A Long Rambling Note On A Bunch Of Things Regarding The Bakken -- June 14, 2015

Updates

June 18, 2015: in the original post, I referenced "the USGS survey" but did not go into specifics, or even have the correct date. Here's a 30-second soundbite:

The state slogan for Montana is “Big Sky Country.” Stretching across Montana, North Dakota and South Dakota, and even the Canadian provinces of Saskatchewan and Manitoba in the Williston basin, the Bakken/Three Forks play is truly a Big Sky resource.

In its 2013 assessment, the U.S. Geological Survey (USGS) estimated mean undiscovered volumes of 7.4 Bbbl of oil, 6.7 Tcf of associated/dissolved natural gas, and 0.53 Bbbl of NGLs in the U.S. portion of the Bakken and Three Forks formations.

Operators are able to target multiple stacked formations in these formations. The total shale can be as thick as 375 ft.

Original Post

 
NOTE: The Williston Herald reports that the Director's Cut will be released Friday, June 19, 2015. Link here: http://www.willistonherald.com/business/active-north-dakota-oil-rigs-the-lowest-they-ve-been/article_f598a188-1244-11e5-8f24-fb31b3bd532f.html?mode=jqm.

If it is not released until Friday, that will be the first time that I can recall in a long time that the Director's Cut was released that late in the month.

Note: on a long note like this, there will be factual and typographical errors; there will be opinions interspersed with facts. Where I seem to be a bit inappropriately exuberant, don't confuse me with facts. LOL.  This is my world view of the Bakken, at least for the moment.

On June 10, 2015, I posted this bullet without a stand-alone post (there was just too much going on):

• disappearing Bakken oil discount -- most interesting

I assume most readers were aware of the story but for those who may have missed it, this is from the linked article:

NEW YORK (Reuters) - Oil traders scrambling to secure crude in the U.S. Midwest have pushed North Dakota's Bakken to a near premium for the first time in two years, a rally stoked by record refinery runs and an unprecedented slump in Canadian imports.

Yet some traders say the surprising strength emerging from opaque physical crude markets in the heartland of the fracking boom also points to a more important, lasting factor: declining production of Bakken crude, a long-anticipated but as yet unproven twist in the shale revolution.

I am posting this again, because it is so important, and has so many story lines, but also because Don sent me this link from an investment discussion board:

I think we have all penciled in the idea that Bakken crude trades at a $10 discount to WTI. But it looks to me like new pipelines & refineries are chipping into the discount, and that in 2 years that pipelines will be competing to transport Bakken crude.

The first interesting item is that midwest refineries have retooled (sensibly) to process Bakken crude. The Enbridge North Dakota Pipeline charges $1.50-$2/bbl to transport into Minnesota. Minnesota is now trading less than a dollar below WTI. So for producers lucky enough to get on that pipeline (220kbpd - about 1/5th of N.D. production), they're getting spreads below $3 today, vs $10 in investor's minds.

In addition, more pipelines are going in, and by the end of 2016, it looks like pipeline+refinery capacity ~ 1.2mmbd, which is about what the Bakken produces now. With rails, they're going to have twice as much capacity as actual production.

https://rbnenergy.com/watching-the-defections-too-much-bakken-crude-pipeline-takeaway-capacity-planned

These pipelines will essentially hook Bakken crude to midwest, Canadian (blended with their heavy) and east coast refineries. I think the reliability and cheapness of pipelines is going to mean several areas are going to use bakken crudes instead of imported ones (this is already happening).

Overall I see the $10 spreads from last quarter moving downward through 2015 and maybe reaching $5 next year. That's a pretty nice tailwind, equivalent to WTI going up 10% or so from the perspective of the Bakken players.

 There are so many story lines here.

Most important: the RBN posts are "live" for a short period of time. They are archived shortly after being posted and are then available only by subscription. The RBN post linked above is still available without a subscription.

Almost as important: this is not an investment site. Do not make any investment or financial decisions based on what you read here or think you may have read here. However, understanding / knowing the "spread" between Bakken and WTI will be helpful in understanding the Bakken.

On another note, the phrase in the Reuters article about "declining Bakken production" probably suggests many things to many folks. Some data points for newbies:

• the most recent USGS survey, back in 2010, or whenever it was, was based on data from the middle Bakken and to some extent, what was known about the upper Three Forks at that time (I have forgotten the specifics) -- if it's important to you, go to the source
• the most recent USGS survey, back in 2010, or whenever it was, did not factor in the two or three lower benches of the Three Forks
• the most recent USGS survey, back in 2010, or whenever it was, was based on technology in use at that time, and certainly did not include the new completion techniques; the projections may not have even included pad drilling (I don't know)
• everyone pretty much agrees that the Bakken has 500 billion bbls of original oil in place
• at one time, Harold Hamm went out on a limb and suggested nearly 1 trillion bbls of OOIP (I have the slide presentation archived); in later presentations the OOIP was scaled back to 500 billion bbls
• everyone pretty much agrees that the minimum primary production from the 500 billion OOIP will be 7%; some will say no more than 3%; some will say a lot more than 7%; take your pick; I'm sticking with a minimum of 7% x 500 billion bbls gets you 35 billion bbls
• the North Slope of Alaska has produced somewhere in the neighborhood of 7 billion bbls (if I recall correctly; don't quote me on that; if it's important for you, go to the source)
• at one million bbls production / day, and 35 billion bbls recoverable, we are talking 35,000 days of production = 96 years (slightly less due to leap years which add a day every four years)
• when the USGS did their survey back in 2010, or whenever it was, the EUR of a Bakken well was said to be in the 300K to 500K range; since then, significantly increased; in the "holy Grail," the EUR of the QEP wells are now in the one million range
• Bentek predicted a long, long time ago -- maybe back in 2010 or whenever it was -- that the Bakken would peak out at 2.1 million bopd

The bottom line for me: if the price is right and the demand is there, the Bakken will easily produce 2.1 million bopd.

Putting that into perspective:

• many folks seem to interchangeably substitute "North Dakota" for the "Bakken" and vice versa
• the Bakken in North Dakota represents about a third, probably less, of the entire state of North Dakota; it's a very, very small area in North Dakota; the Bakken/Three Forks extends into South Dakota (technically, but not much will happen there); Montana (a bit more, but not much); and then into Canada (significantly more than Montana but how significantly, I don't know)
• Saudi Arabia is currently producing about 10 million bopd; to get to 12 million bopd is a stretch (and that's only a 20% increase; 2/10 = 20 increase)
• North Dakota (not just the Bakken) is producing 1 million bopd; if the price is right and the demand is there, the Bakken will easily product 2 million bopd; that's a 100% increase in production; a doubling of production
• Saudi's 20% increase will come with great effort (based on their 5-year $35 billion sustainment program announced in 2012)
• Saudi says the kingdom could become a net importer of oil in 25 years; my granddaughters will know; I won't be around so I will never know
• North Dakota will never become a net importer of oil; North Dakota will be exporting oil easily through 2100

If the decline rate of the Bakken was irrelevant from the very beginning -- back in 2007 -- the decline rate has become even more irrelevant in 2015. I talked about the decline rate issue often in the early days of the Bakken and am not interested in going over plowed ground now. The decline rate issue has a lot do with one's perspective.

One has to laugh. With the current slump in oil prices and the choking back of oil wells in the Bakken, one might not even notice the decline rate.

By the way, no one has recently talked about the Red Queen falling off her treadmill which relates to the decline rate. The active rig count in North Dakota has plummeted:

• April 30, 2014: 187
• March 31, 2015: 99
• April 30, 2015: 86 

One year ago (using most recent data available, April, 2015), there were 187 active rigs; on April 30, this year, 86 rigs. Is that less than half? Let's see: 86 x 2 = 172. Yup, less than half. In April, last year (2014), North Dakota hit a milestone, producing just over one million bopd for the first time in the history of the state. With a record number of active rigs and the number of rigs increasing, North Dakota hits 1 million bopd.

One year late with a plummeting in the number of active rigs, the state still produces well over 1 million bopd.

But as noted in another post, the number of active rigs is only one data point. In addition  to "retiring" rigs, operators are cutting back the number of days wells are producing and they are choking back the amount of production when producing. Operators who do not meet new flaring rules are severely penalized. So, with retiring active rigs, cutting back the number of days production on any given well, choking back on daily production, and the state still exceeds the million-barrel threshold.

How many folks remember this?

Producing wells:

• March, 2015: 12,443
• April, 2015: 12,537

Wells capable of producing in April, 2015: 14,119

• 1,582 wells capable of producing were off-line 

It's probably a meaningless data point, but it seems to be something to keep in mind when discussing the overall crude oil production potential in North Dakota.

Bottom line: if the price is right, and the demand is there, we are not going to see a decline in Bakken production year-over-year for many years. If the price is not right and the demand is not there, hey, folks, great news -- the US consumers should be filling their SUVs with inexpensive gasoline.

It's a long note, but I think it's important for newbies to get a handle on the "decline rate" of the Bakken since it still comes up so often.

The reason operators like the Bakken:

• it's an oily play: 94% or better crude oil production vs 75% or less in other oil plays
• Bakken wells in the best Bakken pay for themselves in six months; if the price is right, Bakken wells outside the core, will pay for themselves in two years
• the wells will continue to produce for decades
• the infrastructure is getting there; improving every day; and, it's already pretty good
• great working relationship with the state
• great working relationship with the local population

This will be the third time I've said it: the data point in the next Director's Cut that I am most curious about is the fracklog. However, after seeing that Investor Village note (the note from the discussion group above), it will be interesting to see what the price of Bakken was selling for in April. We might be surprised.

A huge "thank you" to Don for sending me that Investor Village link.