A reader sent me links to two articles yesterday with concerns about the decline rates associated with the Bakken. Regular readers know the concerns about declines rates; I generally won't post mainstream media stories on decline rates any more.
Just moments ago, another reader, completely out of the blue, sent me this snippet from an analyst:
Over the past couple months we have had an abundance of contact with energy industry insiders and investment professionals through the North American Petroleum Expo (aka 'NAPE') and the Raymond James Institutional Investors Conference. Both of these forums provide an environment of knowledge-sharing and group collaboration, and generally result in a high-level overview of emerging energy market themes and general industry sentiment.
In these discussions (much to the chagrin of our oil production model), there seems to be a growing misconception that, because of the high decline rates in shale plays, we are nearing a point where production collapses in a number of plays - thus making the current oil renaissance unsustainable.
So the theory goes that more and more drilling will be required to maintain or grow oil supply as production from new wells becomes increasingly unable to offset the declines from existing wells - eventually resulting in declining production. This simply is not factually correct.
Although shale wells have very high initial rates of decline, they flatten out relatively quickly; as soon as there is a solid foundation of wells that are 3-4 years old, there is a stable base of production that is not especially exposed to the high levels of decline experienced in the first couple of years that a well is on production. Needless to say, this explanation does not satisfy everybody. To demonstrate our view, we conducted a case study in which we projected Bakken oil production using current industry-reported type curves under different rig count scenarios. In this Stat, we will describe the results of our study.It's probably a private communication meant for subscribers only and I won't post the entire pdf or the link at this time. That much should suffice.
A month or so from now, when the report is being widely circulated to those without subscriptions, I will post the link, assuming I remember.
As long as we are on the subject, let me add a few more points:
- tea leaves alone should suggest this concern is ill-founded; the tea leaves? the amount of investment oil service companies like SLB, BHI, and HAL have invested in Williams County; EOG hits a 24-year high based on Eagle Ford results
- do folks remember the recovery rate being bandied about at the beginning of the Bakken boom? 2 - 3%. Data less than a year later suggested the recovery rate was 3 - 5%; a corporate presentation about that same time suggested as much as 8% recovery; then just last week, I linked a story that suggested primary production could result in 15% recovery from the Bakken
- decline rates are irrelevant; what matters is payback time, and EURs (if you got your entire investment back in one day, and the EUR quadrupled your investment in four months, would you care if the well went dry a year later because of a horrendous decline rate? I know I wouldn't.)
- when the boom began in North Dakota, do you remember how many wells "they" thought would be needed to drill out the Bakken? Around 20,000. That number quickly escalated to 48,000. Some now suggest the number is north of 100,000. At 2,500 wells/year that is 40 years of drilling (three generations of roughnecks); and that's just the middle Bakken/upper Three Forks. We still have the Tyler, and several other formations to consider.
- corporate presentations, almost across the board, show that decline rates are improving across the Bakken
- if anything, six-month IP rates and EURs seem to be increasing in the Bakken, not decreasing
- North Dakota is on track to issue a record number of oil and gas permits in calendar year 2014
- geo-politically, Venezuela seems on the verge of imploding, becoming the Libya of the western hemisphere
- Statoil is having trouble finding new reserves, a similar problem for other majors such as XOM ("Peak Oil" theorists tell us nature/God is not making any more oil)
- I've always opined that Saudi is pumping near their capacity; the analyst on this CNBC video today said the very same thing.
I may be completely wrong. But if I am, it's been a great ride. Life will go one.
For the well-diversified investor: if oil goes down to $25/bbl because Saudi floods the world with oil, the global economy will surge, and a well-diversified investor will do just fine.
Disclaimer: this is not an investment site. Do not make any investment decisions based on anything you read here or think you may have read here.
As long as I've rambled this far, let's look at the statement in bold again: as soon as there is a solid foundation of wells that are 3-4 years old, there is a stable base of production that is not especially exposed to the high levels of decline experienced in the first couple of years that a well is on production.
The Bakken boom began in 2007 in North Dakota. It did not really take off until 2009. KOG was delayed until 2010 in the reservation due to bureaucratic red tape. So, I consider 2011 the base year in the Bakken, and that seems to be born out in the data of active drilling rigs:
| 3/31/2014 | 03/31/2013 | 03/31/2012 | 03/31/2011 | 03/31/2010 | |
|---|---|---|---|---|---|
| Active Rigs | 194 | 188 | 206 | 168 | 103 |
[I would prefer to use 2012 as the base year: it's an even number, easier to remember, and all operators were staking their claims that year (based on the rig counts), even more so than 2011, but folks might consider me "gilding the lily." So for now, 2011, but I claim the right to change that to 2012 later on.]
I agree with the analyst above. Five years from the base year there will be a steady "base" rate of production:
In 2016: 4 years x 2,500 wells + existing 5,000 Bakken wells = 15,000 wells
15,000 wells x 1,000 bbls/month = 15,000,000 bbls x 12 months = 180,000,000 bbls/year
In 2016, I would be disappointed if all new wells did not produce at least 100,000 bbls the first year (that was the old standard; certainly things have improved). 2,500 new wells x 100,000 bbls the first year, add 250,000,000 bbls/year from the new wells drilled in that year.
180 + 250 = 430 million bbls/year
430 million bbls/year divided by 365 days = 1.1 million bopd
The Bentek study of some time ago predicted the Bakken would peak at 2.2 million bopd.
So, somewhere between 1.1 million and 2.2 million bopd seems to be the potential of the Bakken.
I'm sure everyone has a napkin handy and can do their own calculations. If no napkin, an envelope will suffice. Use the envelope in which your royalty check arrived. Smile.
Good luck to all.
Disclaimer: I often make simple arithmetic mistakes and my assumptions above could be way off. And they probably are. I came up with only 1.1 million bopd in 2016. Bentek came up with 2.2 million bopd in 2022) and we are already near the one million bopd mark.
April 1, 2014: here's another "Peak Oil" article over at SeekingAlpha. Doesn't say anything that hasn't been reported before. Decline rates are a red herring and the "Red Queen" is a fact. Who cares? What does it matter. I attended USAF Air War College between 1996 and 1998. I remember a retired USAF general who became an analyst for a think tank: he said we wouldn't see any more gasoline engines in US automobiles by 2010. LOL.
