Bakken Update: Well In Western Williams County Produces 6-Month Payback

 |  About: EOG Resources, Inc. (EOG), Includes: STO
by: Michael Filloon

The increase in unconventional oil production in the U.S. provides an excellent opportunity for investment. The top and bottom lines of and oil and gas exploration and production companies provide cogent information to compare one company to the next. To truly understand these companies, one must understand the most important variable, which is well results. This can be a daunting process as unconventional production is a new technology. Hydraulic fracturing has been around for decades, but it hasn't been used as a basis for U.S. land oil production for very long. There is little data to compare, but we are starting to understand this process and how it affects production. Plays are considerably different. The Bakken has some of the highest costs due to its lack of infrastructure, difficult weather, and deep source rock. These costs are offset by large EURs heavily weighted to crude. Areas like the Mississippi Lime are the opposite. Very low well costs, production under 50% oil and much lower recoveries.

There are several things that make a great unconventional well. The first and most important is identifying the sweetest part of the source rock. Once there, the lateral is set to the expected length. This is rather tricky as laterals can be just about any length. A shorter lateral generally produces better per foot. This is due to the toe of the lateral being closer, so the pump truck can better use its hydraulic horsepower. A lateral also has a series of stages. Stages are a series of numerous reservoir intervals hydraulically stimulated in succession. The shorter the stage, the better the shale is fractured. This opens the well to a larger surface area of shale resource.

To prop open the fractures water, proppant is pushed into the fractures so resource can continue from the source rock and into the well. There are many different types of proppant. Sand is the cheapest, but crushes under higher pressures found in deeper wells. Ceramic coated sand is more expensive, but handles higher pressures. Ceramic proppant is the most expensive and can be used in the deepest pay zones. An operator must balance cost and optimal well design. An example is the amount of proppant used. It does no good to use more proppant than can be used to fill in fractures. The exact amount and type will maximize returns.

Optimal well design is accomplished by balancing these variables used in concert. Each operator uses its own recipe. Companies like Kodiak (NYSE:KOG) and Triangle (NYSEMKT:TPLM) use the best technologies, and this tends to push up well costs. Companies like Whiting (NYSE:WLL) focus on using less and keeping well costs low. We won't truly know which is the best until later in well life. At this time, we will know how wells deplete long term and if spending the extra cash was worth it.

Back in November of last year, I began covering a change EOG Resources (NYSE:EOG) had made with respect to its completion work. I originally noticed this in the Eagle Ford, as it had the best results of any unconventional horizontal wells on land in the United States. Originally it was believed the Eagle Ford was that much better with respect to geology, but other operators in the area such as Magnum Hunter (MHR) and Penn Virginia (NYSE:PVA) under performed in Gonzales County. The differences were quite large, as EOG wells had 90-day IP rates triple that of Magnum and Penn. When the data is compared on a production/foot basis, EOG's wells improve further.

What separates EOG from other operators is how it looks at source rock stimulation. Operators have historically thought the deeper fractures would produce the most resource as it intermingled with the existing fractures. EOG is focusing on creating fractures close to the horizontal leg. Not only would the pressure create more and better fractures, it could possibly increase the number of locations per square mile. This would reduce the chances of communication between wells. With fractures closer to the well bore, it is easier to get the water and proppant pushed deeper into the source rock. In essence, we will see more pressure from the pump trucks exerted over a shorter distance. This would increase the fractures per square foot. In response, more proppant and water would be needed per foot. Tighter stages would be beneficial as this would produce additional fracturing.

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By using this technique, EOG found it needed more water and proppant per foot. These wells cost significantly more as EOG uses twice the stages, twice the water and three times the proppant of the average operator. EOG has done a great job of keeping well costs in check as it sources its own frac sand. EOG hasn't formally announced a big difference current well costs, but it is only using this design on some of its wells. Given the cost, EOG has focused this design on better areas of the Eagle Ford, Wolfcamp, and Bakken. EOG has now begun using this completion design in western Williams County, North Dakota. This acreage can be seen in the picture above labeled the Stateline/Diamond Point area. We already know this completion style works very well with respect to better acreage, and this article will show its affect on western Williams. Below are four EOG completions to date.

Well Choke Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
19927 96/64 9656 48 112514 9905670 712 562
20766 36/64 8882 37 103333 9668031 689 598 440
23421 48/64 9735 49 109753 9669220 884 555
20219 48/64 5071 21 55617 4862530 283 246
Avg. 8336 39 95304 8526363 642 490 440
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The table above provides EOG's new well design. These results are phenomenal considering the area. Well 20219 was a short lateral, so production per foot was still quite good. These wells have some of the largest concentrations of hydraulic horsepower per stage, proppant and water per foot. It has always done this, but continues to better well design. The question isn't how much it uses, but where this design will find maximum concentrations. The fourth well on the list did pull down the initial production averages as it was a short lateral. If removed, the 30-Day IP increases to 762 barrels of oil per day. The 90-Day increases to 572. EURs of these wells run between 650 and 750 MBoe. These are conservative estimates, as I believe these wells deplete at a much slower rate. Other operators estimate EURs from 300 MBoe to 400 MBoe in this area. Below I have listed EOG's 2011 and 2012 western Williams County wells using its old well design.

Well Choke Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
19836 24/64 9106 31 71269 4452250 599 411 328
20113 24/64 7588 26 41223 2951496 388 264 229
21008 20/64 8602 31 60488 4187931 553 373 310
19300 28/64 8479 31 57979 3973139 711 519 383
19964 24/64 10217 31 58683 4263057 617 413 322
19281 36/64 6518 16 33618 3056571 417 286 210
20069 24/64 8648 21 48549 3832818 504 367 302
19529 36/24 9056 31 52307 3994260 559 403 343
19348 36/64 8732 26 53685 4076401 572 406 323
19478 48/64 8793 31 56839 3883962 669 458 320
18538 35/64 9408 31 54890 3865899 599 389 333
20158 32/64 6072 19 31172 2633492 325 178 186
19928 24/64 9118 31 52881 4091582 608 414 313
20128 28/64 5846 21 41894 2924732 324 266 231
20152 24/64 6328 21 36945 2936652 379 282 230
20150 24/64 6082 21 43304 2965710 459 329 256
19695 32/64 5122 15 45009 2165840 365 269 217
Average 7866 26 49455 3544458 509 355 284
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Before EOG began using its new well design, the above wells were the best in western Williams County. As you can see, the disparity in results from table one to table two are quite large. By comparing these tables, we see what is accomplished through better stimulation near the well bore. Since the fractures are closer, it allows for the water and proppant to travel deeper into the source rock. Using tighter stages allows for better stimulation as there is more pressure per square foot.

We don't truly see how good this well design is until it is compared to other operators. Squires is one of the largest and most active fields in the area. I chose this area due to several very good operators and a significant number of results for comparison. EOG Resources is also active and has results in the table above. Below are well design and results for operators in this field. These wells are listed in order by time frame to give an idea of how well design has changed for each operator.

Well Co. Choke Lateral Ft. Stages Ft.

Water Bbls.

Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
19045 (NYSE:CLR) 20/64 10013 24 50384 2939308 323 268 251
19325 (NYSE:STO) 75/64 9545 23 67430 3842630 336 216 169
19617 (NYSE:QEP) 24/64 9308 30 53878 3719642 336 218 229
19736 (NYSE:OAS) 34/64 9265 16 41338 2839049 228 198 183
20482 QEP 18/64 9870 29 50061 3835500 466 237 245
20741 STO 128/64 9714 39 81600 3958660 512 383 308
19656 QEP 48/64 9306 13 44956 2876938 180 165 138
21240 STO 96/64 9848 39 71245 3901501 116 214 186
21861 STO 176/64 9760 39 85720 3909580 443 300 231
21241 STO 179/64 9848 41 81789 4121980 437 305 244
21663 STO 181/64 10260 41 81551 4124420 562 365 294
21878 STO 181/64 9193 39 77186 3651440 440 280 249
22293 OAS 64/64 9262 28 61723 3478109 396 288 226
22294 OAS 34/64 9908 28 63249 3478514 332 247 193
Avg. 9650 31 65151 3619805 365 263 225
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The operators above use more water, proppant and stages per well than EOG's in table two. Normally this would produce better IP rates, but in this case it hasn't. The average EOG well is a shorter lateral, which is contributing to the results. Lateral lengths can vary significantly, which is the reason wells are better compared on a per foot basis. Look at the lowest producing wells above with respect to the 180-Day IP, wells with the longest stages produce much less oil. This occurs in the presence of large amounts of proppant and water. Tight stages could be the most important aspect of well design. If the pump trucks have a smaller surface area to stimulate, it will produce more and better fractures. As a comparison, the average well in 2012 used 300 foot stages. Below I am comparing these results independent of lateral length. EOG has reduced stage length to a little over 200 feet. The first is EOG's most recent completion style.

Feet per Stage Water per Foot Proppant per Foot 180-Day Production per Foot
Table 1 214 Ft. 11.4 Bbls. 1023 Lbs. 9.5 Bbls.
Table 2 303 Ft. 6.3 Bbls. 451 Lbs. 6.5 Bbls.
Table 3 311 Ft. 6.8 Bbls. 375 Lbs. 4.2 Bbls.
CLR 417 Ft. 5.0 Bbls. 294 Lbs.

4.5 Bbls.

STO 263 Ft. 8.0 Bbls. 404 Lbs. 4.4 Bbls.
QEP 396 Ft. 5.2 Bbls. 366 Lbs. 3.9 Bbls.
OAS 395 Ft. 5.8 Bbls. 345 Lbs. 3.8 Bbls.
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EOG is able to better fracture the source rock, with shorter stages and focusing pressure close to the lateral. This is why its increase in water and proppant are so important. Since more shale is fractured, it takes more water and proppant to fill those fracs. The table above provides answers to several questions. By breaking down the data into feet, we can see the affect on production. EOG now uses a little less than twice the water of the other operators. It uses more than twice the proppant. This produces more than twice the oil of other operators and approximately a third more than its own wells in 2011 and 2012.

Before EOG made changes to its completion design, it was still out producing the competition. Comparing 2011 and 2012 wells by Statoil (STO), we see it uses shorter stages, more water and slightly less proppant per foot. STO is considered one of the best operators in the Bakken since it purchased Brigham. Given the well design, we should see more production from STO. In turn, we see much better production from EOG. STO's wide open choke could be some of the reason as well pressure decreases more rapidly, creating a need for artificial lift earlier. I would find it hard to believe we would see this large a disparity in production, especially in just six months. There is a better chance that fractures closer to the well bore not only result in better stimulation, but a less restrictive environment for the water and sand. Since STO's fractures are probably longer, the water and proppant have further to travel. I would guess this is less effective in propping the fractures open deeper into the source rock. We can safely say that EOG is ahead of the pack when it comes to well design in western Williams. This means nothing if the well is not economic. Below I have created a table of assorted wells above trying to show estimated pay back times.

Well Co. Total Oil Bbls. Oil Revenues Total Gas Mcf Gas Revenues Days Total Revenues
20766 EOG 89573 $8061570 56185 $224740 230 $8286310
20069 EOG 95806 $8622540 70705 $282820 562 $8905360
19045 CLR 101430 $9128700 54101 $216404 718 $9345104
19736 OAS 65515 $5896350 52159 $208636 484 $6104986
20482 QEP 87159 $7844310 35858 $143432 451 $7987742
20741 STO 108717 $9784630 80916 $323664 609 $10108294
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The above table is an overview of revenues produced by wells in western Williams County. The data is not completely accurate as about half of the natural gas revenues I figured are NGLs, so the gas and total revenues are higher than the table reports. I calculated using a Bakken crude price of $90/Bbl and natural gas at $4. I would guess this is closer to $8/Mcf when NGLs are figured. EOG's well costs average $5.5 million. This well was probably higher, but payback is probably around 6 months. The worst well on this list was by OAS, but its well costs in this area are around $7 million. Its well will payback in two years. It is currently producing a little over 2000 Bbls. of oil per month, and will eclipse the well's cost in another 5 months.

In summary, western Williams County doesn't produce the media driven EURs of southwest Mountrail and northeast McKenzie. It does have a lower well cost, which offsets lower EURs. This area has lower well pressures than prime Bakken acreage. Well design continues to improve and EOG is leading the way. Going forward, we should see other operators testing their own completion improvements. Most importantly, if EOG can get these types of results, so can other operators.

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.

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 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