The study, which its two geologist authors hope to finish this summer, estimates at least 1.3 billion barrels of oil remain to be pumped from known producing areas.

It is the first detailed look at North Dakota’s possible oil reserves, said Tom Heck, a state Geological Survey geologist who undertook the effort along with Richard LeFever, a geology professor at the University of North Dakota.

Since 1951, North Dakota oil producers have extracted about 1.2 billion barrels of oil, according to statistics from the state Geological Survey and the North Dakota Petroleum Council.

“One of the perceptions among some oil companies might be there isn’t a lot of oil left to be found,” Heck said. “This was done in part to try and counter some of that perception… There is a lot of potential left up here.”

The paper estimates that 600 million barrels of oil are left to be pumped from current wells, using existing production methods. It says about 700 billion barrels remain to be found within the state’s known producing area, which is mostly in western North Dakota….

North Dakota’s oil production last year totaled 31.1 million barrels, a 5.4 percent decrease from 1992 and the lowest annual production since 1979, when western North Dakota was on the brink of an oil boom.

But a few years later, in March of 1997, Matt Cory of the Grand Forks Herald reported on the “Upswing in the Oil Patch” that had begun in 1995:

For the second straight year, the oil industry in North Dakota has seen an increase in oil production and revenue after a decade of decline.

Last year, 32.3 million barrels of oil were produced in North Dakota, up 9.3 percent from 1995′s total of 29.3 million barrels. That total ranked North Dakota as the ninth-largest oil -producing state.

“It has a huge impact on the state,” said Lowell Ridgeway, executive director of the North Dakota Petroleum Council in Bismarck. “For a number of years, we have picked up several hundred jobs. It’s a big boom to the local economies.”

Crude oil produced from 4,087 wells in North Dakota last year was valued at $624 million. And revenue from taxes totaled $52.6 million, up $9.4 million from 1995. The average production rate was 88,622 barrels a day in 1996, up 8,258 from 1995.

The rise in production can be attributed to general economic conditions and improved technology, said Ridgeway, who has been with the council since 1978.

Ridgeway cited the rise in oil prices as spurring exploration in the state. In 1994, the price of a barrel of crude oil was $14.50. The average for 1996 was $19.30 per barrel.

“That, coupled with improved drilling technology, seismic technology and horizontal drilling is the reason for the resurgence,” he said.

In addition, during the 1995 Legislature, taxes were lowered to stimulate more oil and gas exploration, he said.

While production is on the upswing, North Dakota is far from the oil boom of the mid-’80s. The all-time record for oil production in the state was 1984, when 52.6 million barrels were extracted at a rate of 144,000 barrels a day.

That year also was the peak for the industry, as production and revenue declined steadily until 1995.

“It (the decline) was due to the oil price crash of the late `80s,” Ridgeway said. “When the industry slowed down, states like North Dakota suffered.”

During the late `80s, demand increased, and it became cheaper to import oil from outside sources, specifically Middle Eastern countries.

In the next February, Kevin Bonham of the Grand Forks Herald updated the story to reflect further growth in 1997:

Crude oil production in North Dakota rose by a dramatic 9.8 percent in 1997, marking the third straight annual increase.

Production increased by 3.5 million barrels, for an annual total of 35.8 million barrels, the largest amount of crude oil produced in the state since 1991, when production totaled 35.9 million barrels, according to a new report from the North Dakota Petroleum Council….

Here are some of the particulars:

The daily average production in 1997 was 98,200 barrels, an increase of 9,578 barrels over 1996. Production in 1996 was 9.3 percent higher than in 1996. The record daily average production in North Dakota is more than 144,000 barrels, set in 1984.

The value of North Dakota crude oil produced in 1997 exceeded $623 million.

Average daily production of oil wells was 29 barrels in 1997, continuing the state’s rank as the nation’s ninth largest crude oil producing state.

Revenue from oil extraction and production taxes amounted to $53.5 million in 1997, an increase of $900,000 over 1996.

Ridgeway said it is unlikely that the state will be able to continue to increase its oil production, even if oil prices level off, because drilling costs are higher in North Dakota than in other states.

The average oil well in North Dakota is about 8,000 feet deep. In Kansas, it is about 4,000 feet.

The cause of this growth, not surprisingly, was horizontal drilling techniques. In May 1998, Joe Gardyasz of the Bismarck Tribune reported on the technology:

Horizontal drilling enables producers to revitalize areas that were thought to be depleted. The technology has turned around an industry that would otherwise be declining in North Dakota, says State Geologist John Bluemle.

Following 11 straight years of decreasing prduction, 1997 marked the third consecutive year of production increases in the state. A total of 35.8 million barrels were produced last year, up 3.5 million barrels from 1996.

Bowman County has become the state’s top producing county, strictly because of horizontal drilling, Blueml said.

“If it weren’t for horizontal wells, production in North Dakota and Saskatchewan would be declining,” he said. “Saskatchewan in particular is booming because of horizontal drilling.”

By the end of 1997, approximately 25 percent of the state’s total oil production came from horizontal wells, and the percentage is increasing. That’s impressive, he said, considering that only about 12 percent of the state’s wells are horizontal wells.

In 1997 106 horizontal wells had either been completed or were drilled; of those 103 were producers and only three were dry holes.

Between half and three-quarters of the rigs operating for the past several years in the state have been on horizontal wells, said Bruce Hicks, manager of horizontal drilling for the Oil and Gas Division.

“So it looks like it’s going to be the trend of the future for more of these wells to be drilled,” he said. “The horizontal drilling technology is being used more and more in field operations, and we do expect it to continue down the road.”

In southeastern Saskatchewan, more than 50 percent of the oil produced in that region now comes from horizontal wells.

“It’s really taken off,” said Malcolm Wilson, director of Saskatchewan Energy and Mines’ Energy Development Branch. “Horizontal wells have really done a great job of breathing new life into southeastern Saskatchewan, our portion of the Williston Basin.”

In the early ’90s the Canadians’ success drew the attention of North Dakota producers, said Paul Diehl, a petroleum geologist with the North Dakota Geological Survey.

By 1991 horizontal production began in the state, but only in a type of shale known as Bakken formations. But within two years, production from these wells in North Dakota was already declining.

“But we noticed in Sasketchewan they were still drilling a lot of horizontal wells and surpassing annual production levels each year,” Diehl said. The formations in southeastern Saskatchewan were essentially the same as those where horizontal drilling hadn’t been tried in North Dakota.

That same year, the International Williston Basin Horizontal Well Workshop was initiated with a meeting in Minot.

“The idea was to get together and determine why they were successful in Saskatchewan and not here,” Diehl said, “and to educate the Canadians that the productive zones are similar here.”

Without the workshops, development of horizontal drilling would still have happened, but at a much slower pace, Diehl said….

The typical horizontal well may go down 8,000 feet before turning to penetrate a ribbon of rock formation that averages just 10 feet in thickness. It then proceeds an average of another mile horizontally.

Horizontal wells expose more of the compartments that contain oil to the drill bit, making it more likely the well will be able to drain them.

“With vertical drilling it’s a dice game,” Diehl said. “With a horizontal well, now you don’t have to be in an 8-inch hole that has good exposure to these compartments. The odds are much more in your favor that you’re going to penetrate a better reservoir.”

The technology has given companies the ability to return to fields that haven’t been productive for years, and in some cases actually gain more production from them than when they were originally discovered.

For instance, in 1994 the Wayne Field in Bottineau County had 33 wells averaging just nine barrels of oil a day.

When horizontal wells were drilled, they came on at between 200 to 400 barrels a day, said Diehl. “So we found we didn’t know as much about the permeability of those rocks as we thought.”

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A Circa 1990 Production Boomlet in the Bakken Formation

In early 1990, stories began emerging about the growth of horizontal drilling in the Bakken formation and the possibility that the technology would provide a resurgence in oil tax revenue for the North Dakota government. By 1989, plummeting oil prices had led revenue to fall to a fraction of its peak in the mid-‘80s. But in March 1990, Tracy Shatek of the Grand Forks Herald reported:

As state leaders search for revenue to replace funds lost in the referral of three tax increases, oil revenues are looking like an unexpected treat.

When oil prices bottomed out in the mid 1980s, so did oil production and state oil tax revenues, North Dakotans began paying more sales tax, income tax and gasoline tax to make up the difference.

They paid a lot more. At the peak of the oil boom in 1983-85, the state collected $387 million in sales tax and $272 million in oil tax. By 1989, the scales had tipped dramatically, North Dakota expects to collect about $479 million in sales tax this biennium and $82 million in oil tax.

Now it’s looking as if oil patch revenues may rebound, perhaps not to the 1980s level, but somewhere above their current contribution to the state budget.

The major reason for the spurt is horizontal drilling, an old technique being newly applied in certain oil formations. The results — a greater percentage of successful wells and several times the production per well — have put North Dakota ‘s Bakken formation in the industry’s spotlight.

Gov. George Sinner has plugged an element into his state-of-the-economy speech in which he recalls one oil company executive telling him “Governor, this is the most significant oil development in U.S. history, preceded only by Prudhoe Bay and the initial Texas discovery.”

Asked to clarify that statement, Sinner said he was referring to the properties of horizontal drilling, not specifically to the potential of North Dakota’s Williston Basin.

That doesn’t mean horizontal drilling won’t be big in North Dakota, it just won’t be that big, oil industry experts say.

“Whether it’s going to rival Prudhoe, Bay I don’t know,” said Sid Anderson, North Dakota state geologist. “It’s certainly significant. It’s been one of the hottest spots in the United States. Ultimately, it’s going to produce a great deal of oil, but it’s in its infancy at this point.”

The advent of horizontal drilling in western North Dakota has already raised production significantly from a year ago. There are now 22 rigs working, twice the number of a year ago. Fourteen of these wells rely on horizontal drilling.

As more oil is pumped from the ground, more oil tax money flows into state coffers. That’s good news for budget analysts trying to figure out how to close the projected $98 million gap between revenues and spending in 1991-93.

Dick Rayl, director of the Office of Management and Budget, estimates the state will collect nearly $100 million in oil tax revenues this biennium, about $15 million more than originally projected.

“Oil is never going to be the large portion of our budget it was before. The tax structure has changed,” Rayl said. “Like other energy rich states, we financed our government on resources rather than on the income of individuals. That’s why people think we’re spending so much more. We’re not, we’re just paying for it out of our own pockets.”

By way of comparison, an article early this year on North Dakota’s budget said that Governor Jack Dalrymple’s two-year, $9.3 billion budget proposal “assumes the state will collect more than $2 billion in oil taxes alone from July [2011] until June 2013.”

Earlier in 1990, Guy Boulton of the Wichita Eagle reported on a major find by Slawson Exploration:

Slawson Exploration Co. has hit an oil well in North Dakota with potential reserves of 1 million barrels.

The well, which will produce 600 to 800 barrels of oil a day, could be the company’s largest discovery in more than 10 years.

“The first day it started at 100 barrels an hour. It was screaming at us,” said Jim Robbins, Slawson’s vice president of exploration for the northern region.

A well producing 600 to 800 barrels of oil a day will generate $4.5 million to $6 million in annual revenues at current oil prices.

Slawson, the biggest oil company based in Kansas, holds a large acreage position and can drill up to 18 wells in the area, Robbins said.

”This well could easily have a million barrels of oil,” Robbins said. “And when you consider we have nine sections (nine square miles) tied up, you are talking a major oilfield here.”

But he also said the company had not completed its evaluation of the well. The $1.5 million well is Slawson’s first horizontal well, a technology which has the potential of significantly increasing the country’s oil reserves. A horizontal well is drilled vertically to a certain depth before veering horizontally. This increases the likelihood of discovering pockets of oil that are difficult to find with vertical drilling.

Slawson drilled to a depth of 12,656 feet, about 2.3 miles, then drilled 1,800 feet horizontally, the rough equivalent of three city blocks.

The horizontal well puts Slawson at “the forefront of the industry,” Robbins said. “The technology, unfortunately, is one you learn by doing.”

The well is located in Theodore Roosevelt National Park in southwest North Dakota and was struck in the Bakken rock formation.

”This is without question the best Bakken well to date,” Robbins said.

Finally, late in May 1990 Dale Wetzel of the Associated Press contributed an update on the horizontal drilling boom in western North Dakota:

Meridian Oil Co., which drilled North Dakota’s first horizontal well in 1987, has been the most aggressive in using the drilling technique.

But the Denver-based company is getting some competition. Testimony submitted to the state Industrial Commission last week indicates other companies are stepping up their exploration efforts.

Oryx Energy Co. of Dallas intends to drill 20 horizontal wells in western North Dakota in the next two years, investing as much as $30 million in the effort. Oryx has acquired-mineral leases covering 250,000 acres company testimony says.

American Hunter Exploration Ltd. of Calgary Alta, working in partnership with two other companies, has acquired oil and gas leases on about 1 million acres.

American Hunter and its venture partners want to “determine the productive capacity of the Bakken formation over a very large area,” according to company documents. . . .

The companies aggressiveness is spurred by the nature of western North Dakota ‘s oil -producing Bakken geologic formation, said Richard Ellis, a geologist for Leede Exploration of Englewood, Colo.

In the Bakken formation, oil is trapped in shale cracks, called “fractures” by geologists. The cracks usually run vertically.

Vertical wells can produce oil if they hit these fractures, but it is more possible they won’t — resulting in a dry hole. But horizontal wells have a greater chance of encountering the fractures and oil.

Wes Norton, the Industrial Commission’s chief enforcement officer, estimated last week more than 80 horizontal wells had been or were being drilled.

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The Start of the Bakken Boom in 2005

Around the time of Hurricane Katrina and the oil shock it delivered to the U.S., especially the Southeast, exploration companies started to open up the middle of the Bakken formation in North Dakota, using horizontal drilling to get at the oil they’d known about for decades. In late October 2005, James MacPherson of the Associated Press wrote:

Oilmen have known for decades that a thin layer of dense rock nearly two miles beneath the surface in western North Dakota holds millions of barrels of oil.

Demand never had driven technology far enough to tap the “middle” Bakken Formation. Record oil prices changed that.

“We’ve known for 50 years the oil is there,” said Donald Kessel, vice president of Houston-based Murex Petroleum Corp. “Technology is catching up to the point where you can make it economical.”

By all accounts, however, the knowhow is nowhere near perfected on the middle Bakken.

“We are all like blind men feeling our way in the dark now,” said Kessel, who holds an oil engineering degree from North Dakota State University.

Kessel said his company was the first to get a producing well in the middle Bakken in North Dakota. The well was drilled last November and began producing a few months later.

The Stacey Lynne well, near Tioga, N.D., is within five miles of where oil was first found in North Dakota in 1951. The Clarence Iverson No. 1 produced 585,000 barrels for 28 years.

That well was drilled vertically. Wells aiming for the middle Bakken are drilled vertically to about 10,000 feet and then “kick out” for as many feet horizontally.

Advanced horizontal drilling techniques used successfully in the middle Bakken in Montana’s Richland County have not had much success just over the border in North Dakota.

Julie LeFever calls it “a neat geologic problem.”

LeFever, a geologist with the state Geological Survey in Grand Forks, has been studying the Bakken Formation for about 20 years. She believes the Bakken Formation in North Dakota – which arcs from Stark County in the southwestern part of the state north to Bottineau County – could hold as much as 4 million barrels of oil per square mile. The main activity so far is in Dunn, McKenzie and Williams counties.

“We know it’s just an outstanding source rock, but the real key is, How do we unlock it? ” LeFever said.

The Bakken Formation itself runs from Saskatchewan through Montana and into North Dakota, in three layers. Oil was taken from its top layer – a layer created from organic matter “long before dinosaurs” – by traditional drilling techniques over a 20-year-period in North Dakota beginning in the mid-1970s, LeFever said.

The middle Bakken, which ranges from a few feet thick to 80 feet, is sandwiched between layers of loose shale. Its rock consists of sandstone and siltstone, with microscopic pores that contain the oil.

In Montana, the middle Bakken is mostly a more porous and harder dolomite.

To capture oil from the middle Bakken in North Dakota, most companies “fracture stimulate” horizontal wells by forcing pressurized fluid and sand to break pores in the rock and prop them open to recover oil.

The problem is that when the middle Bakken is fractured, rock above the well also breaks, dumping pockets of water into the oil, said Lynn Helms, state Oil and Gas Division director. The more abrasive rock in the middle Bakken also is harder on drilling equipment, Kessel said.

Helms said about 20 operators have leased about 250,000 acres of land in the Bakken Formation in North Dakota over the past 18 months. About 20 wells targeting the middle Bakken have been drilled, and some are getting as much water as oil, he said.

At least six companies are working to solve the problem. One is Dallas-based Headington Oil Co., which has two wells near Belfield, N.D.

“We’re still working on it, as all companies are,” said Bill Walker, a Denver-based geologist with Headington. “Everybody is struggling right now on how to develop those oil wells in North Dakota.”

Headington has made some headway in middle Bakken technology, but Walker said the company is keeping it secret – for now. “It’s fairly early in the play to be sharing information,” he said.

Walker said it costs about $4.5 million to drill a well tapping the middle Bakken, about $1 million more than in Montana.

Richland County, Mont. has been producing oil from the middle Bakken since 2001, and production has doubled every year since, Helms said.

“It took about two years to figure it out in Montana,” Helms said. “It’s only been a year’s worth of trying in North Dakota. They will figure this thing out.”

Helms said about 3,300 oil wells now operate in North Dakota, but only 20 are targeting the middle Bakken.

North Dakota wells produced a daily average of 99,896 barrels of oil in August, the highest level since 1998, Helms said. He said increased activity in the middle Bakken could easily push the daily average to 150,000 barrels a day, a record set in the early 1980s. . . .

“The high oil prices is what’s keeping oil companies here while they get through the learning curve,” Helms said.

“The (middle Bakken) is really small at this point, really only a speck of a speck,” he said. “But it has potential to be a big deal, a very big deal.”

Earlier, in February 2005, the Bismarck Tribune reported on the resurgence of the region’s oil economy:

Oil prices are high, old wells are being put back into production — or re-entered with new technology — and new wells are being drilled in the region.

Mineral acres in McKenzie County are fetching the highest-known prices ever paid in North Dakota’s oil history. . . . The middle Bakken play from Belfield to the state line at Sidney, Mont., is poised for a wave of drilling that could bump the state’s daily production over 100,000 barrels.

These are exciting times, but hopefully not, in the immortal words of Yogi Berra, “deja vu all over again.”

Townspeople and ranchers haven’t forgotten.

Gene Veeder heads up economic development for McKenzie County. When he went back home 12 years ago, “Everything was empty and we’ve spent 10 years trying to fill it up.” . . .

Lynn Helms, director of the State Oil and Gas Division, predicts that between 200 and 400 new and re-entry wells will be drilled annually over the next several years. The prediction hinges on continued high oil prices and whether producers figure out how to successfully pierce the oil -rich middle Bakken with horizontal drills.

In Belfield, oil service business owner Rob Heim said business has never been better. He said what’s ahead and what’s already happening in the oil field has created a buzz everyone can hear.

“This is going to sustain this area for a long time,” Heim said.

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