It looks like the biggest winner from the boon in natural gas production from shale formations in the United States will be the U.S. onshore oil industry.

Thanks to new techniques pioneered in the late 1970s to extract natural gas from tight shale formations from Wyoming to Texas to Arkansas and then east to New York and Pennsylvania, onshore U.S. natural gas production has soared. From 2007 to 2008, a period when production from shales took off, natural gas production from these formations increased by 71%, according to the Energy Information Administration.

Thanks to that booming U.S. supply—and an abundance of cheap natural gas on international markets– and a deep economic recession that surge in natural gas production hasn’t resulted in huge profits for natural gas producers. The price of natural gas trading on the NYMEX (New York Mercantile Exchange) has plunged to $3.87 per million BTUs (British Thermal Units). That’s down from a high of almost $14 in late 2005 and from $9 as recently as recently as August 2008. Producers such as Chesapeake Energy (CHK) and Ultra Petroleum (UPL) fell into the red in 209.

But the same production techniques developed to release natural gas from shale formations are producing what promises to be a very profitable boom in U.S. onshore oil production. And one that’s just getting started in places such as the Bakken share formation in the Williston Basin of North Dakota, Montana, and Saskatchewan. A 2008 U.S. Geologic Survey report put the amount of recoverable oil within the Bakken shale formation at 3 to 4.3 billion barrels. That’s roughly 15% to 20% of total U.S. proved reserves. Production from the Bakken share has gained North Dakota a slot as the fourth largest oil producing state.

That’s a lot of oil in terms of U.S. production, but it’s not enough to drop the global price of oil. At $70 a barrel producers in the Williston Basin are quite profitable, thank you.

Let me dig a little deeper into the oil shale story and then suggest some ways to invest in it.

The oil industry discovered oil in the Bakken formation way back in 1951. But until the natural gas industry pioneered technology to tap natural gas trapped in dense shale formations, oil companies couldn’t get at the oil.

The Bakken formation consists of two layers of shale with a middle layer of dolomite, another sedimentary rock. The shale has natural vertical fractures and early drilling try to run conventional vertical wells into these fractures. That didn’t turn out to be very effective in extracting oil since the shale swells when exposed to drilling fluids, sealing the fractures, and iron pyrite in the shales produced irreparable well damage in some cases.

New technologies borrowed from natural gas wells in other shale formations use horizontal drilling to tap into oil. Horizontal wells can reach thousands of feet of oil reservoir rock that may be in a layer no more than 140 feet thick. Using hydraulic fracturing technology can increase the flow by creating factures that let the oil seep toward the well.

All this certainly seems to work. For example, on October 4 Brigham Exploration (BEXP) announced the completion of its Rough Rider Three Forks well with an early 24-peak flow rate of about 2,356 barrels of oil equivalent. The company has now completed 36 Bakken and Three Fork wells in North Dakota with an average 24-hour peak flow rate of about 2,684 barrels of oil equivalent.

This isn’t to say that everything is going to be smooth sailing in the Williston Basin for oil producers. The big problem is water—or actually the lack of it. Producing oil from shale requires about four barrels of fresh water versus the one barrel of water required to produce a barrel of oil from conventional sources. That requires oil producers in the Williston Basin to employ a constant caravan of trucks to supply millions of gallons to each well site where it is then pumped down the well bore at pressures high enough to fracture the shale. The Bismarck Tribune estimates that producing oil and gas from the Bakken shales will use up to 5.5 billion gallons of water a year.

North Dakota isn’t exactly swimming in water. Average annual rainfall in the state ranges from 13 to 20 inches a year. That’s a lot in comparison to the 5 inches that fall in the Mojave Desert each year. It’s roughly equal to the 15 inches that fall on Los Angeles in a year. New York City gets an average of 43 inches.

Interested in buying into the Bakken boom anyway? There are two different ways to go.

First, you can buy shares of a relatively small, relatively pure play oil exploration and production company in the Williston Basin.

Brigham Exploration (BEXP) is an example of the kind of company I mean. As of December 31, 2009, the company had 282,584 net leasehold acres in the Williston Basin. Shifting the majority of its drilling operations from the Anadarko Basin, West Texas, and the onshore Gulf Coast to Williston beginning in 2007, the company drilled 53 wells in Williston in 2008 and 54 in 2009. Total investment in drilling, leases, and seismic exploration came to $220 million through the end of 2009.

The company has only 117 million shares outstanding and a market capitalization of just $2.3 billion. Revenue came to $70 million in 2009 and is projected to hit $778 million in 2010. Projected earnings per share for 2010 are 45 cents and 80 cents for 2011. The Wall Street consensus alls for 47% average annual earnings growth over the next five years.

Other similar pure plays in oil production from the Bakken shales include Whiting Petroleum (WLL) with 88,000 acres in the Williston Basin and a market cap of $5.1 billion, Continental Resources (CLR) with leases in both the Three Forks and Middle Bakken formations and a market cap of $8.3 billion, and Oasis Petroleum (OAS) with a market cap of $1.94 billion. Oasis Petroleum has only been public since June 2010 but it does hold 292,000 net leasehold acres in the Williston Basin.

Second, you can buy pick and shovel companies—that is shares of the companies that are leasing rigs and providing services to these producers.

The last year has seen an amazing resurgence of land-based drilling in the United States. As of the end of September 2010, the number of drilling rigs working on land in the United States and Canada had climbed by 641 to 1,625 from the end of September in 2009, according to Baker Hughes (BHI). The largest number of those rigs, 718, are working in Texas, home of the Ford, Barnett and Haynesville natural gas shales. That’s up from just 328 rigs a year ago.

Louisiana is next with 178 rigs.

And North Dakota is third with 135 rigs.

Contrast to the trend in the offshore Gulf of Mexico where there were 32 rigs working before the BP disaster and 19 working now.

Drilling and oil service companies with good exposure to land-based U.S. drilling include Weatherford International (WFT), Basic Energy Services (BAS), and Lufkin Industries (LUFK).

Many of these stocks trade near 52-week highs, but that’s what happens when a boom psychology is in the saddle. Current Congressional investigation into high-pressure hydraulic fracturing in the natural gas shales and its effect on water supplies could put a dent in some of these stocks—if investors ever come to believe that Congressional Democrats have the votes to enact new regulations on onshore drilling.

That might give you a chance to get in at a lower price. So might a rally in the U.S. dollar. Is that on your list of likely events in 2010 or 2011?

Full disclosure: I don’t own shares in any company mentioned in this post in my personal portfolio.