The Bakken Is Different -- But Then We All Knew That; February 18, 2014

Reprinted in its entirety in case the original link is broken. The original link is here.

The steady growth of U.S. oil and gas production in recent years has come from a number of shale formations across the country. But not every region is seeing the same growth in economic activity from the energy boom cracked open by horizontal drilling and hydraulic fracturing technology.

The Bakken and emerging Three Forks formations in North Dakota and eastern Montana stand out from other shale areas for a host of reasons. For starters, the formations have a large amount of relatively more profitable oil reserves, as opposed to gas reserves. The Bakken region also had a moderately small preboom population and workforce and little oil and gas infrastructure. As oil drilling and production increased, it generated a high fraction of well-paid employment in oil- and gas-related activities compared with other shale areas, thus helping to drive unemployment rates down and average wages up.

Start with what’s underground. In terms of total energy oil and gas content, the Bakken ranks about in the middle (see oil and gas shale area profiles for details). But the mix of that energy content is crucial. The Bakken has more recoverable oil than other shale formations (see table) and less natural gas and natural gas liquids, based on U.S. Geological Survey (USGS) estimates. That matters because oil prices have remained historically high since 2009, while natural gas prices have dipped, making oil relatively more profitable than natural gas and leading to greater increases in drilling and production compared with other regions.

Chart 1 illustrates the strong growth in active drilling rigs in North Dakota relative to other states with shale formations. Pennsylvania showed the next strongest growth in rigs, which started in 2009 with drilling in the Marcellus formation, but softened in 2012 as the price of natural gas remained low.

North Dakota drilling growth faster than other shale states

The increase in drilling activity in the Bakken has led to robust growth in oil and natural gas production. North Dakota’s oil production increased about 10-fold since 2001, and the state is now the second largest oil producer in the United States after Texas. In terms of gas production, Texas remains the leader, though both Pennsylvania and Arkansas posted solid growth in natural gas production.

Of course, one reason for the Bakken’s high growth in oil production is the relative scarcity of preboom activity. In 2004, North Dakota had an average of 15 active oil-drilling rigs operating in the state. By 2012, the state had over 180 active rigs.

In contrast, Texas already had a mature oil and gas industry prior to the horizontal drilling and hydraulic fracturing boom. In 2004, the state had 500 rigs in operation, which increased to 900 rigs by 2012. Much of the infrastructure necessary for this growth utilized infrastructure already in place for conventional oil and gas activities nearby and in the Barnett, Eagle Ford and Permian Basin formations.

Also, unlike states such as Texas and Oklahoma with established oil and gas activity, North Dakota and Montana started from a small oil and gas infrastructure base. In concert with the increase in drilling rigs, North Dakota and Montana had to build new pipelines, rail facilities, roads and municipal infrastructure in sparsely populated areas. The Bakken boom led to strong gains not only in oil field jobs, but also in construction, trucking and service jobs.

North Dakota also had the greatest percentage change in total employment across all sectors relative to shale counties in other states. Average employment in North Dakota shale counties almost tripled from about 3,000 in 2001 to 8,500 in 2012. Job growth in other shale areas was below 40 percent. Despite this strong growth, the average employment in shale counties in North Dakota remains smaller than the average employment in shale counties in most other shale areas.

A much larger share of Bakken employment has been in natural resources and mining than in other shale areas. In 2012, just over a quarter of all workers in North Dakota’s shale counties were employed in this sector, most of them in oil and gas, which pays about three times the national average weekly wage. In comparison, the mining and natural resources employment share in other shale areas was about 5 percent.

As demand for labor picked up in the Bakken, the August 2013 unemployment rate dropped to 1.2 percent and 3.8 percent, respectively, in the North Dakota and Montana portions of the Bakken. While unemployment rates fell in other shale areas, none dropped as low as in the Bakken. In a few areas, such as Pennsylvania, Arkansas and Louisiana, unemployment rates didn’t drop as much as the national unemployment rate dropped since 2009.

As labor markets tightened in the Bakken and relatively high-paying oilfield jobs grabbed a larger share of workers, average weekly earnings rose steeply compared with the national average and the average in other shale areas. In fourth quarter 2012, average weekly wages across all sectors reached $1,300 in the shale areas of North Dakota, higher than the national average of $950 and much higher than in other shale areas.

In fact, other than in Montana and somewhat in Pennsylvania, average weekly wages in other shale areas didn’t manage to close much of the wage gap with the national average. This is because oil shale regions tend to be more rural (where wages are lower), and the share of jobs in the high-paying oil and gas sector remained low.

Comparing Bakken with Eagle Ford

While the Bakken has received much attention from news media and other observers of the oil and gas sector, the Eagle Ford formation in Texas has also caught plenty of interest. Unlike many other shale areas that have relatively high concentrations of natural gas, the Bakken and Eagle Ford formations both have relatively large oil prospects. How do these two areas compare in terms of oil production and economic activity?

While the USGS estimates a relatively modest reserve of oil in the Eagle Ford formation, the Energy Information Administration expects as much as 6 billion barrels of oil production from the Eagle Ford from 2012 through 2040 compared with over 8 billion barrels from the Bakken. According to the Railroad Commission of Texas, in the first half of 2013, Eagle Ford’s oil production averaged about 600,000 barrels per day. In comparison, the Bakken’s oil production as of June 2013 exceeded 800,000 barrels per day.

Despite similar oil production levels and promising prospects, from January 2008 to March 2013, the Bakken (including North Dakota and Montana counties) has seen more job growth than the Eagle Ford (47,000 versus 21,000) and a stronger rate of job growth (112 percent compared with 9 percent). The Bakken also enjoyed a lower unemployment rate (1.6 percent versus 6.5 percent as of August 2013) and a higher share of jobs in the natural resources and mining industry than the Eagle Ford (27 percent versus 7 percent). This advantage helped boost average wages in the Bakken. Average weekly wages since first quarter 2008 increased by $590 (88 percent) in the Bakken compared with $115 (20 percent) in the Eagle Ford.

Finally, and probably not surprisingly, there are distinct contrasts between the Bakken and the rest of North Dakota and Montana in employment growth, unemployment rates and average weekly wages. For example, the unemployment rate in the Bakken has dropped lower than the rate in the rest of North Dakota and much lower than the rate in the rest of Montana.

Similar comparisons are available in the accompanying appendix for shale areas in other states. In most instances, the unemployment rate and average weekly wages in these shale counties move in a pattern similar to the rest of the counties in their states. While employment growth in the shale areas tends to be stronger than in the rest of their states, the difference in growth between the shale areas and the rest of their states is smaller than in the Bakken. Not only does the Bakken have better economic performance than other shale areas, its economic performance stands out in sharper contrast with the rest of its states’ counties than other shale areas. (For production and geologic profiles of shale areas in this comparison, see appendix article at http://www.minneapolisfed.org/pubs/fedgaz/14-01/shale_oil_appendix.pdf.)

Data collection and analysis methods

References to the Bakken area include the Three Forks formation, which in large part is just underneath the Bakken formation. The Minneapolis Fed defines the Bakken area as nine counties in western North Dakota and three counties in Montana using quantitative and qualitative criteria.

This fedgazette analysis uses the general approach of Erik Gilje (Boston College) in his 2012 working paper “Does Local Access to Finance Matter? Evidence from U.S. Oil and Natural Gas Shale Booms” to identify shale counties. A county is considered a “shale county” when the area had at least 100 horizontal wells in 2011. Almost all the Bakken counties have over 100 horizontal wells; therefore, 100 is used as a benchmark for selecting counties in other shale areas. Virtually all the counties are within the boundaries of current “shale plays” as mapped by the Energy Information Administration. Using this definition, shale counties as a percentage of total counties in each state range from about 5 percent to 17 percent.

Number of shale oil counties in each state

Arkansas    5 out of 75

Louisiana    6 out of 64

Montana     3 out of 56

North Dakota    9 out of 53

Oklahoma    9 out of 77

Pennsylvania    6 out of 67

Texas    31 out of 254

Total                  69 out of 701

In making the Bakken versus Eagle Ford comparison, the Railroad Commission of Texas’ demarcation of Eagle Ford—24 counties in the southern part of the state—is used to define the Eagle Ford area, not horizontal well data.

*********************************

The February 15, 2015, issue of the Economist had a very, very long article on "Saudi America." Because the article could be lost to archives, I have re-printed the entire article here.

Saudi Arabia

DENNIS LITHGOW is an oil man, but sees himself as a manufacturer. His factory is a vast expanse of brushland in west Texas. His assembly line is hundreds of brightly painted oil pumps spaced out like a city grid, interspersed with identical clusters of tanks for storage and separation. Through the windscreen of his truck he points out two massive drilling rigs on the horizon and a third about to be erected. Less than 90 days after they punch through the earth, oil will start to flow.

What if they’re dry? “We don’t drill dry holes here,” says Mr Lithgow, an executive for Pioneer Natural Resources, a Texan oil firm. In the conventional oil business, the riskiest thing is finding the stuff. The “tight oil” business, by contrast, is about deposits people have known about for decades but previously could not extract economically.

Pioneer’s ranch sits at the centre of the Permian Basin, a prehistoric sea that, along with Eagle Ford in south Texas and North Dakota’s Bakken, are the biggest sources of tight oil, a broad category for the dense rocks, such as shale, that usually sit beneath the reservoirs that contain conventional oil. Since 2008 tight-oil production in America has soared from 600,000 to 3.5m barrels per day (see chart 1). Thanks to tight oil and natural gas from shale, fossil fuels are contributing ever more to economic growth: 0.3 points last year alone, according to J.P. Morgan, and 0.1 to 0.2 a year to the end of 2020, according to the Peterson Institute, a think-tank. Upscale furniture stores and luxury-car dealerships have sprung up in Midland since the boom began. Mr Lithgow has truck drivers who earn $80,000 a year. Local oil-service firms have been known to hire fast-food workers on the spot. In all, the unconventional-energy boom will create up to 1.7m new jobs by 2020, predicts McKinsey, a consultancy.

And that is only part of the story. Another benefit of tight oil is that it is much more responsive to world prices. Some economists think this could turn America into a swing producer, helping to moderate the booms and busts of the global market.

Pioneer is rapidly boosting production. But Scott Sheffield, the company’s boss, worries that in a few years he will run out of customers; America has prohibited the export of crude oil since the 1970s. At $100 a barrel, the price of West Texas Intermediate (the most popular benchmark for American oil) is comfortably above the break-even cost of tight oil. But the prospect of a glut has futures pricing it at $20 less in 2018. “There will be a lot less oil-drilling when you take $20 out of everybody’s margin,” says Mr Sheffield.

Until the early 1970s, America was the world’s largest oil producer and the Texas Railroad Commission stabilised world prices by dictating how much the state’s producers could pump. When Arab states slapped an oil embargo on Israel’s Western allies after the six-day war in 1967, Texas cushioned the blow by allowing a massive production boost.

But rising consumption and declining production eroded the state’s spare capacity, and in March 1972 Texas called for flat-out production. “This is a damn historic occasion and a sad occasion,” the Texas Railroad Commission’s chairman declared. When Arab producers imposed another embargo the next year, prices rocketed. America had lost the role of world price arbiter to OPEC, a cartel dominated by despotic regimes. American politicians tried desperately to curb consumption (for example, by lowering speed limits) and to conserve supplies (by banning crude-oil exports in 1975).

American production declined steadily from a peak of 9.6m barrels a day in 1970 to under 5m in 2008. About then, independent producers began adapting the new technologies of hydraulic fracturing (“fracking”) and horizontal drilling, first used to tap shale gas, to oil. Total American production has since risen to 7.4m barrels a day, and the Energy Information Administration, a federal monitor, reckons it will return to its 1970 record by 2019. The International Energy Agency is more bullish; it reckons that by 2020 America will have displaced Saudi Arabia as the world’s biggest producer, pumping 11.6m barrels a day.

Besides directly creating new jobs and income, the fossil-fuels boom could help growth by reducing America’s vulnerability to oil-price swings, in two ways. First, as production rises and imports shrink, more of the cash that leaves consumers’ pockets when the oil price rises will return to American rather than foreign producers. David Woo of Bank of America/Merrill Lynch notes that America’s petroleum deficit has narrowed to 1.7% of GDP while Europe’s has widened to nearly 4%, which seems to have made both the dollar and the economy less sensitive to oil prices.

The second channel lies in the economics of shale. Oil flows relatively easily through the porous rocks that make up a conventional reservoir, so a conventional well can tap a large area. As a result, the volume of oil pumped each day declines slowly, on average at 6% per year. By contrast, oil flows much more sluggishly through impermeable tight rock. A well will tap a much smaller area and production declines quite rapidly, typically by 30% a year for the first few years (see chart 2). 

Maintaining a field’s production levels means constant drilling. The International Energy Agency reckons maintaining production at 1m barrels per day in the Bakken requires 2,500 new wells a year; a large conventional field in southern Iraq needs just 60.

This all means that when oil prices rise, producers can quickly drill more holes and ramp up supply. When prices fall, they simply stop drilling, and production soon declines. In early 2009, after prices collapsed with the global financial crisis, Pioneer shut down all its drilling in the Permian Basin. Within six months, output in the affected areas dropped by 13%.

Bob McNally of Rapidan Group, an industry consultant, predicts that America could be “force-marched” back to the stabilising role it played in the 1960s, this time responding to the market’s invisible hand rather than government diktat. Will that work in practice? It may already have done so. Since 2008, the Peterson Institute notes, turmoil in Sudan, sanctions on Iran and declining North Sea output have taken a lot of oil off the market. Without America, which accounted for half of the growth in global output over that period, Persian Gulf producers might not have been able to make up for the loss. Prices could have risen sharply, hurting consumers everywhere. Yet they did not.

Oil firms try not to over-react to short-term price fluctuations, of course. Capital, equipment and labour all cost money, so they try to ramp up production only in response to what they think will be long-term shifts in the oil price.

The ban on crude-oil exports hurts producers and makes it harder for America to become a swing supplier. Light, sweet (ie, low-sulphur) West Texas Intermediate already trades at a discount of $8 to Brent, its global peer. That is due mostly to transport and storage bottlenecks in America, but increasingly the export ban makes a difference. In recent decades American refiners have reconfigured themselves to handle the heavier, sour oil imported from Mexico, Venezuela and Canada’s tar sands, leaving them with less capacity for refining tight oil, which is light and sweet.

The oil price at which shale producers break even ranges from $60 in the Bakken to $80 in Eagle Ford, reckons Michael Cohen of Barclays, a bank. If exports yielded an extra $1 to $1.30 a barrel, he estimates that might raise total output by as much as 200,000 barrels per day.

f the ban were lifted, crude-oil exports could start more or less straight away. The necessary pipes and tankers are mostly there already. But the political debate is only in its infancy. By law the president can allow exports he considers in the national interest. Barack Obama has yet to express a view on the ban. Legislators from non-oil-producing states are wary. “For me the litmus test is how middle-class families will be affected,” says Ron Wyden, the Democratic chairman of the Senate energy and natural resources committee.

The main beneficiaries of the ban are the refiners. They buy light, sweet American crude for less than the global price, turn it into petrol and then sell that at the global price. Exports of refined petroleum products are not banned, and have, unsurprisingly, soared.

Defenders of the ban (including, naturally, some refiners) claim that if America exported more oil, Saudi Arabia would reduce its own output. Prices to American consumers would not fall, they say, and might even rise. Historical evidence says otherwise, however. When Congress allowed Alaska to export crude oil in 1995, its west-coast customers did not pay any more for petrol, diesel or jet fuel.

Oil producers would obviously benefit from lifting the ban. So might other Americans, in less obvious ways. A global oil market that fully included America would be more stable, more diversified and less dependent on OPEC or Russia. The geopolitical dividends could be hefty. As Pioneer’s Mr Sheffield notes, “It’s hard to believe we’re asking the Japanese to stop taking Iranian crude, but we won’t ship them any crude ourselves.”

Correction: We said above that higher export prices could raise output by as much as 200,000 barrels per year. We meant per day. Sorry. This has been corrected.