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Thursday, June 6, 2013

Idle Rambling On Bakken Wells

Take a look at the the IPs of the wells that came of the confidential list today.

Compare them to the results of the Bakken wells drilled back in 2010 (remove the BEXP wells; the EOG Parshall wells; and, the Whiting Sanish wells which were outliers from the beginning). The general trend is improving wells. IPs of 600 were nice back in 2010, but IPs of 1,000 made the headlines. More importantly EURS have increased since 2010.

To get these better results, some of the factors:
  • better understanding of the geology
  • better understanding of fracking and best technology
  • more experienced crews, geologists
  • more frack stages
  • more proppant (in some cases -- like EOG -- a lot more sand)
  • more water
  • concentration on better locations
With regard to the above factors and cost
  • the cost of the first three listed factors was probably more in terms of time, than in $$$$
  • the last factor listed, of course, is, I suppose, a non-issue with regard to $$$$
  • only the 4th, 5th, and 6th factors relate directly to $$$$ I suppose
Water: going down in cost, and going down significantly (see earlier posts, search WAWS)

Sand and ceramics:  per ton, probably going down in cost; per well, probably increasing cost since 2010, because more proppant is being used/well.

Hold those thoughts.

Starting about 18 months ago, operators were coming under intense pressure to get their cost/well down. $10 million/well seemed to be the ceiling informed investors were willing to accept. Note: the informed investors weren't asking for individual line items to come down in cost, they were demanding that the overall cost of the well come down.

I have no idea how much one can "trust" the numbers used in the corporate presentations, but it appears operators are shooting for $8 million/well, significantly below $10 million/well. (Actually, this is even better, and something I have not seen talked about elsewhere: generally things get more expensive going forward and for Bakken operators to not only stay within the inflationary increases but actually decrease overall costs is quite amazing, I suppose. In other words, all things being equal, one could have expected the average cost for a Bakken well to increase over the past few years; to decrease is interesting.)

So, despite using more, water, more sand, and more stages (I assume all things being equal, the more frack stages, the more the wells should cost), the overall cost of the well has come down. I can't do it, but it would be interesting to see it graphed with the left x axis being the average cost of wells; the right x axis the average quality of the wells; and, of course, the y axis time.  I can imagine a downward sloping of the average cost of wells, and the upward slope of the quality of the wells over time. Even if there are a few super-long laterals (3-miles long) that turn out to be very, very good, operators will still have trouble justifying higher costs for these wells to their investors.

The point I'm trying to make: even as operators are working to get better and better wells (despite the associated costs of more stages, more water, more sand), the investors are not looking at $$$$/foot of fracking, but $$$$$/well, no matter how unfair that might be. I think Mike Filloon has talked about $$$$/foot. The operators are running up against this unfair reality: $$$$/foot will decrease, hopefully resulting in better "bang for the buck," but the analysts will be looking at average cost of the individual wells, and won't get side-tracked with $$$$/frack foot.

To some extent, this is something we seen in most industries: start-up costs are high, but once they get into the manufacturing stage, unit costs come down. Although some folks will argue with me, I am not convinced we are in full swing of the manufacturing stage of the Bakken (we can't get their until infrastructure catches up; until roads are generally all-weather roads; until ... ).

If investors liked the Bakken operators when they were reporting lower IPs, and higher costs per well, they should really like what we are now seeing: higher IPs and lower costs per well.

And infrastructure is yet to catch up. I assume a lot of production is being choked back for any number of reasons, least of which, the flaring restrictions. RBN Energy provided a great explanation for that some time back. It's much more than just pipelines when it comes to natural gas.

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