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What Gives In The Bakken—Besides A Growing Amount Of Oil?

Analysts weigh in on lumpy production, rig counts, waiting on completions and the decline curve.

Lumpy Bakken oil-production figures of late shouldn’t be alarming, explain analysts with Tudor, Pickering, Holt & Co. Securities Inc.

North Dakota state figures have shown production growth trending sideways in the last months of 2012 and into January. An April 2013 estimate is that daily production jumped some 40,000 barrels in February to 778,971 barrels a day, a new all-time high.

However, the TPH team notes, the sideways production figures were “despite a lack of the variables that are typically rumored to cause production hiccups—no infrastructure issues, relatively dry weather in fourth-quarter 2012 and the rig count actually dropping so no rig shortage.

“Supply bulls have held that Bakken production growth has been temporarily stunted by a change to (multi-well) pad drilling and that production will ultimately accelerate from current levels as (frac) crews work through the (well-) completion backlog.”

The TPH team expects total, daily Bakken production will grow by 150,000 barrels this year. “We see four key factors determining growth: number of rigs drilling, rig efficiencies, EURs (estimated ultimate recovery) per well and underlying production declines. Infrastructure is a limiting reagent that we don’t see playing a role in halting growth going forward.”

1. As for rig count, the state reports 186 rigs were working on new wells in March, down from 218 in May 2012 and up from 81 in January 2010.

2. Rig efficiency—i.e., the pace at which drilling each well is being achieved—in the play has grown some 10% to 15% annually, according to TPH estimates.

3. “Meanwhile, on the E&P side, we’ve seen EURs stay relatively constant,” the team reports. “The net impact is that apparent rig efficiencies in the play are less than other horizontal plays because well type has changed”—i.e., the Bakken uses longer laterals, thus more total footage to drill.

4. As for production decline, this has grown. “Of the 700,000 barrels per day producing at year-end 2012, roughly 50% comes from wells drilled during 2012, meaning that producers have to replace 244,000 barrels a day, assuming 40% first-year declines and 25% vintage 2010-12 declines, with that number increasing each year as base production increases.

“So factor No. 1 has declined, No. 2 is improving, No. 3 is declining and No. 4 is creating a bigger headwind to growth with each year.”

More data inbound

Other securities-research teams estimate Bakken production will grow to 1.5 million barrels per day. The TPH team reports, “We think that the recent, seasonal plateau highlights that figures like that would take a meaningfully higher rig count than present to be achieved.”

It concludes that more will be clear as Bakken producers complete their first-quarter earnings calls in the coming week, “which should provide a more current update than the two-month-lagged, government, production data.”

Among the key calls are those of

–NOG (Northern Oil & Gas Inc.), “a good proxy for (Williston) basin growth as it holds working interests across wide swaths of Bakken acreage,” and

–WLL (Whiting Petroleum Corp.), CLR (Continental Resources Inc.) and HES (Hess Corp.), which are making 30% of gross Bakken-play production, combined.

New-well decline

As for Bakken production decline, Bob Brackett, senior analyst for securities-research firm Bernstein Research, estimates Bakken-play well output was falling some 30% in their first year in 2011-12. Thus, January 2012 production of some 545,000 barrels a day in North Dakota would include 312,000 barrels from wells that came online in the prior 12 months.

He also expects new-well productivity to decline as more are landed outside the highly drilled sweetest spots. And, he believes that some of the recent Bakken-play production growth has been due to a drawdown of the well-completion backlog as frac spreads are more available in the past year as they have been leaving the smallest-margin U.S. shale-gas plays.

“While 2012 U.S. crude production admittedly surprised slightly to the upside, we believe investors are increasingly baking in linear—i.e. constant, absolute growth—or even accelerating production increases into U.S. oil projections through approximately 2016,” Brackett concludes.

“For sure, growth will continue at a healthy clip, but accelerating production-growth forecasts in areas like the Bakken don’t make sense to us.”

Waiting on completion

Lynn Helms, director of the North Dakota Industrial Commission’s Department of Mineral Resources, reports that the number of Bakken-play wells waiting on completion (WOC) services has actually been growing in the past few months, however. In February 2012, he reported some 300 wells were WOC. That fell to roughly 250 the following month and roughly 240 the next. However, he estimated 347 WOC in August, 410 this past January and 375 in April.

As for production, Helms reported in April that January 2013 oil production from North Dakota was 737,787 barrels a day, up from 235,925 barrels a day in January 2010. He forecasts February 2013 production was 778,971 barrels a day, a new historical high.

Meanwhile, the state’s oil producers continue to connect associated-gas production from Bakken-play wells into pipe and onto sales. In January, captured-gas production was 791 million cubic feet a day, up from 255 million a day in January 2010, and Helms estimates February gas capture was 850 million a day, a new state historical high.

He adds that there are now an estimated 8,500 oil- and gas-producing wells in North Dakota, up from some 4,600 in January 2010, and 186 rigs were working on new wells in March, down from an all-time high of 218 in May 2012. “Over 95% of drilling still targets the Bakken and Three Forks formations,” he notes.

Still to be produced

An updated U.S. Geological Survey assessment of additional Bakken oil—that is, “undiscovered, technically recoverable”—that may be produced from the Williston Basin, plus now including an assessment of additional oil that may be produced from the underlying Three Forks formations, to be 7.4 billion barrels—roughly half from the Bakken and half from the Three Forks.

There is a 95% chance 4.42 billion will be produced and a 5% chance as much as 11.43 billion may be produced, the USGS adds. The 7.4-billion-barrel estimate is roughly twice that of a 2008 assessment of the Bakken only; the difference is entirely from adding estimates for Three Forks potential.

“Since the 2008 USGS assessment, more than 4,000 wells have been drilled in the Williston Basin, providing updated subsurface geologic data,” the USGS reported when releasing the highly anticipated 2013 assessment Tuesday.

“Previously, very little data existed on the Three Forks Formation and it was generally thought to be unproductive. However, new drilling resulted in a new understanding of the reservoir and its resource potential.”

The Bakken and Three Forks formations may also contain 6.7 trillion cubic feet of recoverable gas—ranging from a low estimate of 3.4 Tcf and a high of 11.3 Tcf—and a half-billion barrels of recoverable natural gas liquids (NGLs).

Editor’s note: Click for a map of the USGS’ 2013 Bakken and Three Forks assessment areas.

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.comUGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.


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