I was recently reviewing the most recent investor presentation from Continental Resources (NYSE:CLR) and noted how much faster that company is growing than its large Bakken competitors.
Click to enlarge images.
The peer group for Continental in the Bakken includes EOG Resources (NYSE:EOG), Hess (NYSE:HES), Statoil (NYSE:STO), and Whiting (NYSE:WLL). All of the producers in this group have grown Bakken production significantly over the past two and a half years, but none as much as Continental. The North Dakota production boom is of course no secret to anyone at this point. It is hard to keep something this big quiet for long even if it is located in one of the more remote places in the United States.
That production growth is in the rear-view mirror. I want to see what is coming at me through my windshield. The question that I want an answer to is what the rate of production growth in North Dakota is going to be over the next five to 10 years.
A couple of weeks ago I looked at what EOG Resources CEO Mark Papa thought was ahead of us in terms of oil production in the United States. EOG is the largest producer of oil using horizontal drilling in the United States by a margin of 2-to-1 so Papa's opinion should be useful given his company drills more horizontal wells than anyone.
He had this to say about North Dakota specifically:
We think there's only really two major driving forces of U.S. oil growth: Bakken and Eagle Ford. Eagle Ford is going to surpass the Bakken likely this year as the biggest oil growth rate. The Bakken is slowing down. Permian is really not on that fast of a track. And then there's what I would classify as all others. And the all others are not growing at a very fast pace at all.
I thought I would look into the EIA website and dig out the data myself so that I could try and understand what is going on. One interesting data point I found on the website is the actual production in North Dakota per day for the month of December in each calendar year. I then compared each year with 12 months earlier to see what the year on year production growth per day was. Here is the recent history:
- December 2007 North Dakota Production 136,000 Barrels per Day
- December 2007 North Dakota Production Increased 21,000 Barrels Per day From Prior December
- December 2008 North Dakota Production 202,000 Barrels per Day
- December 2008 North Dakota Production Increased 66,000 Barrels Per day From Prior December
- December 2009 North Dakota Production 242,000 Barrels per Day
- December 2009 North Dakota Production Increased 40,000 Barrels Per day From Prior December
- December 2010 North Dakota Production 344,000 Barrels per Day
- December 2010 North Dakota Production Increased 102,000 Barrels Per day From Prior December
- December 2011 North Dakota Production 535,000 Barrels per Day
- December 2011 North Dakota Production Increased 191,000 Barrels Per day From Prior December
- December 2012 North Dakota Production 770,000 Barrels per Day
- December 2012 North Dakota Production Increased 235,000 Barrels Per day From Prior December
This growth in production is an incredible story and one that has really picked up over the last three years. But I think this rate of growth has to slow, and perhaps fairly significantly in the next year. I believe this because I think a big part of the jump in production has related to capital and rigs moving away from drilling for natural gas and instead being focused on oil.
The number of rigs dedicated to oil and natural gas drilling looks like this over the past several years:
From May 2009 through to the summer of 2012 the number of rigs drilling for oil increased continuously. Since then, the number of rigs drilling for oil has leveled off. I believe that is going to start showing up in a slower rate of growth in oil production in the United States.
Now I do believe there is more to the rate of growth than just the number of rigs. For instance producers are drilling more efficiently now, the number of days to drill a well has decreased. But the major factor (in my mind) is going to be the number of rigs. We can grow production without increasing rigs, but we can't grow it at the rate we have enjoyed over the past three years.
Above is the North Dakota oil rig count which also flattened in the summer of 2012. Has that started to show up in the North Dakota production figures? To test that, I calculated for each month, how much the daily rate of production (in North Dakota) had increased from six months prior. Again, I used the date from the EIA website linked earlier, and here is what I found:
I wasn't sure what I would see prior to calculating these numbers, but the trend is pretty clear. The rate of increase in production appears to be slowing down fairly clearly. For example, March 2013 production is roughly 60,000 barrels per day higher than it was six months earlier in September 2012. Meanwhile, back in September 2012 the daily rate of production was 120,000 barrels per day higher than it was six months earlier in March 2012.
The rate of production growth seems to have dropped starting in September 2012. For all of 2011 through the end of summer 2012, the rate of production growth over six months prior was a fairly steady 120,000 to 140,000 barrels per day. Since then the increase over six months prior has dropped almost every month and is now at half the rate.
I'm not convinced I'm right about this, but the numbers are starting to support my theory. I'll keep an eye on it in the coming months. I believe that oil production in the United States is going to continue. I just think it is going to continue at a progressively slower rate each year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.