Bakken spot crude prices have traded at a premium to West Texas Intermediate spot crude prices since September 4. Bakken spot crude has not consistently traded at a premium to WTI since October of 2011 and has spent much of the last year trading at a discount of $10 or more. Over the last two weeks Bakken spot crude prices have traded at an average premium of $5 per barrel over WTI. The factors that have created the premium pricing are likely to stay in place into 2013.
Two factors have led to shifting the spread between Bakken oil and WTI from a discount to a premium.
The most important is new rail take away capacity to the East and West Coasts now has more shipping capacity for oil than oil production in the Bakken. Since there is currently excess take away capacity in the Bakken the pipelines now have to compete with the rails for oil and have to pay the going rate.
The second factor is oil production growth in the Bakken has begun to slow more than expected. The North Dakota Industrial Commission announced that the rig count has dropped to 194 rigs, which is the lowest level since July of 2011 and below the all-time high of 214 reached in May. They also announced that daily oil production for the state in July averaged 674,000 barrels of oil per day. This was less than expected and only marginally higher than June. Bakken oil companies are concerned about well costs which are close to double what they were in 2009.Actually, the record number of active rigs was 218, albeit for only a day or two, if that, back in May.
The big story is, of course, the rail story, but we've beaten that story to death.
The declining rig count is getting more air time than it deserves. A better metric is overall production, and as noted above, the July numbers were not encouraging. The better metric is not how many rigs there are, but how many wells are being completed each month, and overall production.
Someone noted -- and it's rarely reported; I've only seen one report -- that the wells completed so far in 2012 are about 30% less productive than the wells completed in 2011. I think it's too early to tell, but anecdotally, the trend does suggest the wells this past year are not as productive as wells completed a year earlier.
So, back to better metrics: the number of wells being completed, and overall production. The latter is, of course, easy to measure. The number of wells being completed each month is also easy to measure, but pad drilling will affect those numbers. Wells are being drilled to total depth in record time (less than 15 days) but due to pad drilling, by the time all four wells on the pad are fracked/completed, one can be into another month, or even worse, for shareholders, into another quarter.
I don't think the decreasing rate of production is due to declining number of rigs. I think it's due to a) pad drilling; and, b) less productive wells (for whatever reason).
It will be interesting to watch this play out.
