Top 10 Things I Learned On My Summer Trip To The Bakken Oil Fields, Part II

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Mark J. Perry

Here's Part II of the "Top 10 things I learned on my summer trip to the Bakken oil fields," see Part I here. I concluded the first post by saying that one of the things that impressed me the most about visiting the Bakken oil fields is the amazing technical sophistication involved in drilling for shale resources in reservoirs miles below the Earth's surface, and then drilling out laterally (horizontally) for several more miles to extract oil from saturated shale rock formations that have been there for millions of years but were previously inaccessible using traditional drilling and extraction technologies. So let me continue that topic in this post with further discussion of the "marvels of engineering" that have revolutionized America's energy production.

6. Advanced Technologies. The combination of hydraulic fracturing and horizontal drilling are truly revolutionary drilling and extraction technologies, and when you visit a drilling site you start to realize how advanced those technologies really are and you develop an appreciation for the high-tech nature of drilling for shale oil and gas. Perhaps this is a little bit of an exaggeration, but imagine the computer technology involved in a NASA space mission (see photo above) and that gives you an idea of the drilling and extraction technologies used in the Bakken oil fields.

Remember the mission of drilling for shale oil: You're going to drill down vertically for about two miles below the earth's surface in the shale resources of the Bakken or Three Fork formations, and then you're going to start drilling laterally for up to three miles in a roughly horizontal direction, guided by sophisticated computer equipment that "geo-steers" the direction of the lateral drilling to stay in the optimal areas of the shale reservoir! Each drilling site has one or more professional, certified geologists, along with petroleum engineers, who help supervise the directional drilling, based on 3-D seismic imaging of the subterranean structure that helps identify and target the fluids-rich shale reservoirs.

In the same way that computer technologies have revolutionized industries like ride-sharing transportation, special effects in movies, surgery and medical procedures, motor vehicles, architecture and engineering, medical and diagnostic procedures, smartphones, computers and devices, advanced manufacturing, 3-D printing, etc., advanced computer technologies have revolutionized oil and gas extraction, which is one of 50 industries identified by the Brookings Institution that constitute America's Advanced Industries Sector. As I mentioned in Part I of this series, the general public is probably unaware of the fact that the oil and gas business is a very, very high-tech industry that uses cutting-edge, advanced engineering, geological and drilling technologies that continually advance and improve. The technological innovation that unlocked the nation's oceans of shale resources hasn't stopped but instead has actually intensified in the Bakken, Permian Basin, Eagle Ford and Marcellus regions. New ideas, technologies and ways of cracking the shale code emerge daily, and the oil and gas industry is now entering a new wave of innovation and advances that is being called Shale 2.0.

In contrast to the advanced technologies involved in hydraulic fracturing and horizontal drilling, the technologies involved to produce renewable energies like wind and solar power are relatively low-tech and primitive - centuries-old technology in the case of windmills. For those of us who appreciate the advanced high-tech, cutting edge technologies of our smartphones, GPS systems, laptop computers and other devices, and understand how those technologies improve our lives, we should also appreciate the advanced technologies that extract oil and gas from shale rock formations miles underground, with an appreciation of how those "marvels of petroleum engineering" also improve our lives significantly.

7. One Example of Advanced Drilling Technologies - the New "Walkable Drilling Rigs." One of the most impressive "marvels of engineering" that you'll ever see are the 150 foot (about as high as a 15-story building), 500 ton (1 million pounds) "walkable" drilling rigs that are becoming a common sight throughout the Bakken (and other oil fields in Texas, Oklahoma, and Colorado). The photo above shows two drilling platforms at a Continental Resources drilling pad in the Bakken near Williston called the "Burr Pad." The one in the foreground is a newer "walkable" rig (discussed below) and the one in the background is a traditional rig platform. Drilling technologies have advanced so significantly that the time to drill and frack a well has come down from an average of 32 days in 2008 to now only about half that time: 14-16 days from start to finish and in some cases even less, resulting in significant cost savings. These drilling platforms now cost as much as $20 million each, especially for the advanced rigs that can "walk" to a new drilling location on the same drilling pad, or even "walk" to another pad a mile away, which is one of the huge, recent breakthroughs in drilling technology. Here's a description of that amazing "marvel of engineering" from the Energy Information Administration:

Moving a drilling rig between two well sites previously involved disassembling the rig and reassembling it at the new location ("rigging down" and "rigging up") even if the new drilling location was only a few yards away. Today, a drilling pad may have five to ten wells, which are horizontally drilled in different directions, spaced fairly close together at the surface. Once one well is drilled, the fully constructed rig can be lifted and moved a few yards over to the next well location using hydraulic walking or skidding systems, as demonstrated in the time-lapse video below.

rigeia

One of the industry's more recent innovations, pad-to-pad moves, underscores the efficiency gains from rig mobility and pad drilling. During the drilling operation in the photo above, rig operator Nabors Industries transported a fully-assembled drilling rig about one mile between drill sites. The cost of rigging down and rigging back up can be high enough that producers may find it more efficient to build a road between two pads, transport the rig intact, and have it arrive ready to drill the next well.

The new walkable drilling rigs are really an amazing technology and you can see in the video below that the drilling platform has hydraulic equipment built into the rig that allows the entire 1 million pound, 150 foot high platform to be lifted up off the ground about 12 inches and it then moves itself three feet at a time to the new location. Walkable drilling rigs not only increase operational drilling efficiency and save money for oil and gas companies, they also significantly improve oil worker safety because the rig moving process is largely automated with fewer steps and less human interaction than the traditional process of "rigging down" and "rigging up" the older model rigs.

8. Economic Impact of a Shale Oil Well. Despite all of the news about a slowdown in drilling activity in the Bakken, the number of active producing oil wells in North Dakota increased to a record high of 12,124 in the month of April (most recent month) and more than 9,500 of those active wells are in the Bakken. What are the production statistics and what is the economic impact of a typical individual oil well in the Bakken? Here are some details via the North Dakota Department of Mineral Resources:

Average cost to drill, frack and complete a Bakken oil well: $9 million

Expected production life of a Bakken oil well: 45 years

Lifetime oil production per well: 615,000 barrels

Expected lifetime revenue generated per well: $46.125 million at $75 per barrel

Total operating expenses per well: $2.3 million

Royalty payments to mineral owners per well over 45 years: $7.3 million

Taxes Paid per well: $4.325 million total ($2.1 million gross production taxes, $1.8 million extraction tax and $425,000 in sales taxes)

Total employee salaries and wages per well: $2.125 million

Average Profits Generated per Bakken well: $20 million net of costs and taxes

Current average daily production per Bakken well: 130 barrels ($7,800 per day at $60 per barrel)

Cumulative Oil Production in the Bakken Since 1954: 1.365 billion barrels through April 2015

Time to Produce the First Half of That Production (682 million barrels): Almost 60 years

Time to Produce the Second Half of that Production (682 million barrels): Less than 2 Years

The overall positive economic effects of fracking Bakken shale oil on the Peace Garden State are truly remarkable. In a recent post on CD, I documented how North Dakota has gone from one of America's poorest states a decade ago to the country's second-most prosperous state last year, measured by per-capita GDP (see chart below).

ND

9. Flights to the Bakken. There are so many people travelling to and from the Bakken oil fields that Delta Airlines now offers four daily nonstop flights between Minneapolis-St. Paul and Williston, ND in each direction. Likewise, United Airlines offers four daily nonstop flights between Williston and Denver in each direction, and one daily nonstop flight between Williston and Houston in each direction! It's pretty amazing that a major carrier like Delta offers four nonstop flights to and from Williston, a small town in western North Dakota with a population of only about 21,000, when Delta only offers three daily nonstop flights each way from Minneapolis-St. Paul to a major metro area like Washington, DC (population of 6 million) and four nonstop flights from Minneapolis-St. Paul to Boston (population of 4.5 million)!

10. Bakken Mancamps. There's somewhat of a misconception that the oil field workers in the Bakken "work hard during the day" and then "play hard on their time off," with a lot of evening and weekend boozing, partying and general debauchery. That's pretty far from the reality for most oil field workers and truck drivers in the Bakken, who are often working 12 hour days, 7 days a week, and who live in one of the area's mancamps and who have very little time for partying, and hijinks. And contrary to the general perception some might have, the mancamps in the Williston are very clean, offer high-quality housing for oil workers, and have very strict rules - there are generally zero-tolerance policies for drugs, alcohol, firearms, pets, guests and cohabitation.

One of the biggest mancamp operators in the Bakken is Target Logistics, which has ten facilities in the Bakken area of North Dakota, as well as facilities in Texas in the Permian Basin and Eagle Ford oil fields, and some international locations in Canada and Mexico, with more than 4,000 total beds in those locations. According to the Target Logistics website, here are some of the features they offer at the Bakken-area mancamps:

Four-star food providing high nutrition and 4,000 calories per day, available 24/7.

Comfortable private rooms with individual temperature controls, flat-screen TV/DVD players, oversized towels and The Hibernator Sleep System with a pillow-top mattress, high thread count sheets and overstuffed pillows.

State-of-the-art recreation and fitness centers and visiting personal trainers.

An Internet café.

Convenience store with free DVD rentals for use in the rooms.

Conference rooms for group safety and organizational meetings.

Lodges are located close to worksites, helping to reduce drive time.

Optional bus transportation to the well site.

A positive all-inclusive environment designed to prepare workforces for peak performance the next day.

The all-inclusive room rate (including unlimited food) is listed at about $110 per night, although in many cases, the companies operating in the Bakken make arrangements directly with Target Logistics on behalf of their workforce, negotiate discounts, and provide housing as part of a worker's total compensation package. And as I documented in Part I of this series, rents and home prices have come down significantly over the last year in the Bakken giving oil field workers a lot more choices these days at much more affordable prices.

For example, here's a listing on Craigslist for 3 bedroom, 2 bath modular-type homes in Williston that rent for $2,300 per month (furnished for an additional $195 per month) and sell for only $59,900 - that seems pretty affordable for a Bakken oil worker or truck driver who is making $100,000 per year or more. The frequently reported narrative of high wages in the Bakken being more than offset by high, rising and unaffordable housing costs seems to be changing rapidly in the favor of workers and renters in the Bakken. The spike in Bakken housing costs several years ago was understandable given the huge increase in housing demand interacting with a limited supply of houses, apartments and mancamps in the short-run. But now that the construction and supply of new housing and apartment units have skyrocketed in recent years, the affordability of housing in Williston has improved dramatically.

Watch the video above to get an idea of the quality of life in a Bakken-area mancamp, and you might be surprised. From various media reports, most people have probably developed lots of inaccurate and distorted stereotypes about life in a Bakken mancamp, and think it's a sub-standard housing option with a low quality of life, punctuated by a lack of rules that lead to wild parties and weekend debauchery. The reality of life in a Bakken mancamp is much different, with a very regimented, rules-based environment, but with lots of amenities and unlimited access to high-quality food 24 hours a day, and generally a very high quality of life for the oil field workers in the Bakken.

Conclusion: To end this two-part series of my trip to the Bakken oil fields in May to experience America's shale revolution firsthand, let me end with a couple of related quotes. The first one is from Gregory Zuckerman's book The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters:

A group of frackers, relying on markets cures rather than government direction, achieved dramatic advances by focusing on fossil fuels of all things. It's a stark reminder that breakthroughs in the business world usually are achieved through incremental advances, often in the face of deep skepticism, rather than government-inspired eureka moments.

George Mitchell's team spent 17 frustrating years trying to get meaningful amounts of gas from shale and Harold Hamm's men failed to pump much oil out of the Bakken until 20007. Their achievements are a reminder of the role of perseverance and obstinance in history's advances.

Foreign nations lack perhaps the key element behind the US energy revolution: an entrepreneurial culture and ample incentives for the years of trial and error necessary for shale breakthroughs. George Mitchell, Harold Hamm and other headstrong wildcatters persevered because they knew they could gain both fame and remarkable fortune finding economic ways to tap shale. Comparable prizes don't always exist in other countries, where governments play a larger role in society.

For all of the criticism this country has fielded for supposedly losing its edge in innovation, surging American energy production is a reminder of the deep pools of ingenuity, risk taking, and entrepreneurship that remain in the country. While some argue that Western civilization has entered a period of decline [and stagnation], many smaller American towns [like Williston] are experiencing a rebirth, with some young people in the energy business enjoying six-figure salaries, suggesting an underlying resilience in a country still recovering from the deep economic downturn.

The successes of the architects of the shale era are attributable to creativity, bravado, and a strong desire to get really wealthy. It doesn't get more American than that. The huge rewards promised in the market-driven American economy…. provide incentive for remarkable achievement.

And here's Bret Stephens writing in the WSJ in January "The Marvel of American Resilience," and quoting Gregory Zuckerman:

Imagine an economic historian in the year 2050 talking to her students about the most consequential innovations of the early 21st century - the Model Ts and Wright flyers and Penicillins of our time. What would make her list? Why, she also might ask her students, did the U.S. dominate its peers when it came to all the really big innovations?

Surely fracking - shorthand for the combination of horizontal drilling and hydraulic fracturing that is making the U.S. the world's leading oil and gas producer - would be noted and would make a good case study. The revolution happened in the U.S. not because of any great advantage in geology - China, Argentina and Algeria each has larger recoverable shale gas reserves. It didn't happen because America's big energy companies are uniquely skilled or smart or deep-pocketed: Take a look at Exxon Mobil's 2004 Annual Report and you'll barely find a mention of "fracturing" or "horizontal" drilling.

Nor, finally, did it happen because enlightened mandarins in the federal bureaucracy and national labs were peering around the corners of the future. For the most part, they were obsessing about the possibilities of cellulosic ethanol and other technological nonstarters.

Instead, fracking happened in the U.S. because Americans, almost uniquely in the world, have property rights to the minerals under their yards. And because the federal government wasn't really paying attention. And because federalism allows states to do their own thing. And because against-the-grain entrepreneurs like George Mitchell and Harold Hamm couldn't be made to bow to the consensus of experts. And because our deep capital markets were willing to bet against those experts.

"When I talk to foreigners, they're even more impressed than many Americans by this renaissance," says my Journal colleague Gregory Zuckerman, author of "The Frackers." "They understand that it only could have happened in America."

My trip to the Bakken confirmed Zuckerman's and Stephens's comments about the fracking revolution, and I was left with the impression that there's probably no place in America right now that better represents the "deep pools of ingenuity, risk taking and 'petropreneurship'" that Zuckerman describes and "the marvel of American resilience" that Stephens mentions, than Williston, ND in the heart of the Williston Basin. If you're looking for a place in America where the American dream is alive and well, where you'll find evidence of the marvels of "Made in the USA" technologies, and where the spirit of American "petropreneurship" has transformed an industry and turned the USA into an energy superpower, you'll find all of that in Williston, North Dakota - ground zero for the US energy revolution and for the American spirit.