MIke Filloon's Update On The Bakken: Halcon -- April 4, 2016

I will proofread this later; this has not been proofread. There will be typographical and factual errors. The original article is linked farther down.

Mike Filloon has provided another incredible update of the Bakken (see below the break down below).

These are some of the thoughts I had while reading through his very, very long analysis.

1. The improvement in Bakken well production is quite incredible. But this makes the data even more incredible: Mike's data does not provide data for current improvements because the newest well logged is two years old.

2. When the North Dakota Bakken was first being drilled in 2007 (the Montana Bakken mini-boom began seven years earlier, in 2000), folks talked about primary recovery in the 1 - 3% of the original oil in place (OOIP). It didn't take long to suggest the primary recovery rate would be 5 - 8%; and since then the primary recovery rate is predicted to be significantly higher. Regardless of forecasts, we have a very credible source telling us that based on data two years old, the current primary recovery rate in the Bakken is 5%.

3. Mike Filloon reiterates what I've said since the beginning: the NDIC makes the oil and gas industry in North Dakota, compared to other states, about as transparent as can be reasonably expected.

4. Natural fracking may explain the "halo effect" often seen in fracking.

5. Refracks are becoming a factor in current US production; I've not seen many examples yet in the Bakken but they are hard to find, easy to miss. But wow! Every well drilled before 2014 can probably be considered for a re-frack, or completely re-drilling (EOG once said it was more economical to simply re-drill, starting from scratch, than re-frack through an existing well. Filloon mentions this without attributing the comments to EOG.

6. Trying to establish accurate initial production over the first 120 days is almost impossible under the  current situation. Mike Filloon mentions that when he talks about the challenge of modeling these wells.

7. "Improvements in decline rates have been substantial." Mike finds a group of Three Forks wells that remarkably do not show the typical Bakken decline. "The interesting aspect of [these wells] is the steadiness and lack of decline. Locations continued to be added so when old wells decreased production, this was filled in with new producers.

8. Again, some of the wells that Filloon uses to demonstrate a point were drilled back in 2011 and 2012; the most recent in this particular group of wells were drilled in November, 2013; and, July, 2014. Efficiencies continued to improved in 2015 and 2016.

9. Well design has changed significantly since 2011 (numbers rounded below; linked article has exact numbers)

Well	18905	18446	21653	25399	26797
Date (mon/yr)	3/11	9/12	9/12	11/13	8/14
Lateral (feet)	9,447	8,915	8,878	9,663	9,638
Fluids (bbls, in 1,000s)	47	81	71	55	110
Proppant (million lbs)	1.08	2.6	2.5	5.0	4.8
Stages	25	25	24	31	32
Max Treat Pressure (PSI, 1,000s)	9.9	9.0	9.0	9.6	10.0
Max Treat Rate (bbls/min)	32.0	37.0	38.0	46.8	71.0

10."Halcon has tightened stages and while increasing proppant and fluids. The last well is a slickwater design, which has proved very productive for multiple operators in the area.

11. "Halcon estimates Middle Bakken crude oil production has improved by 125K bbls in 780 days. Cost reductions have brought its AFE to $6.8 million. In 4Q14, it was $11 million."

12. In general, the Three Forks underperforms the middle Bakken by 10% to 20%. "This is a little strange because it is deeper. Increased depth usually means increased well pressures. The middle Bakken continues to outperform in most areas.

13. Filloon noted that one well had a large production jump over its peers completed earlier. This was seen in a large number of wells during this time frame as operators started tightening stages and using more proppant. "This was was a 31 stage frack and used almost 5 million pounds of proppant.' Compare that with current frack designs by other operators.

12. Filloon talks about "sharing of resource" where wells are drilled closer together.

13. Part of his conclusion from these wells:

Tighter stages and increased volumes of proppant and fluids have provided more production per foot. This continues as we once thought only 1% to 2% of crude was recoverable. Current estimates are closer to 5%, but some believe that number could climb much higher. Halcon's current acreage provides insight into production increases. Over the first 5 months, newer wells outpace by 40% to 50% with respect to total production of crude. In approximately 2 years that percentage decreases to closer to 20%. Although some may believe this is not positive, the oil companies may have a differing opinion. These operators are motivated to increase revenues up front and minimize payback times.

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The Article
Over at SeekingAlpha:

Summary:

• well design improvements continue to increase production
• well results in Halcon's Antelope and Four Bears fields show an initial improvement of +40% and 18% crude increase at two years
• general data does not adequately show production improvements per well as it does not account for well shut ins and lateral feet
• current estimates have shale recoverable resource at approximately 5% but this number could increase significantly in the coming years.
• this data does not provide for current improvements as the newest well logged is two years old

The article begins:

There is a reoccurring theme in US unconventional oil. Arguments refer to better well production. This debate is heated, as investors accuse operators of fraud and others support new increased EUR claims. Improved production has affected world supply/demand. This has added to the current glut and put OPEC to task as it tries to crush its new competition. Levered ETFs and ETNs are never a good way to invest in the market long term. This is especially true for commodities. One could lose a significant sum in a very short period of time. These are never recommended for those without significant experience in trading oil markets. Not only is the average investor included in this debate, but big names on Wall Street are also included in the disagreement on improving well design. Most in the oil industry believe this trend of better results will continue, but there are dissenters.

In states like North Dakota, data is fairly transparent for those interested in going through the NDIC site. Many states are not as good. Texas is a good example as it combines several locations in production data which makes it difficult to see the resource garnered per well. There are several important variables to unconventional well production. The first is caused by the induced fracs. This is the frac'ing process at work, and are the fractures created by the completions crew. When the shale is frac'ed, oil and gas production begins. This production can increase if the induced or created fracs, communicate with natural fracturing within the formation. So basically, the fractures created by the operator come into contact with natural cracks or opening in the rock. Natural fracturing is interesting, as these can connect the wellbore to a very large area. It can also connect the new well to old ones. This resource is shared. The induced fractures produce the bulk of resource in new wells and generally a higher decline rate. The decline rate is how quickly production decreases in well life. After a period of years, which differs greatly from one play to the next, this decline rate stabilizes. Matrix production begins and decline rates decrease to 4% to 8%. This slow decline rate continues for decades. This occurs until the well is shut in.

Refrac's are becoming a factor in current US production. This means that an operator can redo or recomplete the well. New frac's are created to initiate new production. Since the well is already drilled, costs are lower. Through seismic, an operator can look at the formation around the well and see what areas were not fractured initially and create frac's in those areas. If a well was not done properly, it can focus efforts on those areas to start induced fracture production and increase the total volumes of resource. Since matrix production is very low in comparison, and operator is motivated to re-frac. Re-frac's are generally not as productive as doing a new well. Some operators believe this while others do not. This is why we don't see it done to a greater extent. We may see it more in the future, but for now new wells generally outperform. The key is bringing as much of the source rock (shale, etc.) into contact with the well bore. Wells currently obtain only a small percentage of oil from source rock. This percentage continues to increase as operators get more comfortable with the geology. The issue is cracking the rock as thoroughly as possible. As completions crews do a better job, increased volumes of fluids and proppant are used per foot. Bigger wells and bigger resource are what we are seeing.

This continues and given the small percentages of resource pulled today, there is still a significant way to go. The only obstacles are cost and oil price. As time goes by and oil prices recover, we would guess things will get interesting.