Answer To The Quiz

Back on August 23, 2012, I posted a quiz, to be answered in short essay. I received a few replies. The target audience: newbies. Regular readers knew where I was going with this quiz.

The question posed was this: if it is taking less time to drill and complete a well, why are well costs going up?

As a reminder, two data points:

• wells are costing significantly more, often $10 million, and there are reports of one particular Bakken well costing upwards of $20 million
• the time it takes to drill a well has come down significantly, from 45 to 60 days in the early Bakken boom to less than 20 days now

So, all things being equal, the cost of a new well should be significantly less. 

I specifically stated that "inflation" or answers to that effect would not be accepted.

I was looking for two specific reasons explaining the high cost of today's Bakken wells.

The answer(s):

There are two components for a Bakken well: a) drilling to total depth (the vertical well, the curve, and the horizontal); and, b) completing the well, generally fracking, when talking about a Bakken well.

The cost of a Bakken well, to drill it and to complete it, can then be broken into two pieces.

First, the drilling to total depth.

Had all things (but one) remained unchanged throughout the past two years in the Bakken,  the cost of drilling would have come down (again, remember, I nixed "inflation" as a reply), because the time to drill to total depth had been cut in half. But one of the reasons that time to reach total depth has been cut in half is due to the new rigs that are being used in the Bakken. These are specialty rigs designed specifically for the Bakken. Whether one buys the rigs or rents them, the day rate is significantly higher than the previous rigs. Part of the increased day rates will be due to the increased use of diamond bits, as alluded to by Lynn Helms in a recent interview.

Second, completing/fracking the wells.

This is real, real easy. The answer to increased cost for completing a well -- increased amount of proppant. There are two issues with regard to fracking: a) what to use; and, b) how much to use.

With regard to what to use, I believe ceramic costs on the order of 10:1 vs sand. I could be way wrong on that. 

With regard to how much to us, there is no question: a lot. EOG recently fracked three wells with eight million pounds, eight million pounds, and nine million pounds of sand (no ceramics), respectively.

So, what does this mean?

Day rates with these new rigs probably won't go down in the next year. Drilling to depth is probably a wash with regard to costs. With the new rigs, operators are saving huge amounts of money with regard to personnel costs (20 days vs 60 days for roughnecks, two geologists, truck drivers waiting to unload supplies) and with "walking" their rigs on pad drilling. But those savings will be offset by higher day rates. Operators feel they can knock off about $800,000 or maybe even a million dollars per well by pad drilling. 

But that savings is peanuts compared to what proppant and guar is going to cost them. I assume if they use more proppant they also need to use more guar (I could be wrong on that). 

Operators are under huge pressure to cut costs. If the cost of proppants is the 800-pound gorilla in the cost of a completed well, that's where operators will look next.

The first question will be, as noted above, what should be used? The answer: sand, and sand alone. See an earlier post regarding the QEP/Helis deal for that commentary.

How much proppant should be used? That's the $64,000 million dollar question. I think the answer will be: a lot. EOG appears to be testing that thesis by blowing away the middle Bakken with nine million pounds of sand. For newbies, folks thought the four million pounds that BEXP routinely used was "over the top." But nine million pounds is incredible. 

If an operator has to buy sand from a middle man, that increases the cost of the sand significantly. The cost comes down if an operator owns the sand quarries. EOG owns many, many sand quarries in Wisconsin or in some state east of the Bakken. 

Once we start seeing QEP complete the Helis wells they've bought we'll get the first clue on what to use. I will be most interested to see how much they use. 

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For newbies: Whiting says they are the low-cost operator for drilling/completing a Bakken well, stating they can drill a Bakken well for $7 million and in some of the Bakken down to $6 million. Other operators may disagree but that's from Whiting's corporate presentations.