Bakken Update: Contributing To The Oil Glut With A 31% Production Increase And EURs Of 875 MBOE

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Summary

US unconventional wells continue to improve with production increases seen across all plays.

Increased production per foot continues to stress oil prices as new wells are completed in the best core areas.

The Bakken core has seen consistent production increases per well regardless of interval.

Bakken/Three Forks core wells model to an EUR of 875 MBOE.

Unconventional well results continue to improve. This has been the theme in the Bakken, Permian, Eagle Ford and all other US plays. Core well economics have improved enough to grow US oil production at $60/bbl. Some areas saw production increases at just $40/bbl. When I was in elementary school (it was a long time ago), we were told oil prices wouldn't be high enough to support Bakken production in our lifetime. Estimates in the late seventies were a breakeven at a $500/bbl oil price. That obviously changed, but most things do. Ten years ago, peak oil theorists believed we would soon reach a period of time where demand outpaced supply. The current glut, caused by unconventional production, has slowed this talk. Many of those who had pushed peak oil, now continue to talk about frac'ing in a negative light. We continue to hear how it is a Ponzi scheme, or is not economic. They believe the oil producers would risk prison and lie to the public about economics. Those same critics even defy the best independent oil and gas analysts, stating their estimates are not only incorrect, but based on data that is incorrect or does not exist. To be clear, not all peak oil theorists have been negative. Some have changed with the times, as one can go long or short the market. Those good at investment, know this is not emotional, it's just business. So please don't think I believe the entire group is involved in bashing the US oil industry, just a rare few that maybe don't like America very much. I also believe in the peak oil theory, it's just not here yet. Some have moved with the market, and decided peak oil would come to fruition at a later date. I have not always been positive the oil markets, nor have I made supportive claims all of the time.

In November and December of 2014, we highlighted a number of oil companies like Emerald (NYSEMKT:EOX) and Halcon (NYSE:HK) that we believed should be shorted. At that time, we believed world oil production would continue to outpace demand by a large margin. The reason was a belief the world had too much oil. This was a subject addressed much earlier by very smart investors. Jeep had commented that frac'ing would cause a glut all the way back in 2013, which now looks like a brilliant call. It is important to be nimble when investing in oil and gas. We look at oil and gas in a bullish or bearish manner depending market technicals and fundamentals. When reading my articles, I would ask that just because there are some excellent well results posted, it doesn't necessarily mean I am currently long the market. Some may make such statements because they do not want others to know just how good or quickly results are improving. I don't claim to know everyone's reasons, but if someone posts data straight from a state oil and gas site, it is probably correct. If the data is incorrect, I would love to have a conversation about it. We post a significant number of well results to help investors locate areas of interest. We hope investors find this helpful.

The effect on world oil markets has been large. At one point, we thought $100/bbl. WTI was here to stay. Many were wrong, as the US Oil ETF (NYSEARCA:USO) collapsed with huge inventory increases. The chart below not only provides the decline, it shows a recent bullish reversal.

Click to enlarge

(Source: Investing.com)

The current oil price has been difficult for many producers. Oil at $50/bbl does provide decent economics for some core areas. We log well results in areas to help monitor an E&P's economics. When we come across specific areas of interest, we post those results. Economics differ a great deal from one section to the next. Those differences are even greater when comparing specific plays. Lower oil prices will allow some basins to increase production, while others decrease.

Click to enlarge

(Source: EOG Resources)

EOG Resources (NYSE:EOG) provides estimates on unconventional production and its decline through 2017. An uptick in production from the Gulf has skewed the numbers some, but it is still affected. EOG gives us an idea of its best acreage through the number of wells it estimates it will complete this year.

Location

Net Wells

Eagle Ford

190

Delaware Basin

70

Bakken

25

Powder River Basin

25

DJ Basin

25

Click to enlarge

EOG has the best economics in the Eagle Ford, while this isn't the case for most operators. The Permian consistently has better results than any other basin. Its recent purchase of Yates provided a large footprint in the low cost northwest shelf. That purchase should be watched as EOG has done a good job of identifying future plays. Along with a big Power River Basin addition, it also received a large position north of the current Delaware Basin play.

Click to enlarge

(Source: Newfield)

Newfield (NYSE:NFX) provided the above chart. It shows the relative change in daily production by basin. The Permian has seen a large increase, along with the Anadarko Basin (STACK/SCOOP). The Bakken and Eagle Ford have not fared as well. Production has not decreased at the rate many had estimated. Decline rates have improved.

Operator improvements and decreased oil service costs have done much to decrease D&C. This isn't the only reason we are seeing improvements from the industry. Production improvements have been substantial. This can be seen by isolating time frames of completions within a specific area. The Bakken core runs along the Nesson Anticline. The best wells have been in southwest Mountrail, southeast Williams, northeast McKenzie, and northwestern Dunn counties. There have been 5,353 horizontal wells drilled in this area.

Click to enlarge

(Source: Welldatabase.com)

The corresponding heat map provides where the majority of oil has been produced. It shows some of the better areas, like the Antelope and Parshall. We isolated several operators.

Name

Well Count

CUM Gas (MCF)

CUM Oil (BBL)

CUM Water

Whiting Oil And Gas Corporation (NYSE:WLL)

984

208,626,720

175,725,728

99,762,510

Hess Bakken Investments II, LLC (NYSE:HES)

952

263,635,968

130,187,720

120,098,288

XTO Energy Inc. (NYSE:XOM)

602

121,610,136

79,874,104

39,344,050

Continental Resources, Inc. (NYSE:CLR)

487

114,522,152

72,370,960

46,188,404

Burlington Resources Oil & Gas (NYSE:COP)

439

103,786,900

69,897,460

21,530,828

QEP Energy Company (NYSE:QEP)

287

63,004,736

55,156,716

25,862,530

Statoil Oil & Gas LP (NYSE:STO)

226

49,076,370

37,815,864

29,500,076

EOG Resources, Inc.

217

60,706,056

60,161,490

20,975,020

Newfield Production Company

213

56,110,108

29,708,048

11,509,069

WPX Energy Williston, LLC (NYSE:WPX)

212

36,705,430

41,405,316

20,331,028

Marathon Oil Company (NYSE:MRO)

168

35,944,296

37,846,424

10,529,473

HRC Operating, LLC

163

36,251,670

33,580,270

21,288,422

Oasis Petroleum North America (NYSE:OAS)

149

29,922,288

22,014,152

18,026,084

Enerplus Resources USA Corp. (NYSE:ERF)

117

22,547,788

24,737,654

11,514,700

SM Energy Company (NYSE:SM)

88

27,246,116

15,828,040

7,054,077

Abraxas Petroleum Corp. (NASDAQ:AXAS)

30

7,652,446

4,132,264

1,892,176

Triangle USA Petroleum Corp. (NYSEMKT:TPLM)

17

2,748,611

1,624,260

2,011,432

Click to enlarge

(Source: Welldatabase.com)

We have taken this data and isolated the production results over four separate 12-month periods. This should provide us with the data needed to track well results in the Bakken core. We pulled the number of wells and cumulative production data for 18 operators. It does not include all of the Bakken players. The earliest wells were turned to sales between 8/12 through the end of 7/13. The August to July months were used for the most up-to-date type curve in newer wells. This allows an average type curve to be produced for other time frames within this analysis.

Month

Oil MBO

Gas MMcf

MBOE

H2O MBbl

1.00

10.09

10.79

11.96

9.16

2.00

13.83

15.92

16.58

7.84

3.00

11.49

13.81

13.87

5.21

4.00

9.95

12.54

12.11

4.26

5.00

8.92

11.56

10.91

3.86

6.00

7.79

10.08

9.53

3.32

7.00

7.09

9.28

8.69

3.13

8.00

6.30

8.31

7.73

2.87

9.00

5.92

7.87

7.28

2.72

10.00

5.64

7.44

6.92

2.67

11.00

5.27

7.07

6.49

2.51

12.00

5.06

6.81

6.23

2.50

Total

97.35

121.48

118.30

50.05

Click to enlarge

(Source: Welldatabase.com)

The average well in this area produced 97,350 BO or 118,300 BOE in the first year of well life. The numbers looked pretty good considering the well design. The chart below provides the average well's decline over the first 24 months. Red indicates natural gas, green is oil, blue is water and black is the number of locations. The oil decline is roughly one-half when comparing the first month of production to the twelfth.

Click to enlarge

(Source: Welldatabase.com)

Locations a year later performed better. 2014 was pulled using the same variables and charted below. It includes wells that started producing from 8/13 to 7/14. Production data from 1,075 wells were used.

Month

Oil MBO

Gas MMcf

MBOE

H2O Mbbl

1.00

10.31

11.98

12.38

8.79

2.00

15.17

18.75

18.40

9.72

3.00

12.61

16.04

15.37

6.62

4.00

11.36

14.72

13.90

5.68

5.00

10.37

13.77

12.75

4.85

6.00

9.19

12.27

11.30

4.39

7.00

8.22

10.97

10.11

4.02

8.00

7.29

9.87

8.99

3.58

9.00

6.95

9.57

8.60

3.55

10.00

6.29

8.95

7.84

3.27

11.00

5.78

8.29

7.21

2.94

12.00

5.41

8.01

6.79

2.78

Total

108.95

143.19

133.64

60.19

Click to enlarge

(Source: Welldatabase.com)

Wells from a year later produced approximately 11,000 more barrels of crude. The average top producing month was also better. The twelfth producing month from 2013 to 2014 was higher for both crude and natural gas. More water was also produced. Keep in mind this does not include lateral length, so the numbers could be affected by longer horizontals. It also doesn't factor the interval into the comparison. All wells targeting the middle Bakken or Three Forks benches are included.

Click to enlarge

(Source: Welldatabase.com)

The third comparative year covered 8/14 to 7/15. 1149 wells were logged. Oil production did not increase as much, but more natural gas was produced. Each well had total producing days of 553 out of the first two years online. This is 167 days shut in.

Month

Oil Mbbl

Gas MMcf

MBOE

H2O Mbbl

1.00

10.61

14.14

13.05

9.22

2.00

15.22

21.15

18.87

10.44

3.00

13.39

19.24

16.71

7.82

4.00

11.88

17.83

14.96

6.66

5.00

10.56

16.38

13.39

5.90

6.00

9.42

15.32

12.06

5.93

7.00

8.59

14.53

11.09

5.18

8.00

7.85

13.41

10.16

4.73

9.00

7.24

12.57

9.41

4.27

10.00

6.53

11.41

8.50

3.90

11.00

6.08

10.71

7.93

3.75

12.00

5.60

10.06

7.34

3.55

Total

112.97

176.75

143.47

71.35

Click to enlarge

(Source: Welldatabase.com)

A smaller improvement was seen year over year. This could be due to a larger percentage of wells targeting the Three Forks. The upper Three Forks produces 20% less resource than the middle Bakken on average. This is not consistent throughout the entire play. Areas like northeast McKenzie County do better, while Parshall Field is much worse. It produces more natural gas than the middle Bakken. Click to enlarge

(Source: Welldatabase.com)

We used a date range of August 2015 through July of 2016 for the last set. 297 wells were sampled. The decrease in number is mainly due to lower oil prices. Operators with operations in Texas or Oklahoma have moved rigs. North Dakota taxes and differentials are greater. Well economics in areas like the Permian are stealing capex dollars. These wells produced for an average of 292 days.

Month

Oil Mbbl

Gas MMcf

MBOE

H2O Mbbl

1.00

10.43

13.22

12.71

9.27

2.00

13.81

18.01

16.91

9.74

3.00

13.56

18.78

16.80

8.43

4.00

12.32

16.94

15.24

7.20

5.00

12.19

17.80

15.26

7.05

6.00

10.46

16.01

13.22

5.88

7.00

9.60

15.31

12.24

5.56

8.00

9.45

15.44

12.12

5.11

9.00

8.68

14.86

11.24

4.65

10.00

8.00

14.07

10.43

4.33

11.00

7.10

12.39

9.24

4.47

12.00

7.23

11.33

9.19

3.82

Total

122.83

184.16

154.60

75.51

Click to enlarge

(Source: Welldatabase.com)

Oil production per well increased again, as did natural gas. Each year, we not only saw cumulative production increase, but we are also seeing decline numbers improve. The most recent wells were still producing 7,230 BO per month during month 12. Locations that began producing in 2012 and 2013 were at 5,060.

Click to enlarge

(Source: Welldatabase.com)

One-year production results improved over each year. Improvements differed by date range. These improvements were seen although more Three Forks wells are being completed. Well spacing is getting tighter, which should cause some resource sharing between locations. This should also decrease production. These headwinds are occurring, but improved well design continues to outpace. The large number of days a well is not online is also important. Over two months of the year each well was not producing. This is important as it disrupts the production model, and skews results to the downside. The 73 average days shut in accounts for 20% of one year producing days.

Dates

Oil MBO

Gas MMcf

MBOE

H2O MBbl

8/12-7/13

97.35

121.48

118.30

50.05

8/13-7/14

108.95

143.19

133.64

60.19

8/14-7/15

112.97

176.75

143.47

71.35

8/15-7/16

122.83

184.16

154.60

75.51

Click to enlarge

(Source: Weldatabase.com)

The average well in the 2012 to 2013 timeframe produced 97,350 BO in the first year. That increased to 122,830 BO three years later. On a BOE basis, the increase was from 118,300 BOE to 154,600 BOE. This equates to an increase of 31%. Water volumes increased with oil and natural gas production.

The average 8/15-7/16 well produced for 292 of the first 365 days. These eight weeks would account for approximately 21,000 BOE. Well production disturbances are more pronounced early. It is possible the average is higher, as that number is based off of the last or 12th month of well life. So it is conservative. This would bring the one-year type curve to 175,600 BOE. This models to an EUR of 875 MBOE. This EUR is a little lower than I would have expected, but we did include Three Forks wells in the Parshall and Sanish fields. I did include every well, even those that underperformed. As an example, if I removed all wells from the 8/15-7/16 timeframe that produced less than 20,000 BO in the first 12 months, both oil and BOEs increased substantially. Production increased to 148,030 BO and 186,320 BOE per well.

In summary, Bakken/Three Forks production continues to improve per well. Shale has had a negative effect on world oil prices, and will continue to set the bar in the future. If operators can continue to increase production per well and do it at lower costs, it will be the key to determining oil prices longer term. Production from the Eagle Ford and Bakken will increase with oil prices, and may be a better indication of what it will take for US oil production to consistently increase going forward. There is a wide range of data provided by free websites that pulls production data but includes locations that have been in production for years. This does not show the productivity of wells, it only provides cumulative production which is divided by the number of locations. The type curve for 8/15 to 7/16 wells producing in North Dakota shows a BOE improvement of 31% over wells completed from 8/12 to 7/13. Bakken/Three Forks wells in the core now average an EUR of 875 MBOE.

Disclosure: I am/we are long CLR, EOG, MRO, NFX, QEP, XOM.

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 article is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Well data is provided by Welldatabase. Accordingly, the publication of articles should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. This information is provided for guidance and information purposes only. This information is not intended to provide investment, tax, or legal advice. The information contained herein has been compiled from sources deemed reliable and it is accurate to the best of our knowledge and belief. However, I cannot guarantee its accuracy, completeness, and validity and cannot be held liable for any errors or omissions. All information contained herein should be independently verified and confirmed. Hartstreet LLC does not accept any liability for any loss or damage whatsoever caused in reliance upon such information. Readers are advised that the material contained herein should be used solely for informational purposes. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

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