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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (http://stockology.blogspot.com/)
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  • The Real Bakken Shale Well Decline 5 comments
    Dec 10, 2012 5:39 AM | about stocks: CLR, CHK, UNG, EOG, COGQ, ANR, ACI, BTU

    In a previous article "The Real Natural Gas Production Decline", I discussed a simple and effective way of estimating the real declines and realistic EURs (Estimated Ultimate Recovery) of shale wells based on two things that shale gas and oil producers can not lie about: number of wells added during a period of time, and the total daily productions.

    The Simple and Effective Method of Estimating EUR

    The idea is simple. All shale wells are in steep decline. Thus as the producers put new wells into production, a considerable portion of the new production merely compensates the decline of existing wells. If we assume producers add just enough wells to exactly compensate for the decline, then the EUR times number of wells added equals the amount of production during the same period.

    Let me explain in formulas. Let the combined daily decline of existing wells be D, and IP being the Initial Production rate per well:

    Total_Production * D = IP * Well_Additions

    EUR = Total_Production/Well_Additions = IP/D

    In surveying several different shale plays, I found that all of them have a combined decline rate of 0.2% per day. Combined decline rate means the decline of the total production from existing wells. For example if the total production is 500 MMCF one day and 499 MMCF the next day, the 499-500)/500 = -0.2%/day.

    Thus, a rough estimate of EUR equals to IP/D = IP/0.2% = 500 IP, or roughly 500 days worth of production at the IP rate.

    Estimating the Bakken Shale Well Productions

    The North Dakota Mineral Resource Commission has a web site that publishes the shale well counts and monthly productions of Bakken.

    I decide to crunch some numbers to see the real productivity of the Bakken oil wells, using the idea discussed above. Let's start from the oil productions of the latest two months:

    Aug-2012: 635,177 Barrels/Day

    Sep-2012: 662,428 Barrels/Day

    Wells added: 170

    Let's do the calculation using the above numbers. The production rate increased by 27251 Barrel/Day in 30 days. So the daily increase was 908.4 Barrel/Day. Daily well addition is 170/30 = 5.67 wells/day. Let's assume the combined decline rate of D=-0.2% also applied in Bakken. The median production rate during the 30 days from mid Aug. to mid Sep. was 648,660 Barrels/Day. So the natural decline would have been 0.2% * 648,660 BPD = 1297.320 BPD. So 5.67 new wells per day not only compensates for loss of 1297.320 BPD, but also boost the production by 908.4 BPD. Thus:

    IP * 5.67 = 1297.320 BPD + 908.4 BPD = 2205.72 BPD

    IP = 2205.72/5.67 = 389 Barrels/Day

    So that's the IP per well that I estimates, 389 Barrels/Day. The EUR then would be EUR = IP/D = IP/0.2% = 500*IP = 0.1945M barrels.

    Consider that there are so far 4629 wells in d the accumulative oil production is 458.860M barrels, averaging 0.099M per well. My EUR estimate is roughly twice the accumulative oil production per well. So I think my estimate is pretty good.

    A good thing of my method is it is pretty fair. Let's say I over-estimated the D. Let's say the combined decline rate is less than I thought, repeating the same calculation, it results in a less IP as well. Since EUR = IP/D, a less value divided by a less value, gives you a result that is about the same.

    Let's try a D = -0.15% instead of -0.2% and see what I get:

    IP * 5.67 = D * 648,660 Barrels/Day + 908.4 BPD

    EUR = IP/D = 648660/5.67 + 908.4/5.67/D = 0.22121M Barrels

    This EUR result, 0.22121M barrels, is only slightly higher than previous result of 0.1945M barrels. It is only higher by 13.7%.

    Validating My Bakken Shale Well Production Estimate

    Now let's apply the idea to model the actual Bakken oil productions.

    Prod_Rate_Change = Prod_Decline + IP* Well_Additions

    Prod_Rate * D + IP * Well_Additions.

    Thus, knowing the previous month's production rate, we can calculate what the next month's production rate should be, by subtracting the decline, then add number of new wells times IP.

    Let me assume D = -0.2%/Day. I assume IP = 365 Barrels/Day. I further assume that in 2005, 2006, 2007, 2008, 2009, the IP was only 30%, 50%, 70%, 80%, 90% of the current IP level, as the technology was less sophisticated than today, and well productivity was less than what we get today. Let's see how my calculation looks like compare with actual production:

    click to enlarge)

    It looks like a perfect match. Thus my assumed values, D=-0.2% and IP = 365 Barrels/Day, a good numbers that give perfect fit. Had I used an IP higher or lower, my projection would not match the data.

    So based on that, the average Bakken shale well EUR is

    EUR = IP/D = 365 Barrels/Day / 0.2% = 0.1825M Barrels

    My EUR estimate is far below what producers have been pitching.

    Case Study on Continental Resources Shale Wells

    Let's have a look at Continental Resources (NYSE:CLR), who is considered the most successful developer of the Bakken shale oil resources.

    I pulled out CLR's most recent quarterly report. Here are a few relevant numbers:

    • Oil and gas revenue received in the quarter was $617.93M
    • Oil and gas production was 0.103M BOE/day in the quarter.
    • Oil and gas production was 0.095M BOE/day in last quarter.
    • In 3 quarters, CLR participated completion of 541 wells, net 222 that belongs to CLR. So that's 74 per quarter.
    • Capital spending for 3 quarters totaled $2584.434M

    First the capital spending of %2584.434M divided by 222 net wells completed is $11.64M per well. This is the per well capital cost, not including the production cost yet.

    What is the per well IP, and the combined decline rate D? Note that production rate increased from 0.095M to 0.103M barrels in 92 days. That's a daily increase of 86.96 Barrels/Day. If D=0.2%, the daily decline would be roughly 0.2%*0.1M/Day = 200 Barrels/Day. So the daily production increase due to new wells is 200+86.96 = 287 BPD. Daily well addition is 74 wells / 92 days = 0.804 wells/Day. Thus:

    IP = 287 BPD / 0.804 = 357 Barrels/Day

    EUR = IP / D = 357 BPD / 0.2% = 0.1785M Barrels

    These numbers look lower than the average of the whole Bakken, or IP = 365 BPD and EUR = 0.1825M Barrels.

    What is CLR's profitability outlook under these numbers? From CLR's Q3 revenue and production volume, I calculated that the unit price they fetched on the oil and gas was about $65/BOE.

    So a CLR well's expected EUR=0.1785M BOE would fetch a revenue of $65*0.1785M = $11.60M per well. But as discussed above, the per well capital spending was $11.65M. So CLR barely breaks even for the well capital spending. But the capital spending is not the only cost. We have not calculated the production and maintenance costs, the G&A costs. Thus, at the current oil price, CLR is not making any real profit in developing Bakken shale wells.

    Discussions and Investment Implications?

    So then, how could CLR manage to report positive profits for the quarters? Let me explain how it works out for them.

    Just like other shale oil and gas producers, CLR does not record well drilling capital spending as cost directly. Instead, they first record it as investment activity. The the capital cost is recognized in each quarter as depletion and armortization costs.

    I discovered that as producers tend to over-estimate the EURs and over-estimate the life span of shale wells, they end up armortizing the cost way below the fair amount of armortization they should calculated. Thus, as they under-estimate the costs, they end up over-estimate the profitability of the operations.

    But one thing they could not hide is that in quarters after quarters, the producers have consistently spend several times higher on capital spending, than the revenue they take in. Producers continue to borrow more and more on debts in order to continue their well drilling programs.

    Is a business profitable, if it continues to borrow more debts quarter after quarter, and it continue to spend several times more on capital spending, than the revenue it takes in? This is neither profitable, nor sustainable. I can see that when the banks get suspicious and stop lending money, then the shale industry will collapse.

    As I stated many times. The shale gas and oil adventure is deeply un-profitable. The "cheap natural gas replacing coal" is a pipe dream. Investors should bet their money on the rebound of the coal sector, not on the false promise of shale gas or shale oil.

    Full disclosure: I have no vested interest in CLR but I may consider a short position in the near future. I have heavy long positions in coal stocks like James River Coal (JRCC), Alpha Natural Resources (NYSE:ANR), Arch Coal (NYSE:ACI) and Peabody Energy (NYSE:BTU).

    Disclosure: I am long JRCC, ANR, ACI, BTU.

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Comments (5)
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  • Gaucho
    , contributor
    Comments (895) | Send Message
     
    But not to worry. With the US government support they are now planning on selling all of our gas overseas. That way we will be out of fuel much sooner than other wise. It will also drive the prices up here so we can be less competitive. Great planning once again by the US government. Or should I say by the corporations that control the US government.
    10 Dec 2012, 08:48 AM Reply Like
  • Carl Martin
    , contributor
    Comments (968) | Send Message
     
    Mark,

     

    Why are you simply making this assumption?

     

    "Let's assume the combined decline rate of D=-0.2% also applied in Bakken."

     

    Because, if your assumption is wrong, then the direction of your whole article/blog is wrong.

     

    I believe that decline rates for shale gas are far steeper then for shale oil.

     

    But, do you happen to have any proof to offer to back up your assumption?

     

    Meanwhile, I will put some effort into finding some proof for my belief. But, I have noticed over at TOD, that most PO believers also assume that shale oil behaves exactly like shale gas. That's where I think you are going all wrong, but we'll see...
    11 Dec 2012, 03:24 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Carl Martin:

     

    The D=-0.2%/Day combined decline rate is a very reasonable assumption. The proof is right in my article and in the chart. My projection based on that value matches the actual production. Had I used a less steep (smaller) decline rate, the calculation will be much higher than the actual data. Likewise, had I used a higher IP value, the calculation will also come out to be higher than actual.

     

    You simply have to use IP = 365 BPD, and not any higher, and D = 0.2%/Day, and not any lower, to project the correct total Bakken production rate as reported.

     

    Now I do have actual proof that Bakken shale wells actuall DO decline that fast. Look at this on page 63:

     

    http://bit.ly/VAYoHb

     

    The CLR chart shows the cumulative production of Charlotte 2-22H well. They claim the IP was 1396 BPD and at the end of 9.8 months (295 days), it dropped to 167 BPD and accumulative production was 87 MBOE. Going from 1396 to 167 is a loss of 88%, and in only 295 days. That is an average decline of -0.72% per day. Much higher than the -0.2%/Day I used. Of course I am talking the combined decline of all wells, old and new. That's an annualized rate of -51.8% decline/year. I think that is reasonable.
    11 Dec 2012, 04:46 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » I forget to embed the link to the ND statistics of historic Bakken shale oil productions, which is indicated in the graph any way. The link is:

     

    http://1.usa.gov/VCJyQv

     

    The DMR of ND has a good collection of all sorts of data. I will continue to study and analysis data related to Bakken shale wells.
    12 Dec 2012, 04:06 PM Reply Like
  • Zoltan Ban
    , contributor
    Comments (473) | Send Message
     
    Here is another, much simpler calculation, which shows that there is a reasonable chance that the whole Eagle Ford field will ultimately prove to be unprofitable.
    http://bit.ly/V7dtqs
    21 Jan 2013, 10:59 AM Reply Like
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