Markets

Wanted: More Info on Water Management at Continental Resources

By David Phillips

Updated on: July 14, 2008 / 6:09 PM EDT / MoneyWatch

The Company: Continental Resources, an independent oil and natural gas outfit principally focused on developing unconventional resources
The Filing: Continental Resources press release dated July 9
The Finding: Continental reported that its second Bakken shale well in a promising area of North Dakota flowed at an average rate of 1,095 barrels of crude oil equivalent per day (boepd), or about 58 percent higher than the first hole did in its initial week of production in May. Continental, which is the largest leaseholder in this emerging shale play with about 487,000 acres, has been reticent about whether or not it has the water rights needed to develop its potential reserves.

The Upshot: Continental has established an enviable position in acquiring viable acreage in unconventional resource plays with the most potential. The Company estimates that its Woodford Shale natural gas play in the Arkoma Basin, Oklahoma and Bakken Shale in North Dakota and Montana could possibly hold 342 million barrels of oil equivalent (Mmboe) in unbooked reserves -- more than 2.5 times actual aggregate reserves of 134.6 MMboe held at year-end 2007.

Oil shale, however, is trapped in sedimentary rock thousands of feet down. Advances in horizontal drilling, water flooding, air injection, and fracture stimulation technologies have enabled commercial recovery of about 20 percent of the oil deposits from historically non-commercial reservoirs such as the Bakken formation.

In North Dakota, Continental is drilling horizontally on 1,280 acre units to vertical depths ranging from 8,500 to 11,000 feet with opposing horizontal laterals each extending approximately 4,500 feet, for a total drilled footage of approximately 18,000 to 21,000 feet.

Any shale project, drilled or mined, requires access to water--lots of it. For example, heating the rock to convert trapped kerogen into oil subsequently requires injection cooling. About three barrels of water are needed per barrel of oil shale recovered, according to a Rand Corporation study.

Currently, there are approximately 74 operating drilling rigs in the Bakken Shale formation in North Dakota, with Continental having an interest in about one-third of the working wells. As more wells come online, the demand for water will grow accordingly.

Continental's 2008 capital expenditures for drilling, land and seismic activities in the Bakken Shale and emerging U.S. shale plays, such as the Haynesville, Marcellus and Huron shale regions, is approximately $783 million, according to Harold Hamm, Chairman and Chief Executive Officer. The company did not disclose its water rights holdings.

The Question: Has Continental Resources leased or purchased sufficient water rights -- or does it have access to the necessary water-supply systems -- to recover the usable oil trapped within its shale reserves?

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