The Red Queen: Long, In-Depth Article on the Bakken At The Oil Drum: Break-Even Point for Bakken Oil: $90

Updates

April 29, 2013: Rune Likvern, who wrote the first "Red Queen" article for The Oil Drum has a follow-up, asking: Is the typical NDIC Bakken tight oil well a sales pitch? Rune is still fascinated by the decline curve of Bakken wells. I think he misses the point: the important metrics are a) EURs, and, b) internal rates of return. I can guarantee that oil companies are not throwing $10 million into a well to hype a sales pitch. With regard to EURs, the important metrics to track: a) original oil in place; b) additional pay zones (four benches in the Three Forks); and, c) improving recovery rates. Would it matter if all the oil was drained from a well in one year if it provided 100% return on one's investment. I think not. In fact, it might be kind of nice: drill that well, make a 100% return, and then reclaim the land for farming after one year. The real question is this: is secondary and tertiary production feasible from the Bakken using current technology? It looks like the industry has 30 years to work on that problem.

October 9, 2012: Mike Filloon's response to the Red Queen fairy tale.

October 1, 2012: with adequate takeaway capacity, Triangle Petroleum says break-even point is $45.

September 26, 2012: It looks like the folks over at the Bakken Shale Discussion Group have found this article, also. Note: do not reference the MDW blog if you visit the BSDG -- you will be voted off the island. Smile.

Original Post

The Oil Drum has a very, very long article, highly analytical, highly statistical article regarding the Bakken.

The article has two themes:

• the horrendous decline rate of the Bakken is concerning
• the break-even point for Bakken oil is $90

The article begs an obvious question. I will be interested in seeing the comments. The article was just posted so there has only been one comment.

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If you find The Oil Drum article depressing, this should cheer you up.

Bonaparte's Retreat, Segawa Shinji, instrumental
Bonaparte's Retreat, Willie Nelson

Reply to a comment. 

I received a very nice comment/reply to this post and to one of my replies. I replied but the reply was too long for "blogger." Instead of deleting that long reply, I simply cut and pasted it here. I consider my "comments" less well thought out and less well written than stand-alone posts, but I didn't want to lose this. The reply has to do with the comment regarding the need to "increase the pace of well completion" if "we" want to hit the 1 million bopd threshold.

Here's the reply:

Thank you; agree 100%.

1. The million bopd seems to be a nice round number, but the Bakken is made up of many, many oil companies, and they will do for their company what is best; they individually won't be worrying about total basin production.

2. I've blogged about this before, but a major component of valuing an oil and gas company is how well that company manages its reserves. There is no reason to sell oil at a discount once you have your leases held by production. Perhaps it would be best to produce enough oil to meet certain "internal" targets, but to manage the reserves in such a way that one sells oil when the price is higher, if you follow what I'm saying.

3. In other words, if the price of oil comes down significantly, oil companies will want to hold back on selling their oil at a discount. Obviously they have to meet their contracts and that's why they hedge (collars, etc).

4. As I've said many, many times, the business of the business is what shareholders are interested in. For me, the Bakken has proven itself. I will continue to champion it, and post/link stories about anticipated production numbers, but asset (reserves) management for an individual company is more important than production per se.

Again, if you follow me. [I would rather have my company well 50 bbls at $200/bbl, than 100 bbls at $50. Sure, production from 50 bbls to 100 bbls is doubled, but had the company waited for a higher price....you get the drift. Production is only part of the story.

So, switching gears. Pad drilling will introduce another wrinkle.

During the exploration phase, one could predict on a monthly basis how many wells would report an IP once they came off the confidential list.

During the transition to pad drilling, predicting could be more difficult. Let's say there are six wells on a pad. In the old days, once they drilled a non-pad well to total depth, they moved the rig, completed the well as soon as possible, and reported the IP; meanwhile the rig was moving to a new location and drilling. But on a monthly basis, that one rig was drilling a well, and perhaps that well or another well was being completed.

With pad drilling, they will drill to total depth, BUT they won't complete/frack the well. They will drill the next well. And they won't complete/frack that well. They won't frack any of the six wells until all have been drilled to total depth. So, we could see a month go by, or even two months, or even three months go by when no wells are completed by that one rig. All of a sudden folks are going to start getting worried; what happened; why aren't they completing the wells? It's an operational, scheduled delay. They will frack all six when the last well is drilled.

Once all companies are in the manufacturing stage this artificial backlog will take care of itself, but we could see some choppiness for one to two years as all-Bakken pad drilling gets into place. What I see so far on the GIS map server, it will be a long time -- maybe five years, maybe longer, before we are into all-Bakken pad drilling. So, there are many, many variables.

Right now, the most interesting metric is the number of new permits each month. A record was set this most recent month (July, 2012) and I suspect we are going to see some more records. According to the Director's Cut, there were 266 new permits in July, 2012 (surpassing the old record of 245 set in 2010). My records show 261 new permits in August but I don't count SWD wells, so maybe a new record in August. For September (only 30 days) we are on track for 253 new permits; it won't be a record but it will beat the 2010 record.

Bottom line: expect some choppiness in well completion during the transition stage to pad drilling. Best metric to follow to predict the future with regard to well completion: new permits (now setting records).

Oh, one last thing: don't forget "wet" natural gas. The "wet" natural gas to oil ratio is increasing and "wet" natural gas is valuable; not as valuable as oil, but more valuable than most lay folks know. This is a long note, and there may be typographical errors. The Apple autochecks spelling and does some strange things.

So, that was the reply. Not ready for prime time, and needs to be re-done later as a stand-along post.