The Relationship Between Crude Price and The Bakken, Part 1

Reports of dropping crude oil prices negatively impacting the level of investment or amount of oil produced from the Williston Basin are being floated around this week. The general sentiment is that as Brent crude continues to drop into the $80/barrel range (with the possibility of dropping into the $70/barrel range or lower) exploration and production firms heavily invested into the Bakken will have to cut back investments or plans for 2015 because the payback on new wells won’t happen at a quick enough rate or large enough amount because of teh smaller monetary amount they recieve for Bakken crude. Also worth noting is that Bakken crude, most closely tied to West Texas Intermediate, typically trades below the Brent crude price, sometimes with a very wide spread. North Dakota sweet crude sold to the Flint Hills refinery was below $70/barrel this week.

Although it is fact that crude prices have dropped quite noticeably since June 2014, and they may continue to drop, the question of whether production, investment or development into the Williston Basin will slow based on falling crude prices is only answerable through an incredibly complex set of circumstances.

First, consider the recent oil and gas impact study from KLJ Engineering. The study indicates that certain factors greatly impact an exploration and production company’s decision to drill and frack a well. The list of factors includes expected initial production rates for a given well, well completion costs associated with drilling and fracking the well and the price for which Bakken crude can be sold for.

IP Rates:

IP rates can depend on a number of factors, including the drilling and completion company’s ability to execute a pre-determined drilling and fracking plan; well location; the intial flow rate that the well head is opened too; and the formation to which the well will be focused on.

Well Costs:

Well completion costs vary from operator to operator. In some cases, an operator may report well costs as low as $6 million or as high as $14 million. Proppants and water make up the majority of the cost to frack a Bakken well in many cases. Fracking methodology commonly deployed five years ago has vastly evolved, most notably through the amount of water, sand and number of discrete fracture stages placed into the horizontal lateral. Operating costs, the costs associated with maintaining wells, powering well site, disposing of water and other materials, are not calculated into well costs.

Crude Prices:

There are too many factors to consider when explaining the current price for oil. But, here are a few that are impacting the price of oil that have been well documented. U.S.-based shale oil production is at an all-time high and will continue to be at the pace for a long time. Global demand for oil in the near-term future is lowering. Middle Eastern oil producers are not cutting production in an effort to keep oil prices around the $100/barrel mark. In short, the global supply of oil is quite possibly outpacing demand, and, the U.S. does not currently have access to outside markets other than Canada to sell U.S.-based crude into.

All three of the aforementioned factors will play a role into the development of the Williston Basin in a complex way.

So, to the question, How will dropping crude prices impact the Bakken, consider this.

First, start with IP rates. According to the KLJ study, a $7.5 million well with a 500 IP rate in a world with $70/barrel oil will never recover the costs for completing the well. But, if the IP rate is in the 1,000 bopd range, the picture for the E&P firms is much different:

“In stark contrast, modeling sensitivity scenarios such as large drops in prices down to $35 per barrel with high IP wells, which are common in parts of the Bakken/Three Forks, still have positive economic returns. Based on modeling outputs, IPs of 500 bpd or less will not be attractive to companies if well costs equal $7.5 million, and oil prices are in the vicinity of the 2014 average price of $85 per barrel. Conversely wells in the 500 to 750 bpd IP range are attractive, but susceptible to oil price fluctuations. Wells having at least 1,000 bpd IPs are attractive at current or higher oil prices, and for the most part, will still be attractive even with a reduction in oil prices.”-KLJ

As the KLJ study shows, IP Rates can be a guiding factor for well development. But, IP rates are tricky. The expected IP rate of a well—often determined by the geographical location into which the well will be drilled—can help determine the time period for which the well can be paid off. But, the expected IP rate can also be impacted by the type of completion methodology used to complete the well. A better design and fracking process (which we’ve written about extensively on pieces focused on cemented liners, slickwater fracks and most recently coiled tubing), can, however, bump up the expected IP rate if the better completion methodology is used regardless of the geographical location of the well.

So, although the price of oil will force operators to look at expected IP rates before investing in a well, IP rates can change, showing that judging oil price’s role on development when linked to IP rates, is complex. Higher IP rates mean operators can withstand lower oil prices. But, getting to higher IP rates may cause well costs to rise.

In part 2, we will consider how well costs, along with operating costs, and crude prices impact oilfield development.

2015 Editorial Calendar Announced

The plan has been set for The Bakken magazine’s 2015 editorial calendar. The deliberation process was difficult and long, but our team has created an agenda for the coming year that we strongly feel will keep our readers engaged with the current state of the industry.

To view the calendar, click here and go to page 3.

For our editorial staff, the calendar is a guide to our story focus for a given month. For February 2015, the theme for the month is flaring. That means we will include at least one feature length piece on the topic and other smaller pieces on the topic of the month. (For a topic as big as flaring, expect multiple features).

For a first with our publication, we offered a unique webinar today outlining our 2015 editorial calendar and why we choose each month’s topic. We also discussed the ins and outs of our content creation process. The webinar was recorded and can be viewed on our website in roughly one week from today.

John Nelson, the mastermind behind our story delivery process, i.e. circulation, emails, online presence, webinars, etc., also joined in. Nelson provided a snapshot of our target audience, who gets our magazine, and what to expect from our team in 2015 with additional content offerings from the magazine. After listening to the webinar give me a call or email with any thoughts.

Highlights From a Bakken Oil Meeting

The list below represents the main takeaways and highlights from the North Dakota Petroleum Council’s Annual Meeting held last week in Dickinson, North Dakota. Many of the highlights stem from my notes. Certain notes were underlined, circled or bolded by extra pen strokes in an effort to illuminate a note’s importance. Some of the notes below were discussed in great length by our team and industry representatives throughout the meeting. If you attended the meeting and feel the list is missing anything, please let me know.

-Among many relevant takeaways, a KLJ oil and gas impact study reveals that banks are now lending more to Bakken entities in need of debt financing.

-Coiled tubing fracks are proving to be an upgrade to Bakken oil retrieval approaches. Whiting Petroleum Corp. gave a presentation on the process and what it has meant to their Williston Basin operations.

-To help show why the North Dakota Department of Transportation is busier than ever, undertaking a new era, constantly searching for funding or maybe even just simply as a way to illustrate why it is such a crucial part of the state’s development, Grant Levi gave a roads update by opening with this: Between 1950 and 2010, the state has endured a 400 percent increase in the amount of products coming off the field (agriculture and oil).

-The North Dakota Game and Fish Department has, can and wants to work with the oil industry on a long-term approach to development. According to Terry Steinwand, communication is key.

-The U.S. Fish and Wildlife Service wants to be a Bakken problem-solver, not a problem-creator. Kevin Shelley wants to form a new partnership with the oil industry of the Bakken to work on a long-term shared vision. “We are looking for new ways to do business,” he said. Although he openly admitted he didn’t know how those new ways could work, he did say now is the perfect time to establish a better relationship with the industry. Part of his commentary was based on the possibility that more endangered species—present in the Bakken—could soon be listed. “The best time to change our approach to a listing is before the listing is finalized,” he said.

-The NDPC has five times as many numbers as it did six years ago. The main issues for the industry, according to outgoing Vice Chairman Terry Kovacevich, are crude-by-rail and flaring. Also a hot topic, Measure 5. The measure proposes to take 5 percent of oil and gas taxes from the state for conservation. The Greater North Dakota Chamber made a compelling case as to why the measure has negative consequences for the state, let alone the oil industry.

-State representatives who have experienced oil and gas regulatory agencies in other states believe North Dakota has the best of the best.

-The KLJ study also estimates the Bakken will eventually reach 2 million barrels of oil per day in production.

Witnesses Backtrack on Bakken Crude Claims

The same day the U.S. House Subcommittee on Energy and Oversight held a joint hearing to better understand the characteristics and behavior of Bakken crude, the Subcommittee issued a press release with this title: “Witnesses Backtrack on Report’s Claim that Bakken Oil is More Flammable.”

The hearing included representatives from the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA), U.S. Department of Energy (DOE), North Dakota Petroleum Council, Turner, Mason & Co., and the Syracuse Fire Department.

During the hearing, members of the Subcommittee asked a representative of the PHMSA how the PHMSA knew Bakken crude was more volatile than other light sweet crudes. The PHMSA representative, along with another representative from the U.S. DOE on the panel, could not answer directly how PHMSA knew Bakken crude was more volatile. As the hearing continued, it was obvious the lack of information and the unacceptable answering ability of the PHMSA or DOE was causing tension and uncertainty about the PHMSA’s big Bakken claim (PHMSA released a report in July claiming Bakken crude was more volatile than other similar crudes). At least we thought the hearing was tension filled. Emily Aasand kept talking about the hearing as it played out, amazed at what was happening. We talked about the inability of those on the panel to answer a simple question, a question that for the Bakken has great importance.

It is nice to know that our thoughts and perspectives on the hearing—that claims stating Bakken crude is more volatile than other similar crudes are highly inaccurate based on testing performed and in the case of PHSMA, testing not performed—were on point.

Per the Energy Subcommittee press release, “…witnesses today including from the Department of Energy, agreed that such a claim requires further evaluation.”

From the Subcommittee’s Chairman, Rep. Cynthia Lummis, R-Wyo., “This [Bakken crude] is an important resource for the United States and it deserves due attention. The assertion that volatility necessarily correlates to increased ignitability and flammability has generated significant controversy,” adding that, “Testimony from both PHMSA and DOE witnesses clarified the context of volatility, explaining that petroleum from the Bakken region is properly classified as a “light, sweet crude oil” and not outside the norms for light crude oils. Further, the DOE witness stated that more scientific analysis is needed to better define the relationship between volatility and ignitability/flammability.”

And, also worth noting is this from Rep. Paul Broun, R-Ga. “The Department of Transportation report’s comparison of the Bakken crude, which is classified as a light sweet crude, to crude oil in general, including heavier crudes, is a bit like comparing apples to oranges because light sweet crudes as a class are generally considered to be more volatile than heavier crudes,” adding that, “America is on the road toward energy independence, with domestic crude contributing extensively, and it would be disastrous to impede on this extraordinary possibility.”

Takeaways From The Williston Economic Summit

Sometimes the best way to gather information is via text message or old school instant message. This morning my team member Emily Aasand was sitting in the crowd at the Williston Economic Development Summit taking notes, marking down important story ideas and texting and instant messaging me. I asked her to shoot me three of the most talked-about themes or takeaways from the event and it didn’t take her long to ping me back with an IM that included the following.

First, medical services in Williston are expanding. The city is adding a women’s center, rehab services and more physicians. (She even mentioned that the city will soon be able to reconstruct hands). The news of medical services expanding was a big positive during the show.

Second, the growth in the transload industry is still high and developers see it as an opportunity. We have a story planned on a transload facility developer that Aasand talked to at the event. Look for it soon.

Third, city infrastructure growth continues its rapid pace. That can be seen by the addition or plans for a new airport, fire department, more parks, stores and most importantly, housing. National rental firms and housing developers were at the show to learn and talk about that topic. Their main concern was the future of the city and its growth projections. Their questions were answered during several presentations, Aasand said, and the general consensus from the show is that growth in one of the Bakken’s hub cities is set to continue for the foreseeable future.

Look for Aasand’s story on the event here. And, for projections on Williston, check out this original piece we put together last year based on our talks with the researchers responsible for the projections.

The View From Whiting’s Parking Lot

There were roughly 70 of us sitting in the parking lot of Whiting’s Watford City, North Dakota-office last night, but it felt like the entire state was there. Many of those in attendance were there as part of a state legislative tour organized by the Watford City Chamber of Commerce. The reason for Watford City was simple: highlight the incredible activity, constraints, success and plans associated with the current and future state of Watford City.

Following a bus tour of a drilling rig and fracking site—and a long wait in traffic on U.S. Highway 23 east of the town—the tour bus arrived and dropped everyone off at Whiting’s location as the final leg of an all-day trip. We sat under a large tent, assigned to numbered round tables. Each table included industry representatives from the Bakken, the state legislators and young professionals who’ve started careers in the Bakken’s unofficial oil production capital.

Whiting’s facility sits at the top of a ridge, overlooking a large swath of the town. It was hard to tell where the limits of the city ended and the open fields of wheat and oil pads began from that vantage point, a fact that many in attendance understood as a major reason for the gathering’s location. The view was picture worthy, the air was calm and cool as if fall was moving in. A photographer would have been jealous of the sunset behind our tent. Darick Franzen, the president of the chamber, joked with everyone there that he was responsible for the weather. In reality, the organizers of the event had hoped for worse. They had hoped that those in attendance would see some of the less desirable conditions often present there involving dust, wind and mud. But, after someone made that point, many responded that after waiting in a traffic jam outside of Watford City on their way to Whiting, “they had seen enough.”

The event lasted more than an hour and was highlighted from developers, city leaders and county officials explaining their plan to keep the city growing. I can’t describe everything that happened there in this short blog update. Not because I don’t want too, but because I’m not sure this website will allow me to post a 10,000 word blog. The story from that gathering is long. And, in this case, long equals important. What happens following that gathering will impact the ability of that city’s growth, and the industry’s that depend on the city, for years to come. My goal is to include the story on the gathering in our October issue, but I can’t honestly say I’ll have truly conquered and condensed everything from that night into a print piece by then.

An Interesting Week of Bakken Calls

This week was a reminder that the Bakken is a nationally recognized business opportunity. To explain what I mean, I will share some of the calls and emails I received, along with conversations I held during this past week to highlight the fact that the Bakken draws attention from all parts of the country.

Mineral Owner/Small-Time Investor:

Following SM Energy’s acquisition of 61,000 net acres in Divide County, North Dakota, we posted a story on the details of the transaction. A few days later, I spoke with a mineral rights owner and small-time Bakken investor from Iowa looking for insight into the transaction.

Drilling Software:

Included in a bullet point list of what this company’s software can provide for directional drilling applications, I received a very succinct and detailed note from an Oklahoma City-based drilling software provider. We have yet to catch up via phone, but based on the email, I believe the conversation will entail information on the drilling software’s potential use in the Bakken.

Potential Water Supplier:

An Alabama man reached out to me via phone regarding a potential water source that may be available to the Bakken. I’m not going to say much more than that out of respect to the caller, but, he was already working with folks in Montana to find a way to utilize a water source that is going unused. And, it should be noted, I’m trying to connect him with a few different water players.

NORM Handling:

On my to-do list today is a call-back to an Arkansas proppant supplier that left a message for me last night. The call will entail information on proppants I’m guessing, but, it will also include information about NORM. The person who left the message was calling in regards to one of our recent stories on NORM handling and disposal and their ideas on the process.

Insight Gleaned From an Analyst, Midstream Gas Gatherer Conversation on Flaring

Those informal lunch meetings many of us partake in with acquaintances or industry participants may not always yield valuable insight or make chasing a lunch special worth the effort, but as Patrick Miller’s in-depth piece on flaring from our August issue shows, sometimes an informal conversation over lunch can yield worthwhile results that we can take with us back to the office. David Scobel, chief operating officer of Caliber Midstream, told Miller that it was at a lunch with a financial analyst that helped Scobel see one of the major problems with flaring in the Bakken.

Miller writes about that conversation to open his piece, “Executing the Gas Capture Plan.” I won’t spoil the point of the piece or dissuade you from reading the full thing. I will, however, say that he did a wonderful job at using that conversation as a vehicle to deliver for all of us a message about the current state of flaring. After reading the opening lines of the piece, you may not know what Scobel was eating that day, where he was at, or even why he was there. But, you will leave those first few paragraphs with a pretty good understanding of some of the main challenges midstream gas gathering companies have to deal with in regards to flare gas capture within the Bakken.

And, because I’m on the topic of explaining some of our August print stories, it is worth pointing to the exclusive monthly column that the North Dakota Petroleum Council has penned for us.

Have you ever seen a television commercial about the former mayor of Williston, a couple that opened a Bakken restaurant in Watford City or an engineer who was able to move back to Bismarck because of the Bakken? Those commercials were created by the NDPC team. Tessa Sandstrom, communications manager, explained how the commercials came about and why they are relevant to anyone affiliated with the Bakken in our August issue.

Operator Updates: What We’ve Learned in Q2 2014

Our team has been busy covering second quarter earnings calls and production updates from several Bakken operators over the past two weeks. We have a spreadsheet to track which exploration and production firms we’ve covered and which companies we haven’t. For nearly every story we have posted in combination with those we still have in the works, the one glaring theme is that Bakken operators are having incredibly successful second quarters.

Whiting Petroleum Corp.’s Bakken production is 33 percent higher than it was at the same time period last year. Marathon Oil’s second quarter production totals in the Bakken are 16 percent greater than the previous quarter. ConocoPhillips is producing 19 percent more crude than the previous quarter. And, Emerald Oil had its strongest second quarter in company history, beating its production guidance by roughly 8 percent.

The reason for success is more complex than the simple assertion that more wells in the ground than ever before should correlate to more oil produced than ever before. Many of the earnings calls for the second quarter revealed another trend among Bakken operators: good well density plans and completion methodologies used previously are being tweaked for better production totals.

Every one of the aforementioned operators specifically pointed to successful tweaks to completion designs or well density spacing as major reasons for improved production numbers from the previous quarters.

Whiting is high on coiled-tubing and slickwater. Marathon Oil, which reported it had experimented with different completion designs in roughly 50 percent of all of it’s Bakken wells in the second quarter, is big on slickwater, increased stages, cemented liners and more proppant per well.

WPX Energy could offer the best example of the trend that shows Bakken operators getting better at what they do. The exploration and production company announced that it will now use roughly 6 million pounds of proppant per well in the Williston Basin after significant production increases in the wells that used more proppant. The previous norm for WPX Energy’s proppant volume was roughly half of the new volume the company will deploy. On top of its production increases linked to proppant volume, WPX Energy also announced it had added and astounding 200 new drilling locations to its current Williston Basin acreage due to its own testing and analysis of well density. Although it will continue to develop 7-well pads, WPX Energy has shown it can also develop 11-well pads without impacting production.

Why We Cover Completion Details

SM Energy Co. is a prime example of why our team continually tries to include completion technique details into stories regarding exploration and production companies when possible. SM Energy announced this week that it had purchased $330 million worth of acreage in Divide County, N.D., from Baytex Energy Corp. The purchase was the largest monetary transaction for SM Energy in company history. But, the acreage in that portion of the Williston Basin has been known to produce high water cuts, and in the case of some operators, poor well production results. Although SM Energy has already proven it can be successful in the area through its own well production results for its current acreage in Divide County, there has been some perspective in the industry that the area may not be as desirable as other areas in the Williston Basin.

Tony Best, CEO, said he was excited for the purchase and the possibilities that lie ahead for the new acreage. The rest of the executive team mimicked his sentiments. So, given the background of the region that SM Energy will now develop, why is the operator so excited about acreage that it hasn’t been able to verify using its own methods of derisking? Among many reasons that I’m sure we all don’t know about, one glaring reason has to be the success encountered with new fracking designs deployed by SM Energy in its adjacent Divide County acreage that virtually surrounds the purchased acreage.

During the announcement of the sale, SM Energy pointed to the use of increased sand loads as a main cause of better production, and higher rate of return per well in the Divide County wells for which it deployed the greater sand volumes. The new method will be used on the newly acquired acreage, and, the new completion method helps to explain why SM Energy is—and probably rightfully so—excited about the purchase.

Because of the better well results, the company even made the comment that it might need to rethink its downspacing efforts in the area due to the better production. It is possible, the company alluded, that it might need to space its wells closer together to potentially put more in. That is important, and it is why we include information on well completion styles and the production results that follow. In many cases, tweaks to well completion designs can impact the entire service chain linked to production that starts on the well pad.