Sunday, March 31, 2013

Overlapping 2560-Acre Spacing Units In The Bakken; ULW -- March 31, 2013

November 10, 2013: Note: the information on this page may be inaccurate; it has not been updated, and I have not read it recently to see if there are any obvious changes/errors.

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From an earlier post: how to identify "overlapping 2560-acre spacing units on the NDIC GIS map server:
Elsewhere, a reader asked this question: how can one tell where the overlapping spacing units are by using the GIS map server?

This is the best I can do. Go to the GIS map server. Zoom in so that you are looking at these fields: Twin Valley in the far northwest; Antelope in the far east/northeast; Reunion Bay in the far east/southeast; and, Elidah in the far southwest. At the legend on the right side, put a check mark in the square box opposite "2560 Acre"; a dot in the circle opposite "2560 Acre"; and, a check in the square box opposite "1280 Acre."   You will see a portion of the GIS map server with lots of teal (greenish-blue) and a bit of purple. The teal is 1280-acre spacing; the purple is 2560-acre spacing.

The spacing units are lined with a white border (generally - almost always -- along section lines). The teal and the purple spacing units are "standard" spacing units. Now, lean back in your chair a bit, and look for "**1280** and/or **2560** on the GIS map server. Those represent "overlapping spacing units. The number (either a **1280** or a **2560** is placed at the "bottom" of the overlapping spacing unit.

So as an example: in Blue Buttes, 151N-95W, just along the south section line of sections 9 and 10, you will see **2560**. That means that sections 4,3, 9, and 10, is an overlapping spacing unit.

Disregard the numbers preceded by a "c" in this discussion. Numbers with a preceding "c" means that these spacing units are still being considered by an active case (hearing docket case).   
Updates

September 25, 2014: wells sited in 2560-acre spacing units in such a way as to capture "orphaned" oil along section lines or 640- or 1280-acre spacing unit lines are often designated ULW: unit line wells.

April 1, 2013:  An excellent, excellent explanation over at The Bakken Shale Discussion Group. A must-read. There is one nuance that I had not thought of. It is true that each well has its own spacing unit defined by the permit. However, a producing well in any particular spacing unit holds that lease/that entire spacing unit by production, if that makes sense. That raises another question which is too hard to articulate and it really beyond what this blog is all about anyway, so I will defer for now, hoping that it is answered elsewhere. I have to agree with Teegue, that if each well has its own spacing unit defined by the permit, then a permit should pertain to one well and only one well, and should not be used to effectively unitize a spacing unit, again, if that makes sense. It has taken awhile, but I finally understand what Teegue has been saying on this issue all these years, and I agree with him in principle from a mineral owner's point of view. Right, wrong, or indifferent, I can also see the operator's side of the story. But Teegue is correct: it seems a decision was made on how to develop the Bakken on the fly without really understanding all the nuances. This is entirely an opinion. Don't take it for more than that. Simply an opinion. 

Original Post

A reminder: wells coming off the confidential list this long weekend will be posted here as soon as they become available, assuming I have found a wi-fi spot by then.

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I had planned on waiting to write about overlapping 2560-acre spacing unit the Bakken when I had more time, but I see a lot of folks don't understand the reason behind these units.

Much will be written about overlapping 2560-acre spacing units, but for a quick explanation:
1. Vertical wells, the vertical segments of horizontal wells, and horizontal laterals are required to be "set back" from spacing unit lines (generally section lines in the North Dakota Bakken) by about 500 feet.

2. If all wells and horizontal laterals are "set back" from spacing lines / section lines, a lot of Bakken oil is being missed, left behind, "orphanes." (More on that later. That in itself is very, very interesting; something that MDW has blogged about several times, and something few other sites talk about.)

3. The purpose of overlapping 2560-acre spacing units is to allow an operator to site a well/a horizontal lateral in such a location to access the Bakken Pool along spacing unit lines/section lines that would otherwise be missed.

4. Imagine a horizontal lateral running parallel to a section line five hundred feet away on the east side. Now imagine another horizontal lateral running parallel to that same section line five hundred feet away on the west side. One can immediately see one-thousand feet of Bakken without a horizontal lateral. An operator who is approved an overlapping 2560-acre spacing unit, can now run a horizontal lateral right down the middle of that section line. If one looks at the GIS server map at the NDIC web site, one will see why overlapping 2560-acre spacing units are needed, rather than overlapping 1280-acre spacing units.
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This is from the March NDIC dockets:
  • 19796, Hess, amend Manitou-Bakken and Big Butte-Bakken; establish two overlapping 2560-acre units; 1 or more wells on each; Mountrail 
  • 19797, Hess, amend Truax-Bakken, establish 6 overlapping 2560-acre units; one or more wells; Willliams, McKenzie
  • 19798, Hess, amend Westberg-Bakken, establish an overlapping 2560-acre unit, one or more wells; McKenzie
  • 19799, Hess, amend Hawkeye-Bakken, establish an overlapping 2560-acre unit, one or more wells; McKenzie
  • 19800, Hess, amend Hawkeye-Bakken, establish two overlapping 2560-acre units, one or more wells; McKenzie
  • 19801, Hess, amend Blue Buttes-Bakken, establish an overlapping 2560-acre unit, one or more wells; McKenzie
  • 19802, Hess, amend Timber Creek-Bakken and South Tobacco Garden-Bakken to establish an overlapping 2560-acre unit, one or more wells; McKenzie
  • 19803, Hess, amend Cherry Creek-Bakken to establish two overlapping 2560-acre units; one or more wells; McKenzie
Apparently this was posted in Petroleum News Bakken, according to a contributor at another site:
Hess also submitted applications asking NDIC to establish overlapping 2,560-acre spacing units, and is seeking 16 such units in McKenzie, Mountrail and Williams counties. Hess wants to drill one or more horizontal wells between existing 1,280-acre units. The new overlapping 2,560-acre units are in the Manitou, Big Butte, Truax, Westberg, Hawkeye, Blue Buttes, Timber Creek, South Tobacco Garden and Cherry Creek-Bakken pools.
The specifics, i.e., which fields or where the overlapping 2560-acre spacing units will be, really do not matter: the bottom line is that we will be seeing overlapping 2560-acre spacing units throughout the Bakken for the purpose of capturing otherwise "orphaned" oil along spacing unit lines, generally section lines in Bakken spacing.

By the way, these overlapping 2560-acre spacing units are nothing new. They have been on the NDIC dockets since at least March, 2012, and the MDW has posted them all. Prior to overlapping 2560-acre spacing units, there were 1280-acre spacing units.

It's kind of surprising that Petroleum News thinks these are a big deal. It would be much more helpful to explain "theory" behind these overlapping units.

Astute readers will also notice something else occurring in the Bakken but I will leave that to a future post. Actually two things. One has to do with the location (the fields) where these overlapping units are; one has to do with Whiting and its Pronghorn prospect.

By the way, "overlapping 2560-acre spacing units" should not be confused with "2560-acre spacing units." Their purposes and locations are different.

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At this site (also linked above, I believe), a contributor says the overlapping 2560-acre spacing units are being sought by operators to increase the number of wells on a multi-well pad. If maximum length of horizontals remains at 10,000 feet (two sections), I don't see how overlapping 2560-acre spacing makes any difference for laydown or standup spacing units, vs 1280-acre spacing units (but I may be missing something. I need an example). I can maybe see a case where a 2x2 2560-acre spacing unit would be preferred in some cases to increase the density of wells on a single pad, but those cases seem few and far between. I can possibly see them along and under the river. But again, I may be missing something. 

2 comments:

  1. How does one's Working Interest relate to a larger and/or overlapping spacing units? For example, if I have a percent of working interest in a well that is based on a 1280 acre spacing, if another well is drilled in the same section(s) but the permit is based on larger acerage, say 1920 or 2560, does the WI just get diluted down? Is this also the same for an overlapping 2560 acre spacing unit?
    Thanks for any help,

    ReplyDelete
    Replies
    1. Each well stands on its own. Each well requires a permit, and each permit defines the spacing unit.

      WORKING INTERESTS

      Right now, regardless of the spacing unit, a long (about 9,000 feet) horizontal well in the Bakken is going to cost about $9 million (based on corporate presentations). If you have a 10% working interest, you will be responsible for 10% of the drilling and associated drilling costs, regardless of the spacing unit of the well. If the well is a $9 million well on a 1280-acre spacing unit, you will be responsible for 10% of drilling costs if you have a 10% interest (and, of course, the stated $9 million cost is an estimate). If the well is a $9 million well on a 2560-acre spacing unit, and you have a working interest of 10% you will still be responsible for 10% of the costs of drilling that well (and, of course, the stated $9 million cost is just an estimate).

      You monetary return will be based on your 10% working interest. At the present time, a long lateral Bakken well on 2560-acre spacing will produce the same as a long lateral Bakken well on 1280-acre spacing, all things being equal. Long lateral horizontals on 1280-acre spacing are generally about 9,000 feet long (horizontally); long lateral horizontals on 2560-acre spacing are also about 9,000 feet long (horizontally). [Not relevant to this discussion now, there are exceptions. We have recently seen some 14,000 foot-long super-long laterals in the Bakken. But again, they are the exception.]

      Your gain or loss due to working interest on a well will be the same whether it's spaced for 2560 acres or 1280 acres, all things being equal.

      That is not true for royalty interests.

      ROYALTY INTERESTS

      Royalty interests are different than working interests. Again, each well stands on its own. So, a well permitted to drill a 2560-acre spacing unit will not affect a well that is permitted to drill a 1280-acre spacing unit. The spacing unit simply defines which mineral owners participate in royalties from a given well. Again, each well has its own permit which defines its spacing unit.

      All things being equal, a person will receive twice the royalty income from a 1280-acre spaced well compared to a 2560-acre spaced well. If one owns 10 mineral acres in a 1280-acre spaced unit, one will receive royalties based on a 10/1280 fraction; that same person with 10 mineral acres in a 2560-acre spaced unit will receive royalties based on a 10/2560 fraction.

      DISCLAIMER

      This is my opinion. I have no formal training in the oil industry. I feel comfortable with my explanation but it may be misunderstood. In addition, there are many nuances to the question asked and the opinion/answer provided. It is opinion only; do not use it to make investment decisions. Working interests are much more speculative (if that's the right word) and one needs to be prepared to risk a large amount of money. At least by my standards.

      Delete