Status on the Bakken ”Red Queen”

This post presents a study of developments of Light Tight Oil (LTO, shale oil) extraction for 8 companies in Bakken(ND) that as of April 2015 had added around 600 (or more) producing wells in the Bakken/Three Forks formations since January 2008.

The 8 companies are; Continental Resources, EOG Resources, Hess Bakken Investments, Marathon Oil Company, Oasis Petroleum, Statoil Oil & Gas, Whiting Oil and Gas Corporation and XTO Energy.

These 8 companies had around 63% of total LTO extraction from Bakken as of April 2015.

The decline in the oil price has so far reduced the number of rigs drilling in Bakken and a decline in total Light LTO extraction in Bakken. This study shows there are differences in responses amongst the studied companies to the oil price decline.

As with most other things, size matters, also in Bakken.

Data from the North Dakota Industrial Commission (NDIC) shows that in April 2015 Bakken LTO extraction was at 1.11 Mb/d, down from a high of 1.16 Mb/d as of December 2014.

For the period December 2014 – April 2015 those in decline lost about 76 kb/d (close to 10%), while those with growth added around 21 kb/d, curtailing total decline at 55 kb/d (close to 5%).

The 4 companies with growth added about 300 producing wells (46%) of a total of 645 for the months January – April 15 and contributed about 37% of the total Bakken LTO extraction per April 2015.

kb; kilo barrels = 1,000 barrels

The decline in the oil price and LTO flow (for some companies) is likely to move focus to CAPital EXpenditures discipline, profitability and balance sheets healing.

The low oil price has already affected the scale of the drilling and will in the near future lead to a decline in the monthly producing wells additions.

At present oil prices ($60/Bbl, WTI) the net cash flow from operations could unabridged pay for the addition of around 100 wells/month (from spud to flow).

As of the recent months an average of 160 producing wells was started monthly and LTO extraction declined.

NOTE: Actual data used for this analysis are all from North Dakota Industrial Commission (NDIC). For wells on confidential list, data on runs were used as proxies for extraction.

Production data for Bakken, North Dakota: Monthly Production Report Index

Formation data from: Bakken Horizontal Wells By Producing Zone

Data on wells kindly made available by Enno Peters’ continuous excellent work.

General for all companies and charts in this post

The shown production developments are gross for each company. The companies’ entitlement production needs to be adjusted according to the companies’ Working Interests (WI) (and/or other contractual arrangements) for each well.

There may be a combination of causes of changes to the production, therefore some caution should be exercised before deeming future development trajectories. Also note that some of Marathon’s 2008/2009 vintage wells apparently were revitalized in 2014 (ref also figure 5)

The charts for the companies also illustrates that those who got in early in Bakken also got to the better acreage and late comers got the less prospective acreage as suggested from developments in well productivity.

For a Bakken type well (with a cost of $8 Million from spud to flow) it is estimated that at an oil price of $60/Bbl (WTI) it should nominally (0% return) and on a point forward basis break even with a first year flow of about 90 kb.

It likely makes a 7% return with a first year flow of around 120 kb (all things equal).

As LTO wells have steep declines (typically 70% over the first 12 months) their economics is heavily front end loaded and thus becomes very sensitive to the oil price during their initial 2 – 3 years of operation.

A company with a daily flow of around 12 kb/d has the potential to add 1 – one – producing well a month from net operating cash flows with WTI at $60/Bbl.

This illustrates that size matters, as flow above a certain threshold allows for continuous well manufacturing and operations of the scale.

Companies with lower flows may have to do their well manufacturing on a discontinuous basis, which may affect both efficiency and costs.

(All the above should be considered rules of thumb.)

Since January 2008 and as of April 2015 the presented 8 companies started around 6,300 (or 64%) of the 9,900 wells. They had about 63% of all LTO extractions in April 2015.

In Bakken/Three Forks formations the NDIC well data show;

Jan 2014 – Apr 2014:

600 producing wells (an average of about 150 per month) were added and LTO extraction grew around 73 kb/d, more than 8%.

Jan 2015 – Apr 2015:

645 producing wells (an average of more than 160 per month) were added and LTO extraction declined around 55 kb/d, around 5%.

The numbers above demonstrate that the present pace of producing wells additions does not keep up with the Red Queen.

Continental Resources

The average first year flow for all Continental’s wells are around 74 kb and 82 kb for those of the 2014 vintage.

46% of the LTO extraction were from wells that started during the recent 12 months (May 2014 – April 2015).

EOG Resources

The average first year flow for all EOG’s wells are around 127 kb and 145 kb for those of the 2014 vintage.

38% of the LTO extraction were from wells that started during the previous 12 months (May 2014 – April 2015).

Hess Bakken Investments

The average first year flow for all Hess’ wells are around 82 kb and 93 kb for those of the 2014 vintage.

63% of the LTO extraction were from the wells that started during the recent 12 months (May 2014 – April 2015).

Marathon Petroleum

The average first year flow for all Marathon’s wells are around 77 kb and 101 kb for those of the 2014 vintage.

42% of the LTO extraction were from the wells that started during the recent 12 months (May 2014 – April 2015).

Note the increased flow as from mid 2014 from some of the wells of 2008/2009 vintage.

Oasis Petroleum

The average first year flow for all Oasis’ wells are around 70 kb and 67 kb for those of the 2014 vintage.

47% of the LTO extraction were from the wells that started during the recent 12 months (May 2014 – April 2015).

Statoil

The average first year flow for all Statoil’s wells are around 85 kb and 75 kb for those of the 2014 vintage.

37% of the LTO extraction were from the wells that started during the recent 12 months (May 2014 – April 2015).

Whiting Petroleum

The average first year flow for all Whiting’s wells are around 90 kb and 93 kb for those of the 2014 vintage.

49% of the LTO extraction were from the wells that started during the recent 12 months (May 2014 – April 2015).

XTO Energy

The average first year flow for all XTO’s wells are around 76 kb and 98 kb for those of the 2014 vintage.

54% of the LTO extraction were from the wells that started during the recent 12 months (May 2014 – April 2015).

Summary

The deciding factor for future developments of LTO extraction in Bakken will be the companies’ access to cash.

With the lower oil price it is expected that the companies will focus on the most productive areas and reduce drilling in the periphery.

This study has shown that the companies in Bakken responded differently to the decline in the oil price and 4 of the 8 presented companies has so far had a strong growth in their LTO extraction.

The companies also have a backlog of wells awaiting to be fracked/completed (fracklog) and working through this fracklog comes with a cost.

If the oil price remains low (at about $60/Bbl, WTI {and for what it matters are my present expectations}) it is expected that companies will exercise more CAPEX discipline, strengthen focus on profitability and the state of their balance sheets, thus raising the prospects for further declines in additions of producing wells and total LTO extraction.

Some companies have harmonized their well manufacturing (use of drilling rigs) with the lower net operational cash flows and some have apparently strengthened their focus on profitability and the state of their balance sheets.

The companies operating in Bakken come in different sizes, with different financial capabilities and different expectations for the future oil price which now seems to be reflected in their adjustments of activities. Some of those with the poorest wells have pulled less back than those with the better wells (like EOG). This introduces another important variable that will affect the future total LTO extraction from Bakken.

Continuing to add wells that likely are unprofitable may in the short term sustain cash flows, but hurt profitability in the long term.

FRACTIONAL FLOW by Rune