Bakken powers ahead with production despite low oil price
Opec countries and other producers hoping that a lower oil price is going to lead to a quick fall in production from the Bakken oilfield in North Dakota, the US' most prolific shale producer, are likely to be left disappointed
The biggest question for the Bakken, and US production as whole, as the oil price has fallen has been at what point producers start packing up their rigs and going home. It is not a straightforward question. Breakeven costs vary widely between shale oilfields and between the core and fringe areas of the same play. Moreover, they are constantly evolving as new technologies and methods are brought into the oil patch.
However, it appears that in the Bakken at least, operators have a large enough inventory of relatively low breakeven cost wells in the core of the play to keep production rising for at least another year.
After drilling around 10,000 wells in the play, there are few surprises left in the Bakken. Drillers now know that the most profitable area of the Bakken shale lies underneath Mountrail, McKenzie, Williams and Dunn counties, while drilling has tapered off in the periphery Richland and Divide counties.
These core areas are where operators see the highest ultimate recovery rates, highest peak production rates, higher percentages of oil output compared to natural gas and lower decline rates. In a recent report, Bernstein Research, an investment bank, ranked Mountrail as the most attractive place to drill, followed closely by McKenzie and Dunn counties, with the other counties further behind.
In McKenzie, for instance, Bernstein found that EOG Resources and a few other companies saw revenues of more than $90 million per well, with the average around $61m per well. Mountrail saw revenue per well of $58m per well. But that figure falls off sharply at the fringes of the Bakken. In Richland County it was around $30m per well and around $28m in Divide County, which are unlikely to be economic at an oil price of around $75/b.
In the core areas, where investment and drilling has been focused in recent months, most wells are economic at an oil price of less than $65 a barrel (/b), and some even as low as $30/b, according to BTU Analytics, a consultancy. "Crude at $100/b provided a big tent where everyone was invited to the party," Kathryn Miller, an analyst at BTU Analytics said recently. "There is still a significant inventory of wells left to be drilled in the core area of the Bakken to support production growth out of the basin. But producers with fringe acreage could find their cash flows no longer support the growth they expected."
The pace at which the Bakken's production will continue to grow will depend on how well operators can maximise output from their Bakken acreage that remains profitable at a lower oil price.
EOG Resources, one of the largest Bakken acreage holders, is experimenting with well spacing and new completion techniques to get the most out if its core areas. At the beginning of this year, for instance, it starting tests on wells placed 1,300 feet apart. Encouraged by those results, it is now testing wells even closer together at 700, 500 and 300 feet apart. "We are encouraged by early indications from the 700 foot spaced wells, but we need additional time to assess the impact on long-term production, reserves and ultimately the net present value," EOG's vice president of exploration and production Billy Helms told investors earlier this month.
EOG would still see a 10% rate of return in the Bakken at an oil price of $40/b, it has said. The company as a whole says it can continue to fuel double-digit shale growth at $80/b.
Other companies have echoed that optimism in the face of lower oil prices. "We have some of the best acreage in the [Bakken] and even at current prices or below, there are still many areas for attractive investment," John B Hess, chief executive of Hess, said earlier this month.
Eventually, however, companies will run out of drilling opportunities in the cheaper core of the Bakken, and will have to turn to more marginal areas of the play or start to pull out altogether. When that will happen will depend on continued improvements in technology, drilling efficiencies cost reductions and the oil price.
Bernstein, for its part, expects the Bakken's production to peak in 2016 at around 1.4m barrels of oil equivalent per day (boe/d), up 42% from 964m boe/d in 2013. It forecasts production tailing off from there as companies start to run out of attractive wells to drill. By 2020, production is predicted to fall below 1m boe/d.