Boxed In At The Bakken: Oil Production, Rigs Fall Down On The Job

The Bakken Shale is given to tempests and tantrums, but the growing silent treatment is getting harder to deal with.

Along with deathly cold and rough terrain, operators in the Bakken region must cope with producing oil that gets $0.93 on the dollar compared to West Texas Intermediate (WTI) prices in Cushing, Okla.

In North Dakota, the rig count has quieted to 64, down from a peak of 218 three years ago. The number of drilling permits issued in September was 154, down from July’s total of 233, the North Dakota Industrial Commission (NDIC) said in October.

And operators are tiptoeing around their drilled but uncompleted (DUC) wells. At the end of August there were an estimated 993 wells waiting on completion services. The state’s inventory of DUCs has grown by 145 in two months.

The state has aggressively responded to assist E&Ps while also serving property owners and maintaining state revenue. In part, the state has clarified that E&Ps can defer well completions for up to two years and has delayed implementation of gas capture regulations meant to stem flaring.

Lynn Helms, director of the NDIC's Department of Mineral Resources, said in an Oct. 13 webinar that he “expects a slow decline in production” going forward.

So far, that’s held true. After peaking at 1.15 million barrels of oil per day (MMbbl/d) in June, the Bakken has backslid by 22 Mbbl/d through August.

Helms said he expects 1.1 MMbbl/d in production by year-end, though a fall in prices could undercut production even more.

“If we see any degradation in prices, we could get close to 1 million barrels a day,” he said.

The Williston Basin’s continuing descent to the bottom of the rig count has left just a third of the 192 rigs operating in late October 2014 still standing, according to Baker Hughes Inc. (NYSE: BHI).

Helms said the state’s most active and productive counties have seen massive reductions in rigs:

• Divide: -85%;
• Dunn: -68%;
• McKenzie: -63%;
• Mountrail: -79%; and
• Williams: -79%.

Dead Zone

The Bakken is showing evidence of oil supply declines, said Roger D. Read, senior analyst with Wells Fargo Securities, in an Oct. 26 report.

The exhaustion of the existing production base and a slowdown in the pace of new completions has led to well declines. The dip in volumes comes despite significant recovery improvements for some companies and a shift to drilling in the core of the core, Read said.

“Depletion still matters in the oil field,” he said.

To be sure, the Bakken has plenty of life left in it.

A 2013 assessment by the U.S. Geological Survey (USGS) found that the Bakken and Three Forks in North Dakota, South Dakota and Montana contain an estimated mean of 7.4 Bbbl of undiscovered, technically recoverable oil.

Nevertheless, production per well has slipped in 2015. After holding fairly constant from January 2013 to December 2014, it has since begun a modest but consistent decline, Read said.

With the significant year-over-year drop in the rig count, well completions have slowed in the second half of 2015 and into the first half of 2016, Read said. North Dakota has an inventory of “well over 1,000” DUCs, Helms said.

“Based on both declines in well completions and production per well, we are comfortable stating that Bakken production is headed down for many months to come,” he said.

Bowed In The Bakken

The downturn has created an unsteady platoon of Bakken E&Ps that are variously idling assets, digging in for the long haul or seeing production in the third quarter of 2015 but bracing for declining volumes.

The state’s top 10 companies have reduced operations and will maintain production at prices of $50 per barrel of WTI, Helms said.

Large operators such as Occidental Petroleum Corp. (OXY) are leaving the Williston Basin. Others are throttling back production or abandoning their development programs for now.

One operator told Helms that, if possible, “they’re going to run zero frack crews,” he said.

For Occidental, its Bakken holdings have morphed into noncore assets, leading the company to sell off its assets for $600 million in the third quarter of 2015.

Occidental’s Williston Basin average production fell by 4Mboe/d to 17 Mboe/d compared to the third quarter of 2014.

Stephen I. Chazen, president and CEO, said the company had made a strategic decision to exit the Williston Basin, along with cutting back in the Middle East and North Africa.

“The actions we have taken to exit noncore assets, improve drilling efficiencies and lower well and unit operating costs provide greater focus in both our U.S. and international oil and gas operations and will strengthen the financial results of the overall enterprise,” Chazen said.

Newfield Exploration Co. (NFX) has also shifted from the Bakken, as well as the Eagle Ford, for now.

Newfield has shut down its Bakken program, said Mike Kelly, senior analyst with Seaport Global. The company is focused on its Anadarko Basin holdings, despite Williston well costs falling by 8% to $5.5 million in second-quarter 2015 from $6 million in the first quarter.

Due to falling commodity prices, Newfield is expected to write down $1.3 billion in value in the third quarter of 2015, about 20% of its market value, said Thomas R. Driscoll, analyst at Barclays, in an Oct. 21 report. The company could write down another $1.4 billion in the fourth quarter, he added.

Other operators are in a holding pattern.

Hess Corp. (HES) sailed through the third quarter of 2015, but still looked to lose ground in production through the fourth quarter.

The company said Oct. 28 that net Bakken production increased by about 31% to 113 Mboe/d from the prior-year quarter due to continued drilling activities.

Hess brought 48 gross operated wells online in the quarter, for a year-to-date total of 185 wells. Drilling and completion costs for operated wells averaged $5.3 million, down 26% from the third-quarter 2014.

Nevertheless, Hess forecast that Bakken production would fall to 100-105Mboe/d in the fourth quarter.

“Looking at the Bakken specifically, the plan is to operate only four rigs in 2016, compared to an average of 8.5 rigs this year,” said Pavel Molchanov, analyst with Raymond James & Associates.

Similarly, SM Energy Co. (SM) said Oct. 27 that it operated two rigs in the Bakken during the third quarter of 2015. The company is also currently deferring most completions in both its Eagle Ford and Bakken/Three Forks programs. It plans to increase completion activity around year-end.

SM’s Bakken/Three Forks production averaged 22.2Mboe/d, 85% oil. While volumes were down about 7% from the second quarter of 2015, the company is actively drilling without completing wells.

SM said its net inventory of DUCs was 39 wells.

As with other operators, SM’s enhanced completions have increased recoveries per well by 20-30% as the company uses plug-and-perf/cemented liner completions. The company said completions savings were largely due to efficiency gains (60%) and market conditions (40%).

“Two additional Bakken wells were recently completed further south in Divide County and results should soon be forthcoming,” Kelly said in an Oct. 28 report.

The company will also increase its capex in Divide County, N.D., in late 2015.

Whiting Petroleum Corp. (WLL) produced about 136 Mboe/d in the Williston Basin and had about 7,400 future drilling locations as of June 30.

Enhanced completions in the basin have delivered production increases of up to 50% with associated well costs of just 15%, the company said.

Whiting’s 2015 estimated production will grow 42% companywide. However, Wells Fargo Securities projects company production will shrink in the third quarter by 6% and in the fourth quarter by another 3%.

Pitching In

State and congressional leaders continue to help make North Dakota a viable place to do business while balancing the state’s need for revenue and the interests of mineral owners.

In October, the NDIC agreed to modify its gas capture requirements, which require 77% of natural gas to be captured in 2015. As of October, operators have been able to capture about 80% of gas.

From 2012-14, about one-third of the natural gas in North Dakota has been flared into the atmosphere rather than sold to customers or consumed on-site, the U.S. Energy Information Administration said.

Those goals have been eased back, said Alison Ritter, spokeswoman for the NDIC.

Ritter told Hart on Oct. 28 that the goals were just that—possible targets. The commission “never said this was set in stone,” she said.

The reduction in gas capture is a response to several factors, including additional natural gas being produced as operators’ core areas. Drilling is producing 16% more gas than anticipated, she said.

Two major pipeline projects that would have captured an additional 6% of gas have also been held up due to federal approvals. A gas processing plant has also been delayed.

In addition, the commission approved a credits policy for companies that have gone above and beyond gas capture targets. Operators will be able to use credits to compensate for flaring if they have extenuating circumstances, such as a compressor malfunction.

“It saves them from having to curtail production,” she said.

With a growing backlog of DUCs, the commission also recently clarified that operators can technically abandon (TA) wells, giving them an additional year to complete wells.

“Most companies know they’re at end of their rope and they’re going to go ahead and TA that well,” she said. “Keep in mind, nothing changed. This is how the statute read. The commission just reaffirmed their policy.”

Ritter said the state has so far taken actions to preserve the balance between protecting state revenue, industry needs and the rights of mineral owners. For instance, the law gives mineral right owners the right to object to wells that are given a TA status.

“If they want their well production and revenue check they have a right to object to this,” she said.

Congressional leaders are also looking toward the future of the Bakken and Three Forks.

On Oct. 21, U.S. Sen. John Hoeven, R-N.D., said he asked Suzette M. Kimball, the nominee for USGS director, to update the agency’s study of recoverable reserves in the Williston Basin.

“USGS released its last estimate for the Bakken and Three Forks in 2013,” Hoeven said. “That assessment more than doubled the previous estimate and has been tremendously helpful in attracting infrastructure investment along with energy development.”

Previously, at Hoeven’s request, USGS released its 2013 study of recoverable oil reserves for the Bakken and Three Forks.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.