Coffee Table Talk, September 2010

For newbies to the Bakken, "snapshot" comments of the Bakken, September, 2010:

Companies are racing to raise more cash to expedite their drilling programs. Continental Resources (CLR), Brigham Oil (BEXP), and Whiting (WLL) have each announced plans to raise $400 million cash by selling senior notes."

Value of Bakken acreage keeps increasing. Enerplus (ERF) announced yesterday (September 21, 2010) an agreement to buy 46,500 acres in the Fort Berthold Indian Reservation area at an average cost of almost $10,000/acre.

Super-fracking. Drillers are routinely using 30 fracture stages to stimulate a completed well, and there are now reports that some wells have been fractured with 40 stages, which some refer to as "super-fracking." Some opine that we will see 60-stage fracturing before it's all over.

Chokepoint. Slowing down the completion of wells is the fracking schedule. There are simply not enough crews to frack all the wells as they are completed. Some companies have their own dedicated fracking crews. EOG does not frack between November and March.

Water. Fracking requires lots of water. Millions of gallons. There are occasional stories in the local media questioning whether there is enough water. In fact, less than one percent of the Missouri River would supply all the water that is required. And a river flows; it's not a static pool.

Spacing in North Dakota used to be (rule of thumb) 640 acres, or one section. Spacing is now routinely 1280 acres (two sections).

Sophisticated rigs. The rigs are getting more and more sophisticated every year. Two super-sophisticated rigs are now on their way to North Dakota.  Experienced roughnecks are being flown in from Louisiana on a routine basis: two weeks in North Dakota, two weeks back in Louisiana for rest and relaxation. 

Multiple wells in one section. A year ago, we seldom saw more than one well in a section; now Whiting (WLL) is putting up to four or five wells in one section, targeting two formations, the middle Bakken formation and the Three Forks (Sanish) formation. And EOG! EOG will start putting three wells in each Parshall oil field section. That alone is a huge story.

Multi-well pads. At least three companies (Hess, EOG and CLR) are permitting multi-well pads, on which they place two, three, four or six wells. Slawson has a lot of 2-well pads.[We also need to add Samson -- Samson Resources, a privately held company (not SSN) -- to the list. Samson has been granted four (4) multi-well pads this calendar year -- 2010 -- with two wells on each pad.]

24-hour flowback reporting. Some companies have replaced reporting initial production (IP) numbers with 24-hour flowback numbers. All things being equal, the latter methodology results in significantly greater numbers than IPs determined by averaging production over 7 or 30 days.

Long laterals. Most horizontal wells in the Bakken are now 9,000 feet long (two sections, "long laterals"). Occasionally one will still see a 4,500-foot-long "short" lateral. There is talk of "super-long" laterals (three sections, which I personally doubt will happen). In Williston, Subway Restaurants refer to their sandwiches as "long laterals" (foot-long) and "short laterals" (six-inch). Locals prefer white bread; out-of-towners, 9-grain or hearty Italian.

Mergers and buyouts. XOM bought XTO, a player in the Bakken. Hess recently bought American Oil (AEZ). Denbury (DNR) bought Encore (ENC). Some of the deals are completed; some are still in process.

Formations in "the Bakken." Although not universally accepted, many oilmen feel the Bakken formation is a separate formation from the Three Forks (Sanish). Most of the wells are still targeting the middle Bakken but we are seeing more and more TFS wells. In some areas, another formation, the Birdbear, is amenable to horizontal drilling and may contain as much oil as the middle Bakken (lots of controversy on this one). The middle Bakken and TFS horizontal wells are referred to as "unconventional" wells. Along the North Dakota-Canadian border, and a bit east of the Bakken activity, is another formation, the Spearfish, that is being targeted by EOG with conventional wells. In addition, there is occasional interest in conventional wells targeting the Lodgepole formation around Dickinson.

Longevity of the field. Based on current data it will take until 2030 to complete all the wells in the Bakken, and the wells will continue to produce oil until 2100 A. D.

Dual laterals. Oil companies are putting in dual laterals targeting two formations, or even the same formation. McDonald's Restaurant, on Million Dollar Way, Williston, North Dakota, has just installed a second parallel (a "lateral") drive-through due to excessive traffic. Roughnecks will feel right at home driving through McDonald's dual lateral drive-through.

High Cost. Horizontal wells cost about $6 million to complete including a small number of fracturing stages. It is unclear  how much each additional fracture stage costs, but it is probably in the neighborhood of $200,000/stage.

Time. Oil wells can now complete a well (not including fracturing) in about 25 days; some as quickly as 16 days. This is way down from 40 - 45 days in the old days (two years ago). Conventional wells targeting the Spearfish can be completed in three days.

Records. Record number of active rigs in North Dakota (146). Recover amount of oil being produced (#4 in US; 10 million barrels/month).

Takeaway capacity. 80% of oil is transported out of state by pipeline; 10% by railroad; and 10% by trucking it back to Canada to be placed in pipelines. Takeaway capacity meets production unless a pipe is damaged/shut down.

Companies.

• CLR: the face of the Bakken, CEO Harold Hamm; most active rigs in the Bakken
• BEXP: pushing the envelope on fracturing; reports highest 24-hour flowbacks
• WLL: advocated "long laterals" from the beginning; now everyone is doing long laterals
• EOG: the best acreage in the Bakken; "owns" the Sanish, the best oil field in the Bakken
• NFX: Newfield; quiet, but has had some very, very good wells
• HES: the original oil company in ND; big, but not biggest, player in the Bakken
• KOG: company most associated with the Fort Berthold Indian Reservation
• NOG: only Bakken-company that doesn't have any rigs; partners with others
• Slawson: private; very, very good wells
• Anschutz: private; very good wells; they are selling their E&P operatiions
• Fidelity: the E&P arm of Bismarck-based utility, MDU; natural-gas focused utility
• Oasis (OAS): became a significant player in the Bakken when it acquired Fidelity acreage
• Samson Oil and Gas Limited (SSN): Australian company in the Bakken; very small
• Samson Resources: driller, operator; NOT the Samson Oil and Gas Limited (SSN) company
• AEZ: very small cap company that disappointed its shareholders when bought by Hess

Disclaimer and note: all of the information above is just idle chatter among Willistonites talking about the Bakken. They are "general" comments one will hear in Williston. Most knowledgeable sources would agree on most of the statements above. However, some are a bit controversial, but all of them can be linked to a reliable source.

Enerplus Acquires More Bakken Acres For ... .... $10,000/acre

Enerplus enters into agreement to buy more acreage in the Bakken. From the press release:

Building on our existing Bakken land base in North Dakota, Enerplus has entered into an agreement to acquire an additional 46,500 net acres (72 sections) of land in the Fort Berthold area of Dunn and McKenzie counties in North Dakota.

These lands are directly adjacent to our existing land holdings in this area and are prospective for light crude oil in the Bakken and Three Forks formations. The acquisition materially expands our current position to over 70,000 net acres (109 sections) in the Fort Berthold area, the majority of which will be operated by Enerplus with a greater than 90% working interest.

With this acquisition, we now have over 210,000 net acres of undeveloped land with early stage Bakken and Three Forks potential in North Dakota and Saskatchewan in addition to our core Bakken
field at Sleeping Giant in Montana.

The acquisition includes approximately 800 bbls/day of light crude oil production and proved plus probable reserves of 10 million BOE primarily attributable to the Bakken formation based upon our internal evaluation. This compliments our existing estimate of eight million BOE of unbooked proved plus probable reserves in this area. The purchase price before closing adjustments is US$456 million and will be funded through Enerplus' existing credit facility. The acquisition is expected to close in October 2010.

$456 million/46,500 acres = $9,806/acre.

Yup, almost $10,000/acre. It's great acreage but it's not in the Sanish or the Parshall oil fields, as far as I know.

Investors: you now have another data point with which to valuate your favorite Bakken company.

Linked Article for Newbies and Those Who Feel the Bakken is "Not For Real"

One of my readers sent me this link:

http://www.dldebertin.com/oilnew/oilpresent.htm

That was one of the first articles I linked to my site a couple of years ago. It can be found in the Bakken background articles in the sidebar to the right. Without question, it's one of the best historical documents ever on the North Dakota oil industry. If you are interested in more photos, search "Shemorry" at my blog or click here.
 
This is a great article a) for newbies; and, b) for those who don't think the Bakken is "for real."

Wow, wow, wow - a Trifecta: WLL Becomes the Third Bakken Company To Announce a Huge Senior Note Offering

First it was BEXP. Then it was CLR. Now it's WLL.

Late yesterday, WLL announced a $350 million senior note offering.

Last week BEXP and CLR both announced similar offerings.

[Now, just to be catty, will KOG announce a similar offering? Smile.]

This speaks volumes about a) the eagerness for companies to expedite their drilling programs; b) anxiety over losing permits about to expire; c) losing leases to others top leasing; and, d) probably, the cost of super-fracking.

Price of Oil and Investors

Investors that come to this site are always focused on the price of oil, perhaps overly concerned. I know I am.

But for all the volatility in the price of oil, it seems to have found a trading range of $70 to $80. I forget, but I think I opined some months ago that the floor would be $80, maybe I said $70. I forget.

Heading back toward the $60 range this past week, the price of oil seems to have, at least temporarily reversed course, and is now up a bit, back above $75. Good news for oil investors.

But is there really much difference, other than psychological, to an individual investor whether the price of oil is $72 or whether it is $82?  I have said many times that there is much more to the business end of the oil industry than the price of oil. In fact, as long as oil stays in a $10 trading range, I doubt the price of oil has much effect on the bottom line of a well-run oil company.

(Note: the price paid for North Dakota oil is generally significantly less than the benchmark price we see on the television crawler; probably closer to $55.)

To start with, most of these companies hedge. That is, they sell contracts for their oil months in advance. The price at which they will sell their oil is set six months to one year out.

On another note, I think most folks were surprised to see how much the loss of one pipeline affects the bottom line of Bakken oil companies (see recent Enbridge stories). That certainly had a greater effect than the daily volatility of the price of oil. Due to one pipeline being shut down for a few days (weeks?), some Bakken producers are expected to miss their third quarter production estimates. I opine they may miss their annual production estimates.

However, all things being equal, it's NOT about the price of oil within a $10 trading range. Rather, it's about three things: a) how well the oil company runs its business from a financial point of view; b) the company's business model; and, c) the increasing amount, on a daily basis, of the amount of oil a handful of companies are pumping out of the Bakken.  The average amount of oil produced in North Dakota during calendar year 2009 was 6.7 million barrels. In July of this year (2010), North Dakota produced almost 10 million barrels.

Yes, a drop in the price of oil costs "us" a significant amount, but for long-term investors, the increasing production is going to be the bigger story. Again, assuming oil stays above $70.

More Good News From the Oil Patch: Bakken, North Dakota, USA

From the Bismarck Tribune online: the North Dakota budget -- the government anticipates $70 oil and a $1 billion budget surplus. North Dakota's two-year budget is slightly under $9 billion.

From the Dickinson Press online: the 1.6 million foot-long Bison Pipeline is nearing completion, dateline Bowman, North Dakota. This is a natural gas pipeline and a huge story.

The 30-inch-diameter pipeline will carry gas from the Powder River Basin of Wyoming to North Dakota, where it will connect with the Northern Border Pipeline and then on to Chicago for distribution to markets in the Midwest, for a total distance of 302 miles.

The project’s capacity is designed to carry approximately 477 million cubic feet per day.

The Bison Pipeline being buried. This photo was taken October 5, 2010, seven (7) miles north of Bowman. This is site prep for the Bison Pipeline, a 42-inch pipeline being put in by Transcanada, from Wamsutter, Wyoming, to Manning, North Dakota.

Updates 

October 30, 2010: Update on progress and taxes to the county.

A 302-mile pipeline that is being built across the southeastern corner of Montana will have little effect on the state — unless you happen to live in Carter County.

TransCanada Corp., the company building the $600 million Bison Pipeline, estimates that it will generate property tax revenues of $8.8 million a year in Montana when complete. And nearly all of the pipeline’s 97-mile route through Montana is in Carter County. It also passes through tiny slivers of Fallon and Powder River counties.

*****

This is another huge story, this time from the Minot Daily News online: Halliburton  will build a huge -- 38-acre -- site at the new Minot industrial park. It's all about fracking. More on that later. This new endeavor comes on top of a recently $20 million expansion of the Halliburton site in Williston.

Halliburton spokesman Brent Eslinger said his company intends to invest approximately $15 million for operational and maintenence facilities, parking areas and an administrative building at the Energy Park. Work is scheduled for completion in the first quarter of 2011. According to Halliburton, the facility will bring 250 jobs to Minot.

From the Williston Herald online: a nice story on the boom that a Bakken town is experiencing.

My Home In North Dakota, Adam Taylor
From the Billings Gazette online: Montana's unemployment rate rises to 7.4% -- more than double the rate in North Dakota.

NOTE: most of these stories will be available on the web for a short period of time. Many of them will not be accessible some weeks from now. The links will be broken. Googling the topic will generally find the an alternate source for the story.

ObamaCare (Not About the Bakken): Children-Only Health Insurance

This site is devoted to the Bakken. I have fond memories of the state I call home, and I am inappropriately exuberant over the activity in the Williston Basin.

I appreciate those who stop by to see what's going on in the Bakken and every morning the first thing I do is check the site to see what readers are seeing as the lead story. I hope it will be a positive story on the oil industry in western North Dakota.

But I usually rant at least once a day (occasionally more often) about some non-Bakken topic. I assume most of my readers do not appreciate such posts on a site that bills itself as "all Bakken all the time." But I do my best to minimize the number of such posts and readers can be assured that before the day is over there will be not less than three new Bakken posts. (By the way, I spend a lot of time updating old posts; what you see posted as the lead stories each day is about ten percent of what I post behind the scenes. This site has an incredible amount of archived information, most of it linked on the sidebar at the right. The site is optimized for the Firefox browser and if you know how to use the two Firefox browser "search" options, you can generally find what you are looking for if it concerns the Bakken and has relevancy to more than just one or two readers.)

My rant for the day comes from the Los Angeles Times website: health insurers in California will stop selling child-only health policies starting tomorrow (Thursday, September 23, 2010) because the insurers fear runaway costs.

Major health insurance companies in California and other states have decided to stop selling policies for children rather than comply with a new federal healthcare law that bars them from rejecting youngsters with preexisting medical conditions.

Anthem Blue Cross, Aetna Inc. and others will halt new child-only policies in California, Illinois, Florida, Connecticut and elsewhere as early as Thursday when provisions of the nation's new healthcare law take effect, including a requirement that insurers cover children under age 19 regardless of their health histories.

This was predictable. I was just surprised that health insurers would be so audacious to take such action with such clarity and transparency.

Except for reproductive issues and mental health care issues, men and women between the ages of fourteen years of age and fifty-five years of age have  minimal health care costs. For young families, their health care costs revolve around their infants and young children, which require multiple well-baby and well-child visits during the first six years of life, and that's just for healthy children and preventive medicine care. In addition, adults are generally covered for medical care stemming from two major health risks: car accidents (through their automobile insurance) and workplace injuries (through OSHA regulations and workmen's compensation).

Insurers say they cannot afford the terms of the new health care program and the bill did not provide a back-up plan, or Plan B as soccer moms would call it.

And so it goes. Sad.But.Predictable.

[Update: one day after posting the above, the Washington Examiner goes into greater detail on just how bad ObamaCare is.]