Unconventional well costs have pulled back significantly over the past two years. Not only will these costs continue lower, but current reductions have been better than expected. It is my opinion these costs are not correctly factored into analyst estimates. This is bullish the bottom line, and more specifically in the Bakken.
The North Dakota Bakken has some of the highest unconventional well costs in the United States. There are many reasons for this, all of which are important and somewhat unique to the area. The Bakken/Three Forks is over 10000 feet deep. This requires high spec drilling rigs, and considerable time to drill. Keep in mind that depth varies. Divide and western Williams counties average approximately 7000 feet for the middle Bakken. This is why well costs are lower in these areas. Another issue is infrastructure. States like Texas have had many decades of oil and natural gas production. Over time disposal wells, water depots, and etc. were built and can still be used today. Water is cheaper as depots are closer, and pipe is already in the ground. Natural gas infrastructure has been built, so less flaring occurs. Produced water is hauled shorter distances for disposal.
The weather is also a problem, as North Dakota winters provide several weeks of sub-zero temperatures. Not only does this decrease productivity, slippery conditions slow trucking. This winter has been especially difficult, as we saw snow on April 18th. Spring flooding causes problems as well. This is not well understood by those outside North Dakota. Most of the flooding occurs in the east. Fargo and Grand Forks have been exposed to flooding from the Red River, but this has nothing to do with oil production in the state. Bismarck is in south central North Dakota. It saw major flooding from the Missouri River. This was the first seen since the Garrison Dam was built. The same year we saw the Souris River flood the city of Minot. The bulk of flooding problems have little to do with waterways. Depending on the amount of snow and how quickly it melts, we could see surface overland water. This can temporarily block highways and make it more difficult for trucking to get to water depots and disposal wells. This also affects construction as building materials can have issues getting to well sites.
Bakken well costs peaked in 2010-2011. All of the issues listed above were a problem, but the most important had to do with oil service. There was a shortage of trucks, frac crews, and many of the other services needed. There were four hour waits at disposal wells, and water was at a very tight supply for fraccing. Operators had to pay top dollar, and it could take months after to complete a well. Sand and proppant shortages were an issue. Small operators had to take what they could get, which provided sporadic results. In 2011, Oasis (NYSE:OAS) was paying $120000/stage. This is improving for all operators as Continental's (NYSE:CLR) cost was $124000 in the 4th quarter of 2011. This has decreased to $98000/stage in the third quarter of last year.
Weather will always be an issue in the Bakken, but costs have decreased across the board. Most of the operators are reporting a decrease in well costs of $1 to $1.5 million. This has been an inadequate measurement when well design changes are taken into consideration. Oasis has reported a 16% or $1.7 million decrease in well costs. Kodiak (NYSE:KOG) stated its well costs reduced in 2012 by 15 to 20%. It expects an additional 5% this year. Continental reduced its well cost by $1 million last year to $8.2 million. It believes pad drilling will decrease those costs on average by $300000 to $400000/well. Whiting (NYSE:WLL) breaks down its acreage with respect to costs, giving a better comparison. Its Sanish Field acreage has costs of $6.5 to $7 million. Its acreage in southwest Williams, Richland, northeast and central McKenzie counties have well costs from $7 to $8.5 million. These areas are deeper and hotter, requiring more ceramic proppant and stronger materials. Whiting believes it can decrease Sanish well costs by $175000 and $500000 in the Pronghorn. Much of these cost savings are attributed to efficiencies. Continental saw a 40% improvement in drilling times from 2011 to 2012. Further savings are garnered from operators drilling SWD wells and putting in fresh water pipe. Each saves $2/barrel in costs. Piping oil from the well site can decrease costs from $1.50 to $2/barrel.
When looking at well costs, it is important to use like comparisons. 2012 well results will differ in area and operator. These variables can directly effect well costs through amounts of proppant and water. The table below provides Continental's 2012 well design in Banks and Camp fields.
The data above is in northeast McKenzie County. This is a deep part of the basin and has provided very good results. Kodiak EURs in this area are between 750 MBoe and 950 MBoe. The table below is Continental's well design in the same fields for 2011.
The tables above show Continental continues to increase lateral lengths, proppant, water and stages. Because the well files do not always have data on amounts of ceramic proppant used, I added it to the sand and used as a total. Not only do well costs continue to decrease, but operators are using a more expensive well design. In reality, well costs continue to decrease at a much faster pace. Some of this is hidden by better source rock stimulation requiring more water, proppant and shorter stages. Keep in mind that one well in the first table used only 21325 gallons of water, which did somewhat affect the average. I think the number was a typing error, but included it in case this is incorrect. Below are the average differences:
- Lateral length: 562 feet
- Water: 3342 gallons
- Proppant: 174952 pounds
- Stages: 2
In summary, we continue to see well costs decrease in the Bakken. These decreases are for several reasons. Water depots and salt water disposal wells continue to be drilled. Chinese and Russian ceramic proppants are less expensive, while sand is readily available, decreasing cost. Oil service backlogs are much shorter, which has allowed operators to bid jobs. This has decreased drilling and completion times. Well costs will continue to decrease as operators switch to LNG powered rigs. Pad and batch drilling should also decrease the number of days to drill and complete. Companies continue to decrease estimates on well costs in 2013. Pay close attention to well design as it will help to give a better estimate as to where Bakken costs are headed.
Disclosure: I am long KOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not a buy recommendation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take in consideration commissions, margin interest and other costs, and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. For more articles like this check out my website at shaleexperts.com. Fracwater Solutions L.L.C. engages in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines and disposal wells. It also provides contracting services for all types of construction at well sites. Other services include soil remediation. Please contact me via email if you are interested in working with us. More of my articles and other pertinent information on the oil and gas sector, go to shaleexperts.com.