- Good: 35%
- Bad: 65%
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Now, for a new question. It's a bit complicated; it's hard to me to phrase it just right, but most folks who are following the Bakken, will understand the "intent" of the question.
Background: Some folks elsewhere appear to want the North Dakota legislature or the NDIC set deadlines for drilling additional wells on a spacing unit once the first producing well has been drilled and the commission has approved additional wells. The folks are concerned that operators will not drill additional wells on a spacing unit once the unit is held by production. It is important to note that a Bakken well tends to produce 20% of its EUR in the first year of production. The rest will be produced over the next 20 to 30 years. There are significant tax breaks and incentives for oil produced in the first year. At least that's my understanding.
So, the new question, for mineral owners only:
For mineral owners only: if the price of oil drops to $40/bbl, would you want your operator to drill a new well at that time, or when oil is back to $100/bbl?
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CommentI first started doing the polls because my 9-y/o nephew put a poll on his blog and I wanted to see if I could do it. It turned out to be quite simple. The polls are kind of a pain: thinking up a poll question and then doing the technical stuff to get it posted. Interestingly enough, after all these polls, it turns out that this one in this post has actually helped me think through some interesting issues with which the NDIC has to struggle.
As I've been repeating more often recently: I don't think most folks have really made the leap to tight oil. I know I understand less than 1% of the Bakken.
There are some interesting questions and concerns raised on that issue. Though it is obvious those over at that blog are suggesting little more than Tilting at Windmills.
ReplyDeleteThe 1,280 acre spacing was initiated to hold by production as many minerals as possible. It served that purpose. Now it leaves the mineral owner in a bind as to when they'll realize the full potential of their asset (beyond that initial HBP well).
Small companies like KOG will continue with infill drilling as quickly as they can, since this is their sole asset and they want to capitalize on it. However a major like OXY may postpone their full development for many years while they focus elsewhere around the globe. While some grandchildren may appreciate that, a 70 yr old may never see that eventual development. Although it all works out in the end I understand their frustration.
You may be correct, but there were many reasons for 1280-acre, and 2560-acre spacing. Holding by production may have been one of them but it was not the major reason. To be honest, when 1280-acre spacing was first proposed, I doubt it had anything to do with "holding by production as many minerals as possible." I won't say more because the discussions can go and on. We all have our worldviews.
DeleteMy biggest concern is that some unthought-out decisions could have some major unintended consequences, and thus the reason for the poll. We were fortunate that CLR was the "face" of the Bakken and not a) CHK; b) OXY USA; or, c) MDU (Fidelity).
If "majors" leave North Dakota to focus elsewhere, it tells me one thing: there are better opportunities. If the "majors" start to leave, the state of North Dakota needs to make the Bakken more attractive economically (e.g., reducing taxes, improving infrastructure). We saw what happened to their off-shore oil industry when Great Britain raised taxes on their North Sea oil.
On a completely different note, using OXY USA as an example leaves me with mixed thoughts.
And finally, one last thought: has there been any indication that companies are leaving once they get their first well? Look at the Brooklyn oil field (CLR) and the Sanish (Whiting). Interestingly, both of those fields are 1280-acre spaced. EOG is hardly drilling in the Parshall (that was noticeable from the beginning) and the only major difference between the Parshall and the Sanish, EOG and WLL, is the former is 640-acre spacing and the latter is 1280-acre spacing.
Obviously they will develop a schedule for drilling, and holding a lease by production enters into the discussion but it certainly is not the only data point being considered. In fact, from what I can tell, it plays almost no role right now in the Bakken. The only thing I'm noticing (and the jury is still out): it looks like operators may be drilling the best Bakken right now to get their financial statements/balance sheets in order. But 640 vs 1280, at best, is marginal in the big scheme of things.
When folks spend this much time discussing spacing, it continues to remind me that "we" have no idea how big the Bakken is. But that's the difference between those who own minerals and those who do not. I do not own any minerals.
As a mineral owner, am kind of torn on the issue. Would like all the wells to come in at max profit (my pie-in-the-sky view). But reality is, any well drilled now will pay out at market price whenever and whatever that price may be. So, I guess it's "Drill, baby, drill"
ReplyDeleteBruce, good comments. Don't misunderstand, I'm not suggesting anyone is leaving the Bakken. Instead I'm suggesting some companies have the luxury of postponing full development in ND. In effect those proven reserves serving as 'cash in the bank' for an undetermined later date.
ReplyDeleteRather than spacing size (640 vs 1280), I see the primary difference in the pace of drilling in the Parshall & Sanish Fields is Whiting needs this quick pace (Bakken is 70% of their total production), while EOG is far larger and has enough alternate projects (Eagle Ford & Permian) to defer the full Williston basin drilling until the future. Like EOG, OXY is another company which appears to be tying down their leases with a well then deferring their additional drilling. I'm generalizing this, yet that is how it appears to me; The smaller firms are much more likely to proceed full bore compared to some of these majors. Eventually the drilling will come for both, yet a second or third well in southern Dunn Co (OXY), or northern Mountrail Co (EOG), is apt to still be years away.
There are many, many issues, and I agree with your comments.
DeleteSee comments below. At the end of the day, companies are valued by their reserves. If EOG and OXY (or any other company) have the greatest year ever in production, but are unable to replace (or grown) their reserves, their market value will decline. For that reason, I find KOG to be a most interesting company to follow.
A second note not yet addressed: most agree that wells are getting continually better. When the Bakken boom started, they were doing one-stage fracks. Would you prefer that all your wells be one-stage fracks? They are now doing 40-stage fracks. In the beginning, it was all sand, but quickly moved to ceramics. The jury is still, but would you prefer your operator to drill a short lateral, with a one-stage frack, with all sand? No, I didn't think so. Would you like your operator to drill that short lateral, with a one-stage frack, with all sand, and then have no pipeline to put the natural gas in and flare it off? Would you prefer to have your operator drill without the best geologist available? Would you prefer to have your operator drill without the benefit of 3-D seismograph? All of this was not available in 2007 when the boom started in North Dakota. The wells are going to get better, and better, and some folks are going to be do better by waiting an extra year or two.
The seismography is getting better and better. The completions are getting better and better.
No, there are so many variables to consider. I could be wrong, but mineral owners seem to look at one variable. When are they drilling my well?
Again, the point of the poll is too show the foolhardiness of asking Bismarck to determine the drilling calendar. Even NDIC doesn't do that (determine the drilling calendar).
I think a lot of mineral owners forget that these companies are in business for their owners (shareholders) first. And perhaps their employees, who are often also shareholders (through pension programs, etc).
ReplyDeleteI think the operators put together a yearly drilling schedule and then tweak it through out the year based on any number of details.
At the end of the day, all things being equal, publicly held companies are valued on their proven reserves. If an oil company has the best year ever in the history of the company with regard to daily production, but announces it has no more oil in the ground, the company is toast. Likewise, if it has a lot of oil/gas, but is in over its head in debt, it will have challenges (think GMXR -- bankrupt).
Oil companies are "E&P" companies: exploration and production. As important as production is (and lately that's all some people seem to be thinking about), oil companies are also interested in exploration. Early in the Bakken boom, operators were drilling "everywhere" to define what they had. Now, as we get into the manufacturing phase, operators will change the emphasis based on their needs.
No, they will not pay out at market price whenever and whatever that price may be. In fact, oil companies write contracts, set floors, set ceilings, hedge. They contract to sell so much oil to their customers (generally refiners, I assume). If they over-promise and can't produce all the oil they had forecast, they will be buying oil at spot market from their competitors and they will lose money. If the produce more oil than they can get out of the Bakken, they have to find a way to store it. That should not happen; they will choke back at the well head; they monitor the wells and can turn the wells on / off from off-site. [Today's drop in oil price might actually be good news for some oil companies if the drop is short-lived, and not a trend.]
North Dakota, the Bakken, the Spearfish, etc., can handle only so many rigs. The infrastructure, manpower, roads, rules and regulations, weather, housing, etc., can handle only so many rigs. So, with finite number of rigs, oil companies have to decide where to put them. Multi-well pad drilling changes everything.
No, there are many, many issues. The purpose of the poll was to show the foolhardiness of having the legislature determine the drilling schedule for oil companies.
To repeat: oil companies, by contract, promise their consumers so much oil six to twelve months out. I assume there might be longer contracts. Regardless of the price of oil one year from when the contract was written, the oil company needs to provide the oil. The company's skill in contracts, hedges, floors, collars, ceilings, whatever they are called, makes all the difference.
KOG has a problem. As far as I know they only have reserves in the Bakken. Their oil in North Dakota may last "forever." But if it doesn't, it does not bode well for KOG. Their share price will track with the price of oil, I suppose, all things being equal.
KOG, at one time, was "E&P." Now, KOG is pretty much all "P" ("production") now. If it is to grow (and ultimately survive), KOG needs to find more oil acreage somewhere. KOG may buy more acreage in the Bakken or in the Eagle Ford, as an example. So, yes, once they get their "spacing units" held by production, and generate necessary cash flow, it would not surprise me if they started emphasizing "E" again. And to the uninformed it might look like KOG is not drilling somewhere in ND because they hold their acreage by production. But, as noted above, an oil company will not do well if it doesn't grow its reserves. At the national level, this is exactly where XOM finds itself, having difficulty replaced its reserves. I just posted a story earlier today: Norway, as a country, is having the same problem.