Friday, September 18, 2015

Friday, September 18, 2015 -- Long, Meandering Note


This is not an investment site. Do not make any investment or financial decisions based on what you read here or what you think you may have read here. I am not a trader. I invest for the very long term.

I have no formal training, education, or background in the oil and gas industry.

I often make factual and typographical errors.

I often make simple arithmetic errors.

I am inappropriately exuberant about the Bakken.

I have no formal training, education, or prior experience in raising grandchildren.

I am heavily invested emotionally in Big Oil.

I hate blind spots. And I have many.


Some weeks ago I posted a really, really good post on recovery rates in the Bakken. Unfortunately it was all wrong. Actually, what I posted was correct, except that it was based on a slide that I misinterpreted. A reader caught my mistake (thank goodness) and I immediately pulled that post down. I can't remember, but I believe in my welcome/disclaimer I talk about my philosophy on updating posts and/or removing posts. In general, I will not "hide" my corrections and, in general, I will not remove earlier posts.


So, we start again. Some weeks ago I posted a really, really good post on recovery rates in the Bakken. Unfortunately it was all wrong. Actually, what I posted was correct, except that it was based on a slide that I misinterpreted. A reader caught my mistake (thank goodness) and I immediately pulled that post down.

I bring that up because today over at Seeking Alpha, Richard Zeits has a great article on the potential of US shale. This is a keeper; I assume it will be archived by Seeking Alpha in the near future, with access only for paying subscribers.

There is so much in that article, I'm not going to cut and paste much here. But for those who want to cut to the chase, here is what I overheard at Cashwise in Williston on my most recent visit there:

"All" (except the USGS and a lot of other folks) agree the Bakken has 500 billion bbls original oil in place (currently being depleted by about one million bopd). At one time, Harold Hamm went out on a limb and suggested 903 billion bbls but that has been pulled back to 500 billion bbls (publicly).

When we first started talking about the Bakken, we were talking about 1 - 3% recovery rates (primary production). Early on, I provided evidence and calculations that the recovery rate was actually closer to 8%. After that, one major operator in the Bakken did "admit" that recovery rates in the Bakken were in the 5 - 8% range. There are now folks who feel the recovery rate is or will be 20% (primary production).

When we first started talking about the Bakken, we were talking about EURs of 350,000 bbls, and it quickly went to 500,000 bbls. EURs greater than 500,000 were thought to be exceptional. Now, I can't imagine any operator drilling any well in the Bakken without an expectation of 500,000 bbls even outside the core. Whether one gets 500,000 bbls from wells outside the core will depend on the price of oil some years from now.

Zeits is now taking about 2-million-barrel EURs. 

In the sweet spots of the Bakken, it appears that EURs of 1 million bbls are now the expectation. At one time, a lot of folks thought the sweet spots were limited in the Bakken. In fact, it has become somewhat of a surprise how much of the Bakken is composed of those so-called "sweet spots."


After reading the Zeits article over at Seeking Alpha (linked above and discussed above), if you haven't already, be sure to look at EOG's most recent presentation. This, too, is a keeper, and will probably be lost in the ether some months from now. [Later, see this note also.]

When looking at this, remember this is EOG only (for the most part).

Before looking at the presentation, it might be helpful to look at the history of EOG in the Bakken, at this link.

The most recent update I had at that link:
  • 1Q14: down to 90,000 acres of Core Bakken; Antelope Extension: 20,000 acres; Core well -- 92% oil, 2% gas, 6% NGL; Antelope well -- 78% oil, 11% gas, 11% NGL; source: EOG
Now, compare the new data, at slide 5 (EOG marks it slide 4) of the linked presentation (note: I often make mistakes in interpreting data; I often make factual and typographical errors; it is difficult to separate fact from opinion; I often round numbers; it is difficult to separate my observations from the presented data; these comments are for my use to help my better understand the Bakken; feel free to read them and comment on them but don't quote me on any of this stuff; if it's important to you, go to the source:
  • EOG has expanded its core acreage from 90,000 acres to 120,000 acres in the Bakken this past year
  • EOG has 110,000 non-core acres in the Bakken
  • EOG in the Bakken, core + non-core = 230,000 acres
  • At one time, EOG had around 600,000 acres in the Bakken
  • I understand the difference between core and non-core, but I don't differentiate between the two (for the most part)
  • 230,000 acres / 640 acres = 360 sections
  • 120,000 acres core / 640 acres = 200 sections (rounded up from 187)
  • 110,000 acres non-core / 640 acres = 175 sections (rounded up form 172)
  • 187 sections x 8 wells = 1,407 wells
  • 175 sections x 6 wells = 1,050 wells
  • EOG says: 187 sections --> 590 remaining drilling locations or 3 more wells per section
  • EOG says: 172 sections --> 950 remaining drilling locations or 5.5 more wells per section
  • Then note the small print (asterisked): as of January 1, 2015, Bakken/Three Forks); and assumes no further downspacing, acreage additions, or enhanced recovery. Comment: one can assume two of those three assumptions will go by the wayside, and probably all three.
  • Years of drilling: note that non-core is missing an estimate. Core area says 590 remaining locations over 14 years = 40 wells / year. In the non-core area, 950 / 20 wells / year would get you almost 50 years of drilling. 
  • And then finally this: if EOG has about 250,000 net acres, it is a relatively small player compared to what CLR and WLL hold; and really a small player if one considers the entire size of the Bakken. Both CLR and WLL have around a million acres in the Bakken (if I recall correctly) and Hess has about 650,000 acres (based on old data; I don't have current figures for Hess)
  • one last comment: both Zeits and I agree that in the core, one has to assume EURs of one million bbls; with almost 600 drilling locations in the core Bakken, EOG should uplift through primary production 600 million bbls of oil. Note that EOG comes up with 620 million boe for all their core Bakken wells, not just their remaining wells. 
So, other than slide 5, are there any other interesting slides in that presentation? Let's see:

Slide 11 (as marked by EOG):
  • completed well cost in the Bakken at $7.1 million; target = $6.5
  • spud-to-TD: 8.2 days; record = 5.6 days
Slide 17 (as marked by EOG):
  • EOG's Bakken play
  • EOG's reserve potential in the Bakken: from 0.4 billion boe (2010) --> 1 billion boe (2015)
Slide 22: it is important to note that peer groups do not include CLR or WLL; does include Hess

Apples And Oranges

When I was going to high school in Williston, back in the 60's, a $15 million project anywhere in the area would have been headline news. Of course, I would not have been paying attention; my interests were directed elsewhere. But in the 60's and through the 90's and even into 2005, a $15 million project would have been headline news. Now it's just another story in the Bakken. In this case, I'm referring to a project that will hardly be noticed: Kinder Morgan wants to turn a Hiland gathering pipeline into a transmission pipeline. This project will require no new pipeline (minimal digging, in other words); it will require new surface structures including a storage tank. I assume much of the $15 million will be related to salaries and wages.

A second point to take away from this announcement is that despite all the hand-wringing over the low price of oil and its effect on North Dakota, the Bakken keeps chugging along. And it's not going away. Maybe more on that later. The operators are putting this "breather" to good use: putting in more infrastructure. When I was back in Williston just a week ago, the landscape had hardly changed. One can drive for miles and miles and see very few wells. And on much of that landscape, when one sees a well, it is a well -- a singleton. Eventually, wherever there's a single well, there will be a pad with at least four wells. And in the really hot areas, where one sees a pad with four wells, one will eventually see a pad with twice or three times that number.

When oil prices fell -- the "official" date is October, 2014 -- the middle Bakken was well demarcated and operators knew pretty much what they had. However, they were just beginning to get a feeling for the upper bench of the Three Forks, and one can say that with a few exceptions, the second and third benches have not even been explored or evaluated. I'm not sure if the 2nd bench will be all that great, but in places the 3rd bench looks pretty good. But it's all relative and it all depends on the price of oil. So, until prices improve, it looks like the Bakken is in a holding pattern: putting in more infrastructure and drilling out the core middle Bakken. I'm not even sure the Three Forks, upper bench, is getting all that much attention.

The third point to take away from this announcement is the close working relationship among the oil and gas industry (the operators), the state (regulators vs development), landowners, and the public who are not directly involved. When you read The Dickinson Press article linked above, note the comments made about the commissioners who will be looking at this request. I find that very, very enlightening and very, very comforting.

Other Big Projects

While I was in the Bakken last week, I was surprised at the new residential and commercial development still breaking ground. There was a new residential development project just breaking ground. Two new gas stations were going up: one on the west side of town, one on the southeast side of town. The latter was a brand new station replacing an old one in the same location. The former, the one on the west side, is going to be a huge station, well inside city limits along the bypass.

The truck bypass around Williston is a big, big deal; it will be built with lots and lots of cement.

The new airport is on track, though I don't think ground has been broken.

The huge new four-story renaissance building on south Main is nearing completion including below-ground parking, I believe. I don't know the specifics.

Much of Main Street renovation was complete and now they are working on the north end of Main Street, in the JC Penney block.

There's a huge new rail yard east of Williston that watered my eyes when I saw it; private endeavor.

The four-lane bridge crossing the Missouri southwest of Williston is coming along, and I'm betting that the next time I visit Williston it will be complete. I plan to visit Williston next spring, but, and this is a huge "but," my brother-in-law retires December 1, 2015, and he has always wanted to see Mount Rushmore. If I can swing the dates, I will try to get him and me up to the Bakken, Mount Rushmore, and Chief Crazy Horse in early December. If not, the road trip will have to wait until April, 2016.

My hunch is that when winter sets in, in a few months, Williston downtown will be "dead." Books on Broadway will be as bus as ever. I still say it's the best private bookstore I've seen. It's more than just a bookstore, with it's unique science sets and projects for students, unique gifts for all ages, and it's coffee bar. Plus good conversation when the employees have time to talk. I assume we will start to see change in ownership of hotels/motels; some will close; we will start to see stories about foreclosures, but there may be some pleasant surprises there; ... much more could be written... but next summer will be another huge summer.

The good news: Debbie Downer will never miss the opportunity to publish a negative article on the Bakken.

A new airport in Williston would have been a huge story if that was the only project being talked about, but it's just one of many.

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