Fraccing is not a new technology. It has been used safely for decades. It is important to understand the process of horizontal drilling, to understand why this process is safe. Northern Oil and Gas has a very good video on this process that shows how little contact groundwater has with drilling fluids and zero contact with completion fluids. The most important variable is the casing, of which there are a several “layers” in each well.

Each company has its own different recipe for frac fluid. Ingredients of this fluid have drawn heavy interest, as companies did not want the competition to get a hold of this valuable information. Other companies were happy to disclose, posted the information on the internet for all to see. All chemicals used at a well site must be listed in MSDS sheets on location, so it is not a big secret what is being used, more a question of how much. Frac fluid is 99% water and sand/proppant. Other chemicals such as biocides or friction reducers are a very small portion of this mix. Companies like Flotek (FTK) have designed clean frac fluids that are biodegradable.

Environmentalists have complained that fraccing needs to be regulated. Fraccing is regulated by several federal acts and regulations, except for the Safe Drinking Water Act. Each state is responsible for regulating the oil and gas industry and how it effects drinking water. Fraccing is regulated closely as the state is known to check out well sites randomly, performing water tests and making sure regulations are being followed.

Approximately six million gallons of water are used to frac a single well in the Bakken. Of this, one million gallons will return from the well as flowback. There is more to this than just six million gallons of water. It takes twelve hundred truck loads to bring six million gallons of clean water to the well site. The one million gallons of flow back takes over 200 truck loads to disposal wells, where this flow back is dumped a mile under the ground. Heckmann Corp. (HEK) is a company that provides the service of disposing of frac water. Frac water disposal wells have also been linked to causing earthquakes. For this to occur the disposal well must be near a fault line. From what I understand all of the earthquakes have been minor.

The large amount of water used in fraccing has brought concern. The large amounts of fresh water used has already caused problems in the Eagle Ford and Marcellus shale areas. Water shortages have prompted the filtering of flow back to a purity level that can be re-used to frac new wells. Water filtration systems have been designed by companies likeGeneral Electric (GE), which use either filters or chemicals to clean frac water. Ecosphere (ESPH.OB) produces mobile water filtration units that use heat and oxygen to clean water, without the use of filters or chemicals.

In North Dakota there has been a significant issue with the use of reserve pits for the storage of flowback. Even when these pits are lined, it still can leak and pollute soil. Since these pits are in the ground it is difficult if not impossible to know if this has occurred. Companies likePoseidon Concepts (POOSF.PK) provides frac water storage units that are above the ground, can be heated, and better handle problems with pollution.

The Bakken has been somewhat insulated from water problems associated with fraccing. North Dakota has a significant amount of water, and estimates show it should be able to handle fraccing the Bakken/Three Forks. Even when wells have blown, none have shown groundwater pollution associated with chemicals used for fraccing. There have been complaints of pollution from reserve pits, but the state is working on phasing these out. In my opinion the most pressing problem is with wasted water in the Bakken. Trucks can wait three to four hours at disposal wells, plus added congestion to the highways and county roads have been tough on state infrastructure. I am not one for regulation, but the recycling of water could have added benefits.

Disclosure: I am long ESPH.OB, FTK.

Additional disclosure: This is an article on fraccing in the Bakken. It is not a buy recommendation.

I believe 2012, could be a big year for oil. Not all commodities will do well, but the demand for oil should continue to be strong. If problems persist for the Euro, this could have a negative effect. If not, Bakken oil producers could have a great year.

1. Samson Oil and Gas (SSN: 2.21 +0.96%)
   
2. Statoil (STO: 25.95 +1.72%)
   
3. EOG Resources (EOG: 109.09 +2.45%)
   
4. Whiting (WL: 0.00 N/A)
   
5. Continental (CLR: 79.28 -0.11%)
   

There have been several producing wells in this area:

1. Swindle 16-10: IP rate of 1065 Boe/d
2. Rogney 17-8: IP rate of 909 Boe/d
3. Charley 10-15: IP rate of 1069 Boe/d
4. Tolksdorf 1-1H: IP rate of 642 Boe/d
5. Rognas 2-22H: IP rate of 1013 Boe/d
6. Gobbs 17-81H: IP rate of 909 Boe/d

Whiting’s Starbuck Prospect is in this area of Montana. It has over 88000 net acres, which proves Whiting’s confidence in the play. Continental is running a two rig program here, and completed 6.9 net wells in 2011. Brigham had estimated its acreage in eastern Montana would produce seven wells/location. Kodiak (KOG: 8.66 -0.46%) is currently estimating two middle Bakken and two Three Forks wells in its Sheridan County leasehold. Station Prospect has very good thickness of the middle Bakken. Thickness in this play varies from 50 to 70 feet. The upper Three Forks is just beginning to be worked. I will be real interested in the upcoming production from this pay zone. Triangle has 54500 net acres in Station Prospect. It estimates three middle Bakken and three upper Three Forks wells per pad.

1. Dwyer 150-101-21-16-1H
2. Larson 149-101-9-4-1H through 4H
3. Gullickson Trust 150-101-36-25-1H through 4H
4. Fredrick James 149-101-3-10-1H

Whiting calls this area Hidden Beach. It has had very good results. Whiting has completed five wells in this prospect. The average IP rate as been 2669 Boe/d, with a high of 3092 Boe/d and a low of 2216 Boe/d. This area has a very good upper Three Forks payzone. To the north, Brigham (STO: 25.95 +1.72%)  and Kodiak  (KOG: 8.66 -0.46%) have had excellent results. Kodiak’s Koala middle Bakken wells could produce 1000 Mboe and 800Mboe in the upper Three Forks. Brigham also had good middle Bakken production to the north of Triangle’s acreage, which includes two wells with IP rates over 4000 Boe/d. Other oil production companies have already de-risked this area. At this point Triangle will just need to execute.

1. Holm 150-99-13-24-1H: 2370 Boe/d and 23.44% WI
2. Staal 150-99-23-14-1H: 3034 Boe/d and 12.84% WI
3. Lawlar 151-98-31-30-1H: 2789 Boe/d and 6.33% WI

The biggest problem is valuating Triangle’s acreage. Its North Dakota acreage has been purchased for an average cost of $2500/acre. Its current TEV/acres is $2618. There are reasons for this as much of its acreage has not been developed so a valuation at this point is just a guess. But the acreage to the southeast has some upside. Its Montana acreage could very well produce numbers comparable to southeast Divide County. The Station Prospect is inside the thermally mature middle Bakken, it is to the west of the Brockton-Froid Zone. The difference in TEV/acre seems extreme between Triangle and other Bakken players. This number ranges from $8000/acre to over $12000/acre.