There's A Whole Lot More Going On Than Rig Counts -- June 7, 2015

Note: in a long post like this, there will be more typographical and factual errors than usual. See full disclaimer elsewhere. This is simply the opinion of an individual with no formal training or background in the oil and gas industry. I post this mostly to help me understand the Bakken hoping that where I am confused or make mistakes, readers will enlighten me. As long as this post is, much was left out, much was not said.

This "case study" is not to sort out everything in the Bakken. It is to make one point: the drop in Bakken crude oil production is due to a lot more than just the active rig count and the backlog in fracking.

If this information is important to you, go to the source. I don't think there is anything in this post that could be construed as investment advice, but if you think you see it, don't make any investment or financial decisions based on what you read here. This is not an investment site. Yes, the USA Today article that is linked could be used as investment advice; that was not the purpose of linking it.

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There is an interesting article in USA Today from OilPrice suggesting that all that talk about oil going to $20 or $30 isn't going to happen.

It begins:

Oil rising to $60 a barrel is displeasing some people, particularly the shorts. Some of the more extreme -- those calling for oil in the $20's – have wisely fallen silent. Others, like Goldman Sachs, who a few months ago had set their flag in the 30's, have unfortunately not gone so silent. They recently moved their flag into the 40's but they continue to talk a lot. A better strategy – though one that would require some humility — would be to stop talking and listen.

I've followed OilPrice for awhile now and this article continues their theme. I did not find much new in the article that hasn't been talked about in the blog.

However, for newbies and for me, the article is full of interesting data points. Interesting in the sense that the data points give me something to discuss.

By the way, before I go on, there is a new term introduced in this article: fracklog. This refers to the backlog in wells that need to be fracked.

This caught my eye:

The IP (initial production) rates right after a completion may be high with shale wells, but there is a very steep precipice that immediately follows. As we move through time, more and more wells are slipping down this curve that bottoms out at 15% to 20% +/-of initial production rates. And this only takes a handful of months. The flat section a year or so out is known as the tail. The tail is good money, but the upfront flush is what pays for wells.

Ever since the beginning of the Bakken, observers have talked about the "steep decline." OilPrice brings it up again. But there's a slight twist. 

Everyone agrees the drilling rigs are coming down in unconventional/tight/shale oil, and everyone agrees that there has always been a steep decline after the initial period of production, say six months or so.

However, there is a new wrinkle. Last night I started updating all the "drilled-but-not-completed" wells reported in the first quarter of 2015. I only completed a few before I noted something very interesting. I had noted this some months ago, but never blogged about it, but now it's becoming so obvious, I thought it time to write about. [And, also due to the fact there isn't much else to write about today.]

Look at the production profiles of just four of the wells I updated last night (see below). These wells came off the confidential list in 1Q15 and all went to DRL status (by the way, most wells that would have gone to DRL status in the past are now going to SI/NC status, something noted late in 1Q15 and now throughout 2Q15.

I don't like using production profiles from Continental Resources. That company seems to manage individual well production a lot differently than the others in the Bakken based on the limited data I get from production profiles. But I can't be choosy. So, here are the production profiles from two Oasis wells, one XTO well, and one CLR well. As you look at these profiles, remember the typical production profile of a Bakken well one year ago:

• first month: ignore; the well may have been fracked at the beginning, middle, or end of the month
• second month: best month to get an investor excited
• third month: holds steady, maybe more than the second month
• fourth month: holds steady; this is where the break comes; some really great wells hold up; some start to fall; in the "old day," most began to fall by the fourth month; as the Bakken matured, wells were holding up better through the fifth month
• fifth month: most Bakken wells now show the typical decline, though the good wells will continue to hold up pretty well
• sixth month: that's it; time to move on; we've seen the potential of that well, and from here on it, it's a steady decline, albeit very slow in some cases, and work-overs, pump installations, operational considerations will take the wells off-line periodically.

So, now, look at these 1Q15 wells:

• 28342, 951, Oasis, Chalmers 5301 44-24 2TR, Baker, t12/14; cum 32K 4/15:

Pool	Date	Days	BBLS Oil	Runs	BBLS Water	MCF Prod	MCF Sold	Vent/Flare
BAKKEN	4-2015	3	32	0	0	23	1	22
BAKKEN	3-2015	12	1241	1240	5886	1753	1753	0
BAKKEN	2-2015	25	2438	2812	5530	2080	2080	0
BAKKEN	1-2015	25	16635	16303	30282	13904	13904	0
BAKKEN	12-2014	14	11152	11077	19586	1457	1457	0

• 28396, 754, XTO, Ernest Federal 31X-19G, Haystack Butte, t2/15; cum 16K 4/15: 

Pool	Date	Days	BBLS Oil	Runs	BBLS Water	MCF Prod	MCF Sold	Vent/Flare
BAKKEN	4-2015	20	4857	4046	6955	7054	5887	1061
BAKKEN	3-2015	10	8514	8514	13216	10642	965	9677
BAKKEN	2-2015	3	1835	2535	9580	2157	0	2157
BAKKEN	1-2015	2	720	0	3335	1393	0	1393

• 28626, A, CLR, Rennerfeldt 4-30H, Brooklyn, 38 stages, 4.3 million lbs, fracked 2/15; no test date; cum 2K 4/15:

Pool	Date	Days	BBLS Oil	Runs	BBLS Water	MCF Prod	MCF Sold	Vent/Flare
BAKKEN	4-2015	2	635	264	492	923	887	36
BAKKEN	3-2015	10	1536	1458	17144	3258	0	3258
BAKKEN	2-2015	0	0	0	0	0	0	0

• 27224, IA/95, Oasis, Mallard 5692 31-22 11T2, Alger, Three Forks, 2nd bench, in July, 2014, 12 stages, 1.8 million lbs; in October, 2014, 24 stages, 3.1 million lbs; t10/14; cum 3K 4/15; on-line for 20 days over 10 months; last produced in November, 2014:

Pool	Date	Days	BBLS Oil	Runs	BBLS Water	MCF Prod	MCF Sold	Vent/Flare
BAKKEN	4-2015	0	0	0	0	0	0	0
BAKKEN	3-2015	0	0	0	0	0	0	0
BAKKEN	2-2015	0	0	0	0	0	0	0
BAKKEN	1-2015	0	0	0	0	0	0	0
BAKKEN	12-2014	0	0	37	0	0	0	0
BAKKEN	11-2014	5	957	958	4928	2042	2042	0
BAKKEN	10-2014	6	872	834	10629	1626	1626	0
BAKKEN	9-2014	0	0	32	0	0	0	0
BAKKEN	8-2014	9	1234	1202	16543	998	998	0
BAKKEN	7-2014	0	0	0	0	0	0	0

Commentary

The broad brush:

• first month: ignore
• second month: best data we now have to estimate the well's potential
• third month: all bets are off

All bets are off by the third month for three reasons:

• operators are cutting back production because prices are low; it's better to store oil underground than above ground
• NDIC flaring rules; severe penalties if operators continue to flare
• NDIC conditioning rules: going forward, less of an issue, but still needs to be considered

Even if prices were sky-high, the Bakken would not reach maximum production because of NDIC flaring rules. The conditioning rules, it turns out, won't have much effect.

Now, the fine brush look, but still a superficial look, at the four wells highlighted above.

Fine brush, the Oasis Chalmers well:

• remember, ignore the first month
• only 25 days 2nd and 3rd month; normally Bakken wells produce the full 30 and 31 days the first two months
• then the huge drop off in months 4 and 5: we never used to see that; in this case Oasis dropped to 3 days in the fifth month; for all practical purposes, the well has been shut in; there may be operational reasons but the outcome is the same

Fine brush, the XTO Ernest Federal well:

• ignore the first month
• look at that second month; should have been up for the full 28 days
• third and fourth month: coming along, but still well below full month production; and the wells continue to flare (not good news)

Fine brush, the CLR Rennerfeldt well:

• ignore the first month
• ignore the entire production profile; it makes no sense which is not unusual to see in CLR pad drilling

Fine brush, the Oasis Mallard well:

• this is a Three Forks 2nd bench well well; we have seen too few 2nd  bench wells to know how this payzone will work out 
• the IP was atrocious, but over a 9-day period, it looked promising
• after that, who knows, but whatever it is, this is not a typical Bakken decline curve; no Bakken wells drop to 0 bbls by the third or fourth month, no matter how bad they are

This is the bottom line: with regard to decline curves, before January, 2015, observers could actually see the typical Bakken decline curves; and the operators could provide nice schematics of the decline curve for any given well. Not only that, but the operators were improving on the decline curve, and the quasi-canard that Bakken wells had a serious decline issue was becoming more and more a cliche as operators improved on the decline curve.

The mainstream press talks about decreasing production in the Bakken due to fewer active rigs and the steep decline rate of Bakken wells.

There's a whole lot more going on.