Thought Piece

This article was written by Patrick Miller of The Bakken Magazine over a year ago. In it, he quotes Jonathan Garrett (a principal analyst with Wood Mackenzie in Houston and the company’s Bakken expert) extensively. This piece is more or less confirmed by a recent forecast, “Top 5 Issues to affect oil/gas in 2017,” made by Tom Ellacott of Wood McKenzie that I republished earlier. Essentially, North Dakota has reduced its cost of exploration and production, which will likely minimize the impact of Iran and OPEC.  Steve

Never Underestimate The Rock of the Bakken

Low oil prices and global economic concerns have yet to hurt Bakken production. Analysts say that could change, but probably only temporarily, according to several Bakken experts. By Patrick C. Miller | August 17, 2015


Production totals will remain high thanks to multi-well pads that rely on efficient rigs and a backlog of drilled but uncompleted wells that could come online

If Hollywood ever makes a movie about the Bakken, the Rocky movies of the ‘70s and ‘80s might provide a good storyline. Like Rocky Balboa—the self-named Italian Stallion boxer in the 1975 hit movie “Rocky”—the Bakken has taken punch after punch from powerful, resource-rich adversaries, yet refuses to go down.

In fact, contrary to predictions earlier this year that the Bakken boom would soon go bust because of Saudi Arabia’s knock-out blow—the continuation of high production rates that caused global oil prices to plummet—North Dakota’s oil production has continued to match 2014’s record pace and might yet exceed it.

Jonathan Garrett, a principal analyst with Wood Mackenzie in Houston and the company’s Bakken expert, bucked the trend of forecasting a downturn in production. He projects that production in the Bakken will increase from an average of 1.1 million barrels per day in 2014 to 1.2 million barrels per day this year. “

Other analysts and Bakken watchers were surprised when they compared it to the Permian and the Eagle Ford,” says Garrett. “North Dakota is far away from major demand centers and major refining hubs. Because of the transport costs, people were quite worried about getting crude to market at a price that makes sense.

“I’ve not been surprised that production has gone up,” he continues. “I’ve been surprised at the gains in well productivity have expanded this quickly and for this long.”

John Auers, executive vice president of Dallas-based Turner Mason & Co., also expected Bakken’s production to trend upward, despite low oil prices. “I’m not surprised, but I am impressed,” he says “And not just with the Bakken, but also with the other tight oil basins. I would have expected production to fall a little more. I’m impressed at how well they’ve been able to maintain production, even in light of this significant drop in prices.”

One trend that threw off the experts’ predictions is the assumption that a sharp decline in Williston Basin rig counts translated into the expected dip in Bakken crude production.

“In the North Dakota Bakken, I note that although the number of active rigs is down around 59 per cent, actual production edged up in May,” says Patricia Mohr, a vice president with Scotiabank of Toronto, Ontario, and specialist in economics and the commodity market.

For this to continue, she says, “The market needs to see an actual supply side adjustment—as well as the big pick-up in demand witnessed in the first half of 2015 to be assured that world supply and demand conditions will tighten in the second half of this year.”

Growing Stronger

The widely-held belief that production is closely tied to rig counts might be a thing of the past. More wells spaced in smaller areas and improvements in drilling rig technology—more horsepower, greater torque and walking ability—mean that fewer rigs can be used to drill more wells. Therefore, the rig count is not necessarily a reliable indicator of where production is headed.

“The capability of these rigs is a step above some of the rigs that have been stacked and their predecessors,” Garret says. In addition, he attributes improvements in drilling rig and well completion efficiencies, larger well sizes and the fact that producers are drilling their best Bakken rock as the three key factors leading to a production increase.

“This is not a normal drilling pattern that we’re doing here,” Garrett explains. “Right now, everyone’s drilling their best possible acreage. Production grew in May over April.  It went up over 32,000 barrels, and we were able to do that with 40 percent of the rig count.”

Auers notes that fracking technology is particularly well suited to engineering improvements, and engineers are constantly coming up with more efficient, faster and less expensive ways of doing things. “All technology is amenable to improvements, but fracking is almost a manufacturing-oriented style,” he says “Manufacturing processes all lend themselves to continual improvements. That’s what happened, and it’s going to continue to happen. It’s anybody’s guess on how far you can go on that.”

Developing a better geologic understanding of the Bakken resource has also played a role in the Bakken’s strong performance.

“Sometimes people ask if all the big gains in productivity are behind us,” Garret says. “I’d say probably not.” The ability to geo-steer the drill bit into the best oil-bearing shale layers of the Bakken and Three Forks formations has paid dividends.

“Where you land your lateral matters, and your completion program and your optimal landing zone has to be unique for each well,” Garrett explains. “It’s not enough to be in the Bakken, You have to be in the section within the zone that’s going to yield the best results.”

In the same fashion as the resilient Rocky was eventually forced to retire, the Bakken’s ability to absorb punches doesn’t mean that they don’t hurt or take a toll. The need to reduce costs during the low-price environment has meant less drilling in marginal areas, budget reductions and job layoffs. But that has also led to even greater efficiencies and innovative ways to reduce expenses.

“As they say, necessity is the mother of invention,” Garrett notes. “We’re in tough times and you have to make it work. That’s part of it. Plus, there’s so much data now that’s readily available on Bakken wells, on Niobrara wells and Eagle Ford wells that you have a sense about what’s working, what’s not and what are the trends. More water, more propllant, a faster pump rate, slick-water fracks—these are all things proving to be optimal ways to complete an unconventional reservoir.”

In Rocky IV, a massive Soviet boxer tells Rocky, “I must break you.” According to Auers, who regularly speaks with contacts overseas, the Russians believed that U.S. oil production from the Bakken and other shale plays were merely a deception that couldn’t be sustained once the Saudis decided not to cut their production. They and the Saudis were sadly mistaken, he says.

“I think people underestimated the best parts of the Bakken and the fact that those best parts are still getting better,” Garrett says. “I think they were looking for initial production rates or implied EURs to cool off. Largely, that has not been the case. Plus, I think people were really surprised at how quickly costs could come down.”

Auers points out that when oil prices were high and the pace of drilling was frantic, oil service providers could charge top dollar. Now that the demand for their services has fallen, so have the prices they charge producers. “The prices have gone down and they’ve cut their rates,” he says. “There’s a 15 to 20 percent savings rung out of the service part.”

As Garrett notes, “If we were having this conversation a couple years ago, I would have said the cost of a Bakken well was $9-10 million. Now there are folks quoting values that are less than $7 million on wells that are markedly bigger.”

A Happy Ending?

Auers and Mohr agree that global events—as well as the laws of supply and demand—will have an impact on world oil prices and future Bakken production.

The Saudi punch to the head has been followed by body blows in the form of reduced energy demand from China’s declining economy, financial problems in Greece and the nuclear agreement with Iran that will bring even more Middle Eastern oil to an already glutted world market.

According to Mohr, the Iranian nuclear agreement with the five permanent UN Security Council members and Germany will complicate the recovery in oil prices. Iran has the equivalent of 180,000 barrels per day of crude stored in tankers, she notes, plus can probably bring on stream another 800,000 barrels per day within a short period of time.

“The global market will have difficulty absorbing all of this crude in the near term, though 2016 may see the biggest impact from Iran returning to the oil market,” she says. Auers believes the impacts of the Iranian agreement and the economic situation in Greece won’t be as great as a struggling Chinese economy that generates less energy demand.

“I’m more worried about what’s happening in China,” he says. “It’s hard to call it a collapse of their stock market because they’re still way up compared to last year. Chinese demand drives petroleum demand. It’s much more important in the oil industry than anything that happens in Greece.”

Mohr agrees, adding, “China is the second largest oil consumer in the world and has more potential to increase per capita consumption given its stage of economic development than in the U.S. China is now the world’s biggest auto market and—depending upon decisions made on technology—should be a strong gasoline market going forward.”

Auers thinks a slight dip in Bakken production will probably occur, although he doesn’t expect it to last for long.

“We’re going to continue to produce oil out of the Bakken in the million-plus range,” he says. “It could fall below a million barrels a day in North Dakota in the next year or two, but not a lot below. Longer term, I’m pretty bullish that it’s going to get back up to the level we thought it would be at before—1.5 million barrels per day or maybe more.”

Mohr’s outlook is that WTI oil prices will remain low in 2016.

“While world capital spending on oil exploration and development has dropped 20 to 30 per cent, the impact on world oil production has so far been very limited,” says. “This partly reflects an actual step-up in production by the major Persian Gulf countries—Saudi Arabia, UAE and Kuwait—in a bid to regain market share, and in fact, expand it in Asia—for example in China. It also reflects a significant lag between exploration and development and production in many countries.”

Garrett believes that conditions for increased activity in the Bakken could start to improve by the end of this year or the middle of 2016. Wood Mackenzie’s view is that the WTI crude price will average $60 next year.

“I think at that point, you’ll start to see more operators start to hedge more of their production,” Garrett says. “They really don’t want to hedge or lock in at $52 WTI, but locking in at $60 might make sense. I think that will justify some increases in production.”

Mohr doesn’t expect production to go upward soon and thinks producers will hedge at a higher level.

“It is unfortunately premature for producers in the Bakken to step up production now,” she said. “I think if they can hedge forward at $65 it would make sense, but not at $52.”

Even Rocky was eventually force to hang up his gloves, but Auers says new developments in secondary and tertiary recovery methods or re-fracking could give the Bakken new life.

“A real breakthrough would be an economical source of CO2 that you could re-inject back in to get the hydrocarbons out,” he says. “There’s a lot more oil down there than they’re pulling out. The technologies to do that aren’t that far away and aren’t much more expensive. The Bakken has a lot of long-term staying power.”

In other words, the final Bakken sequel is a long way from being made.