Tier 1 Drilling Locations In The Bakken -- Commentary -- Not Ready For Prime Time -- Posted October 24, 2017

Part One

I'm purposely "burying" this post. It will be posted "over" an old "draft" that was never posted. It should end up being posted among the January, 2016, posts. I'm posting it here because I don't want to lose my thoughts on this subject, but I don't want to get into a big "philosophical" discussion with readers ... yet. I'm hoping most readers won't see this post.

In other words, my thoughts on this subject are not yet ready for prime time.

This is being posted on October 24, 2017.

There are two links.

The first is to a post with regard to Statoil and Tier 1 drilling locations.

The second link has to do with an e-mail exchange with a reader (see link to Schlumberger below). The reader was citing the 3Q17 Schlumberger earnings call in which Schlumberger seemed to be stating that E&P companies drilling on-shore US (i.e., shale plays) are quickly running out of Tier 1 drilling locations.

This was the e-mail from the reader:

I always read what completion companies have to say each quarter.  SLB's is pretty interesting especially the "business environment" area.  I remember writing to you about how companies were drilling  /  still drilling their brains out in core positions in a lot of plays and that won't go on forever.  There is only so much land.

It looks like Mr. Kibsgaard is referring to maybe the Permian in this light.   I said that was definitely going on in the Bakken and if this happening in already in the Permian and the prices people paid....ouch..where will production go if people have to move from Tier 1 areas?

Schlumberger's (SLB) CEO Paal Kibsgaard on Q3 2017 Results - Earnings Call Transcript

This was my reply:

That's a great question/observation.

Perhaps you are referring to this paragraph in the transcript:

Brent crude which is now in backwardation is seeing faster inventory draws and stocks are already approaching the five year average. In North America land where the E&P companies have added significant CapEx over the past year, the production growth is so far falling short of expectations, driven by supply chain inflation, operational inefficiencies and the need to step out from the Tier 1 acreage. This has led to a moderating investment appetite where the previous pursue to production growth is now being balanced out with an equal focus on generated solid financial returns and operating within cash flow.

1. I say that's a great question / observation for a number of reasons. I was thinking about the very same thing last night, "sweet spots"; Tier 1; core locations, whatever one wants to call them.

2. I'm in the minority on this, but I don't think we will see a tightening of supplies any time soon unless OPEC (namely, Saudi Arabia) continues to cut production / exports.

3. OPEC seems to be talking their book, saying that "demand" will pick up in 2018 - 2022 and that will put pressure on "supply." I'm not convinced. But again, I'm in the minority on this one.

4. I can't speak to the other on-shore, unconventional (shale) plays in the US; I can't speak to the Permian, for example.

5. However, in the Bakken, I'm not a bit worried about operators running out of core drilling locations (Tier 1 locations) at $50 oil.

6. If OPEC is correct, and analysts are correct, that the price of WTI will trend toward $60, then the core drilling locations (Tier 1 locations) will increase.

7. But this is what is really getting me excited. Several things:

a) infill drilling. when the Bakken boom began, everyone thought there would be one well per section. I blogged from the beginning that if you had one well in your drilling unit, you would eventually  have 4, maybe 8, and possibly 16 wells in that drilling unit. I doubt we are even close to an average of four wells in each drilling unit in Tier 1 locations in the Bakken. That's a lot of wells yet to be drilled in Tier 1 locations in the Bakken.

b) it's pretty much accepted that only one of six wells has been drilled in the Bakken. The data suggests that 60,000 wells will have to be drilled; so far 10,000 Bakken wells have been drilled. Obviously, many/most of those 60,000 wells will NOT be Tier 1 wells. But I still doubt the average has reached 4 wells/drilling unit in Tier 1. I still think folks think there will only be 8 wells in a drilling unit in Tier 1 locations. CLR thinks there will be 16 - 32 wells in a drilling unit in the Bakken.

c) But this is the biggest thing that excites me: I think every well completed before 2016 is a candidate for re-fracking. Every well, not just some. Obviously they will re-frack the wells in the Tier 1 locations first. But that's still a lot of wells to re-frack. And if you've noticed, the re-fracked wells are incredible wells. Really incredible.

d) I have not blogged this yet, and I may be ahead of my headlights, but I'm beginning to question this whole concept of "Tier 1" locations in the Bakken.

Yes, for various reasons, some areas will be better than other others in the Bakken, but my hunch is that improved technology (especially microseismic activity and geologists' experience) will result in "Tier 1 locations" expanding; the "definition" of Tier 1 is all relative. When they first started drilling in the Bakken, they talked about EURs of 350,000 but now the "Tier 1" locations are expected to have EURs of 750,000 to 1 million bbls. That's huge. That suggests to me that some of the locations not considered Tier 1 before will now become "Tier 1" by the old definition. And one has to remember that the new operators have acquired some acreage for dimes on the dollar as older operators have moved out; or gone bankrupt.

So, I guess SLB is concerned about operators having to expand outside the original Tier 1 locations as those locations get drilled out. Again, I can't speak to the other plays, but I just don't see that happening in the Bakken in the next six months, or even the next five years.

I've said many, many times on the blog that I am inappropriately exuberant about the Bakken. I assume it's only a matter of times before we see folks talking about lack of drilling opportunities in Tier 1 locations, but I don't see that at all, for two simple reasons: a) infill drilling has barely started; we haven't even begun drilling the lower benches of the Three Forks; and, b) re-fracking.

Part Two -- posted October 28, 2017 -- See this post.

There's a lot of discussion coming from readers about what I call the "halo effect." I think I've posted enough examples (see "wells of interest") to prove my point. Frankly, it's getting tedious.

In addition, there's a lot of hand-wringing about communication between horizontal wells in the same formation. I think that's a red herring.

And then, there's a of talk about the impossibility of communication between the first bench of the Three Forks and the middle Bakken. I have posted many examples where communication between these two formations is almost required to explain the production profile of certain wells. Now with this newest post (see link above), I don't know how you can explain it any other way.

But I don't want to get into a discussion among readers on this, so I will let it go for now.