Friday Night Ramblings -- The Bakken, But Nothing New

CarpeDiem.com regularly posts uplifting updates regarding the Bakken and just as regularly there is one informationally-challenged individual who never fails to comment. I can't even succinctly summarize his/her arguments/comments because they ... well, they just don't reflect reality.

One of the more interesting arguments is that all the good wells have been drilled, all the sweet spots have been found. The reality is, if nothing else, it appears most operators have been getting better at completing Bakken wells. As time goes on, we will see more and more data validating that observation.

Back in November, 2009, Hess drilled EN-State B-155-93-1609H-1 in section 16-155-93, Alger field. It was a very long lateral, almost 21,000 feet, and Hess reached total depth in 18 days. And that was back in late 2009. The IP was a moderately impressive 531 bbls/24 hours. To date that well has produced 137,876 bbls of oil. Although wells are increasing in cost, at the time this well was drilled, the general consensus was that wells were well on their way to recovering costs when 100,000 bbls had been produced. Yes, the decline rate is horrendous, but this well is still producing about 2,500 bbls/month (at $50/bbl --> ~ $125,000/month and at very little cost.

[Most natural gas from this well is being sold, but a bit is still being flared. This naturally begs the question whether the well is producing at maximum rate. The NDIC has rules about flaring and production.]

[In addition, I was unable to find the frack data for this well; it may be there, but if it is, I missed it. But back in 2009 they were fracking with less proppant and fewer stages than in 2012. All things being equal geologically, the wells should be even better going forward.]

So, back in 2009, Hess drilled the State B well in section 16, which has now produced almost 150,000 bbls (remember, this figure is only through September; it is now almost the end of November).

And today, Hess was issued permits for four more wells in this section: #2, #3, #4, and #5 in the EN-State B-155-93-1609H-1 series of wells.  So, we will get to see if, as some have suggested, "they" have drilled all the good wells in the Bakken. I can hardly wait to see how these four wells compare with the "original" well in this section.

That 2009 well is expected to produce oil for 39 years -- that's the average lifetime projected for a Bakken well. But the lifetime of a well is inconsequential. The total recovery is the key, and the period of time it takes to reach total recovery. Regardless how long a Bakken well produces, the estimated ultimate recovery (EUR) is what is important, and whether it can produce that total in a reasonable length of time. I don't know what the average EUR is/was for a legacy formation, such as Red River, or Madison, but it appears that 150,000 to 250,000 bbls is about as good as they get, and the average is well below that, and it takes 30 years to reach those totals. A Bakken well reaches 150,000 in under two years in most cases. EURs are estimated to range from 400,000 to one million bbls for Bakken wells, the latter in the best Bakken locations.

Check out "monster wells" to get some idea of the potential of the Bakken as well as other formations. 

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Some folks might have noticed this announcement earlier today:

KOG announced that it has completed its offer to exchange $800 million aggregate principal amount of its unregistered 8.125% Senior Notes due 2019 for $800 million aggregate principal amount of its outstanding 8.125% Senior Notes due 2019. 

$800 million. Hey, folks, in my book that's $1 billion.  Don reminded me that just a few years ago one could have bought a share of KOG for 60 cents.  Not too shabby. And except for a few fields, most sections still have just one well in them. The Bakken is just beginning.

They say it will take at least 48,000 wells to drill out the Bakken (that number has been increasing, and will probably continue to increase). I suppose about 5,000 total Bakken wells have been drilled to date.  Through December 31, 2011, according to the NDIC, 3,578 Bakken wells had been drilled.  Close to 2,000 more Bakken wells will be drilled this year. North Dakota now produces more oil than California with less than 8,000 active wells; someone has said that California has about 60,000 active wells.

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A new hotel is going up in Alexander, North Dakota, right in the center of one of the sweet spots in the Bakken. They are putting that hotel up in 90 days. Modular concept. It is designed to be in place "permanently." But it can be moved if necessary. This is the kind of entrepreneurial thinking that makes the Bakken so exciting.

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It seems like just the other day that we read the announcement that Love's was putting a truck stop in north of Williston. That truck stop opened this past week.  A year ago folks were clamoring for a truck reliever route, or another bypass around Williston. Some weeks ago, that bypass was being used. Not perfect, but infrastructure keeps moving along.

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Crude-by-rail? Who would have thought? CBR has completely changed the way we think about moving oil in a fast-moving economy.

Initial Thoughts on the NDIC November Dockets

This photo is part of the series of photos sent from a reader taken in the Williston area. Note the little figures with two legs which will give you an idea of how big these rigs are. Note two cranes on site. My understanding is that the largest crane operator west of the Mississippi is in the Bakken. I could be wrong on that.

Initial Thoughts on the November Dockets

A reader asked about my thoughts on the November dockets. This was my reply, unedited (for the most part) and off-the-cuff, in line with how I've described this blog in the "welcome" and "disclaimer."

I've posted my usual summary (I post it to ensure that I actually read every entry; otherwise, if rushed, I might just skim through it.)

http://www.milliondollarwayblog.com/2012/11/ndic-hearing-dockets-november-2012.html

My initial thoughts, regarding the November dockets:

• fairly "empty" of the type of cases we used to see when the Bakken exploded (figuratively speaking, of course): not so many entries on permitting, expanding fields, etc.
• BR is taking the lead in 2560-acre spacing; I don't know if this is peculiar to BR's thinking regarding the economics of a Bakken well, or if it's related to the location of their properties
• it was notable to see no mention of OXY USA or Newfield; of course, many others were also missing
• CLR's 14 wells in one 1280-acre spacing unit in Divide County was very, very interesting
• it was exciting to see Oasis look to add 23 1280-acre spacing units to the Cottonwood, and anticipating 8 wells on each unit
• but this case was even more interesting: Slawson's 5 wells on a 640-acre unit; and then this: EOG's 6 wells on a 320-acre unit in McKenzie County

If we really start seeing 6 wells on 320-acre units in the sweetest spot(s) of the Bakken, that will be a game changer, and should merit a fair amount of press. [See update: it is likely that 6 wells on 320-acre units will be rare; there are very few existing 320-acre spacing units.]

A lot of the cases were continued cases regarding redefining stratigraphic limits. I have talked about this subject and probably won't talk about it here in reference to the dockets, except to note it. Mineral owners and oil companies obviously see this issue very differently.

A lot of cases on pooling which never interest me because I am not a mineral owner. I'm more interested in the potential of the Bakken and how the Bakken is developed.

So, the big story is really about stratigraphic limits, and continued move to more wells/spacing unit, with 1280-acre units being the norm, and BR taking the lead on 2560-acre units.

But really not much else to say.

Commentary

For the record (I have posted this before): the MDW blog has fulfilled its goals (there were two).

I will continue to post active rig counts, IPs, daily statewide production, etc., but none of this really matters to me any more. From my perspective, the Bakken is now in the hands of the politicians and the bean-counters back at oil company headquarters. I have a good feeling for what the Bakken potential is, and I have a good feeling for how it is being developed. Politicians will be influenced by their constituents and money; the bean-counters will develop the Bakken based on the economics of "a Bakken well." Just 'cause a well can produce 1,000,000 bbls EUR, the boss isn't going to do it if it doesn't make money.

I suppose if anything interests me now is how much more money will be poured into the Bakken on an annual basis in terms of new oil services coming in to the area and existing oil services expanding.

These are the new metrics: a) permitting; b) takeaway capacity; c) infrastructure dollars (all dollars minus direct costs associated with drilling/completing wells). (I may add others.)

In the short term (three days, unless we have weeks, months of recounts, chads, court battles), we have the "Romney cliff" to navigate. Big changes in the Bakken hang on who "wins" the presidency. ("Winning" seems to be the wrong verb.)

In the near term, but not the 3-day short term, we have the "fiscal cliff" to navigate. That could result in some year-end deals, but it almost seems we are near that deadline. Perhaps there are "tons" of year-end deals ready to go/not go depending on the election outcome. It's possible, with one election outcome, we will never learn of those potential deals.

By the way, for investors, and this is not an investment site, there is a very interesting article on page B1 of the weekend edition of the WSJ: how practical is 'tactical'? I never thought I would see this:

The classic "balanced" portfolio favored by prudent investors—60% in stocks, 40% in bonds—is up 11.2% over the past 12 months and 10.4% annually for the past three years.

Over the past decade, this no-brainer portfolio earned 6.3% annually. Even over the past five years, as stocks barely got back to where they stood before the financial crisis, a buy-and-do-nothing investor gained an average of 2.8% a year—thanks to the strong returns on bonds.

Even so, investors have flung money at tactical funds. These portfolios don't place bets on stocks, bonds or other assets and let them ride. They trade in and out, seeking to earn positive returns as markets go up and to limit losses when markets go down. If buy-and-hold investors are tortoises, tactical funds are hares.

And that's why I've never wavered in building part of my portfolio by dollar-cost averaging the majors (for example, XOM, COP, CVX). Locally, MDU is very, very interesting. I don't hold any shares and won't be buying any shares in MDU in the near future -- I always love those disclaimers -- as if one person buying shares in a company is going to make a difference -- unless that person is a "Warren Buffett" or an "icon." (As in Carl "Icon.") But I digress. For conservative investors interested in the Bakken, MDU may be exciting company to watch, even if not investing in it. One will learn a lot about the Bakken (and perhaps the national economy) based on what MDU does the next couple of years.

[This is a hoot: in preparation for the next segment, I googled XOM and this popped up: http://seekingalpha.com/instablog/783565-turnkeyoil/1188681-warren-buffett-and-carl-ichan-are-investing-in-fuel-refiners-vlo-xom-cvx-mpc-mur-hes-mro-cop-oxy -- how coincidental, with an October 18, 2012, byline.]

Which reminds me: it's not getting any easier to find and produce oil:

ExxonMobil’s strength is in its balanced operations, strong financial flexibility and continuous improvement on efficiency and cost control. The company’s efforts to build an unconventional resource portfolio both in North America and overseas aims at increasing production through increased exposure to large energy resources with long reserve life and low field declines. Despite the collapse in natural gas prices, ExxonMobil expects unconventional gas to play a dominant role in future supplies owing to the rapid decline in conventional production.

Recently, its Canadian unit − ExxonMobil Canada − agreed to acquire Calgary-based oil and gas driller Celtic Exploration Ltd., in a move towards expanding its footprint in the unconventional energy plays in North America.

Again, in September, the company and its subsidiary, XTO Energy Inc, entered into an agreement with Denbury Onshore, LLC, a subsidiary of oil and natural gas company Denbury Resources Inc., to acquire all of Denbury’s Bakken shale assets. The deal will increase its production in the Bakken oil shale region.

However, we remain skeptical due to the company’s continued disappointing production trend, which decreased for five quarters in a row. We see ExxonMobil struggling to grow production volumes over time.

By the way, I don't think the XOM-DNR deal was as much about XOM looking for more unconventional production as it was about DNR looking to get back to its core competency.

And, as abruptly as going over a fiscal cliff, this post comes to an abrupt end. Again, remember, this is not an investment site. The writer has no background in the oil and gas industry.