Archive for the ‘Bakken’ Category
In this post I present some of the methods I have used to get estimates based on actual NDIC data on the Estimated Ultimate Recovery (EUR) for wells in the Bakken North Dakota.
The Bakken is here being treated as one big entity. As the Bakken shales [for geological reasons] are not ubiquitous there will be differences amongst pools, formations and companies.
One metric to evaluate the efficiency of a Light Tight Oil (LTO) well and a large population of wells are looking at developments in the Reserves over Production (R/P) ratio.
The R/P ratio is a snapshot that gives a theoretical duration, normally expressed in years, the production level for one particular year can be sustained at with the reserves in production at the end of that year.
Further, as LTO wells decline steeply and a big portion of the total extraction has come/comes from wells started less than 2 years ago, this dominates the Reserves/Production (R/P) ratio. The flow from a big population of high flowing wells in steep decline results in a low R/P ratio (and vice versa).
The R/P metric says nothing about extraction in absolute terms, which is another metric that needs to be brought into consideration in order to obtain a more complete picture of expected developments.
Development in Well Totals by CategoriesThe average Bakken well is now estimated to reach a EUR of 320 kbo [kbo; kilo barrels oil = 1,000 bo]. Based on this, the average well has an R/P of 2.7 after its first year of flow, which suggests that about 27% of its EUR is recovered during its first year of flow.
Estimates done by others based on actual NDIC data puts now the EUR for the average Bakken well slightly below 300 kbo.
As from what point the wells reach the end of their economic life, educated guesses now spans from 10 bo/d (0.3 kbo/Month) to 25 bo/d (0.75 kbo/Month).
In retrospect, it becomes easier to understand the amazing growth and resilience of Light Tight Oil (LTO) extraction from Bakken (and other US tight oil plays) if the effects from the use of huge amounts of debts (including assets and equities sales) is put into this context.
Debt leverage together with a high oil price are what stimulated the US LTO extraction for some time to appear as something like a license to print money.
Now, and as long present low oil prices persist, the LTO companies are in financial straitjackets.
- It was high CAPEX in 2015 from external funding, primarily debt and assets/equities sales, that created the impression of LTO’s resilience to lower oil prices (ref also figure 2).
Actual data show that so far there has been some improvements in well productivities [cumulative versus time]. However, these improvements by themselves do not fully explain the apparent resilience of LTO extraction to lower oil prices.
- NONE of the wells now added in the Bakken are on trajectories to become profitable at present prices (ref also figure 3).
The average well now needs about $80/bo at the wellhead to be on a profitable trajectory.
(The average spread between WTI and North Dakota Sweet has been and is above $10/bo.)
- As far as actual data from NDIC on well productivity (EUR trajectories) provide any guidance it is not expected that well manufacturing will pick up in a meaningful way before the oil price moves and remains above $60/bo @ WH.
Writing down the drilling cost and rebasing profitability from completion costs [for DUCs, Drilled UnCompleted wells] does not change this fact.
- The decline in the LTO extraction will (all things equal) relentlessly erode future funding capacities for drilling and completion [well manufacturing].
- It is now all about the net cash flow from operations, debt service and retirement of debts [clearing the bond hurdles]. Debt management and debt restructuring will remain on top of the agenda for management of LTO companies. It should be expected that the management of these companies will do everything in their powers to clear the bond hurdles and keep their companies out of bankruptcy.
- For 2016 well additions in the Bakken will fall below the threshold that allows to fully replace extracted reserves.
In the industry this is referred to as the Reserves Replacement Ratio (RRR).
For the Bakken the RRR for 2016 is now expected to be below 50%.
(This lowers the collateral of the LTO companies and their debt carrying capacities.)
At present prices several companies cannot both retire their debts according to present redemption profiles and manufacture a lot of wells. This is why it is suspected that halting all drilling (where feasible [i.e. Contracts without stiff penalties for cancellation]) and deferring completions have become a necessity born out of the requirements for debt management.
This analysis presents:
- A forecast on total LTO extraction for Bakken (ND, MB/TF) towards the end of 2017.
- A closer look at a generic LTO company in Bakken and its near future challenges with clearing the bond hurdles.
(The generic LTO company is based on [weighted] financial data from several, primarily Bakken invested companies’ Security and Exchange Commissions (SEC) 10-K/Q filings for 2015).
To keep the focus on the (debt) dynamics in play, The Financial Red Queen, I opted to use a generic company. This is also done to play down discussions about specific companies.
- The important message to drive home is how declining cash flow from operations, the big debt overhang and clearing the bond hurdles will constrain many LTO companies’ funding (CAPEX) for well manufacturing [drilling and/or completion] as long as oil prices remain below $60/bo @WH (or about $70/bo, WTI).
- With sustained low oil prices, the servicing of total debt has been and will be the power that forces companies deep in debt and heavily exposed to LTO into bankruptcies and causes losses on creditors and become the real driver behind the steep decline in LTO extraction.
After years of following developments in extraction of light tight oil (LTO) in the Bakken, the oil price, studying actual well production data from the North Dakota Industrial Commission (NDIC) and the SEC 10-Q/Ks filings for several companies heavily exposed to the Bakken, a quote from Shakespeare’s Macbeth comes to the fore of my mind:
All causes shall give way: I am in blood
Stepp’d in so far that, should I wade no more,
Returning were as tedious as go o’er:
(Macbeth: Act III, Scene IV)
For me the Macbeth quote very much sums up the predicament many Bakken LTO operators now find themselves in.What this study/update present:
- With the decline in the oil price the average well as from the 2012 vintage will struggle to reach payout and become profitable.
(The oil price decline reduces the portion of the more recent wells that are on trajectories to reach payout and become profitable.)
- The 2015 vintage follows the 2014 vintage closely, suggesting that around 20% of the wells of 2015 vintage are on a trajectory to reach payout and become profitable.
- The underlying decline from the legacy wells is strong. The extraction from all the wells started between Jan 2008 and Dec 2014 declined by close to 440 kb (or about 41%) from Dec 2014 to Sep 2015.
- Some of the early wells (2008 vintage) have been restimulated (refracked) and the effects are short lived and the economics of this looks questionable, at best.
- A near steep decline in LTO extraction from the Bakken is baked into the cake due to the financial dynamics created by a lasting low oil price.
- An average of around 136 wells/month were added so far in 2015 while extraction declined close to 60 kb/d, suggesting 140 – 150 wells needs to be added each month to sustain present extraction levels.
Studying the SEC 10-K/Qs for several of the companies that are heavily weighted in the Bakken shows that natural gas and NGLs (Natural Gas Liquids) are weighing down the financial results for many companies.
This post presents a study of developments of Light Tight Oil (LTO, shale oil) extraction for 8 companies in Bakken(ND) that as of April 2015 had added around 600 (or more) producing wells in the Bakken/Three Forks formations since January 2008.
The 8 companies are; Continental Resources, EOG Resources, Hess Bakken Investments, Marathon Oil Company, Oasis Petroleum, Statoil Oil & Gas, Whiting Oil and Gas Corporation and XTO Energy.
These 8 companies had around 63% of total LTO extraction from Bakken as of April 2015.
The decline in the oil price has so far reduced the number of rigs drilling in Bakken and a decline in total LTO extraction in Bakken. This study shows there are differences in responses amongst the studied companies to the oil price decline.
As with most other things, size matters, also in Bakken.
Data from the North Dakota Industrial Commission (NDIC) shows that in April 2015 Bakken LTO extraction was at 1.11 Mb/d, down from a high of 1.16 Mb/d as of December 2014.
- For the period December 2014 – April 2015 those in decline lost about 76 kb/d (close to 10%), while those with growth added around 21 kb/d, curtailing total decline at 55 kb/d (close to 5%).
- The 4 companies with growth added about 300 producing wells (46%) of a total of 645 for the months January – April 15 and contributed about 37% of the total Bakken LTO extraction per April 2015.
kb; kilo barrels = 1,000 barrels
The decline in the oil price and LTO flow (for some companies) is likely to move focus to CAPital EXpenditures discipline, profitability and balance sheets healing.
The low oil price has already affected the scale of the drilling and will in the near future lead to a decline in the monthly producing wells additions.
At present oil prices ($60/Bbl, WTI) the net cash flow from operations could unabridged pay for the addition of around 100 wells/month (from spud to flow).
As of the recent months an average of 160 producing wells was started monthly and LTO extraction declined.
This post is an update on LTO extraction in Bakken based upon published data from the North Dakota Industrial Commission (NDIC) as per January 2015.
This post also presents a closer look at developments in LTO extracted from the three of the four counties that presently dominates LTO extraction; McKenzie, Mountrail and Williams.
With an oil price below $50/Bbl (WTI) the companies involved in extraction of LTO in Bakken faces two financial challenges;
- The decline in the cash flow from operations reduces funding capacities for manufacturing new wells. A lower oil price also lowers the value of the companies’ assets and borrowing capacities.
- The “average” well with around 90 kb [90,000 Bbls] of flow in its first year is estimated to have an undiscounted point forward break even (that is a nominal break even with 0% return for the well) at around $65/Bbl (WTI). The break even price increases with increases in the return requirement.
From December 2014 to January 2015 LTO extraction from Bakken(ND) declined from 1.16 Mb/d to 1.13 Mb/d.
In short, LTO extraction at present prices ($45/Bbl, WTI) makes little commercial sense!
This post is an update on total Light Tight Oil (LTO) extraction from Bakken in North Dakota based upon actual data as of October 2014 from North Dakota Industrial Commission (NDIC). It further presents a statistical analysis on developments of well productivity with a detailed look at developments in Parshall, Reunion Bay and Sanish.
- There were general improvements in LTO well productivity in Bakken during 2013.
- Present trends in LTO well productivity for Mountrail’s sweet spots (Alger, Parshall, Reunion Bay, Sanish and Van Hook) suggests these are past their prime.
- Figure 29 in this post show development in well productivity for Alger and Van Hook and figures 06, 08 and 10 for Parshall, Reunion Bay and Sanish. A common feature for Parshall, Reunion Bay, Sanish, and Van Hook is that these reached new highs in well productivity for wells started in 2013.
Alger has been in general decline since 2011.
- LTO extraction in recent years may be viewed as a source for global swing production for oil.
The saying is that hindsight (always) provides 20/20 vision.
In this post I present a retrospective look at my prediction from 2012 published on The Oil Drum (The “Red Queen” series) where I predicted that Light Tight Oil (LTO) extraction from Bakken in North Dakota would not move much above 0.7 Mb/d.
- Profitable drilling in Bakken for LTO extraction has been, is and will continue to be dependent on an oil price above a certain threshold, now about $68/Bbl at the wellhead (or around $80/Bbl [WTI]) on a point forward basis.
(The profitability threshold depends on the individual well’s productivity and companies’ return requirements.)
- Complete analysis of developments to LTO extraction should encompass the resilience of the oil companies’ balance sheets and their return requirements.
LTO extraction in Bakken (and in other plays like Eagle Ford) happened due to a higher oil price as it involves the deployment of expensive technologies which again is at the mercy of:
- Consumers affordability, that is their ability to continue to pay for more expensive oil
- Changes in global total debt levels (credit expansion), like the recent years rapid credit expansion in emerging economies, primarily China.
- Central banks’ policies, like the recent years’ expansions of their balance sheets and low interest rate policies
- Credit/debt is a vehicle for consumers to pay (create demand) for a product/service
- Credit/debt is also used by companies to generate supplies to meet changes to demand
- What companies in reality do is to use expectations of future cash flows (from consumers’ abilities to take on more debt) as collateral to themselves go deeper into debt.
- Credit/debt, thus works both sides of the supply/demand equation
- How OPEC shapes their policies as responses to declines in the oil price
Will OPEC establish and defend a price floor for the oil price?
I have recently and repeatedly pointed out;
- Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates and developments to consumers’/societies’ affordability.
Oil is a global commodity which price is determined in the global marketplace.
Added liquidity and low interest rates provided by the world’s dominant central bank, the Fed, has also played some role in the developments in LTO extraction from the Bakken formation in North America.
As numerous people repeatedly have said; “Never bet against the Fed!” to which I will add “…and China’s determination to expand credit”.
Let me be clear, I do not believe that the Fed’s policies have been aimed at supporting developments in Bakken (or other petroleum developments) this is in my opinion unintended consequences.
In Bakken two factors helped grow and sustain a high number of well additions (well manufacturing);
- A high(er) oil price
- Growing use of cheap external funding (primarily debt)
In the summer of 2012 I found it hard to comprehend what would sustain the oil price above $80/Bbl (WTI).
The mechanisms that supported the high oil price was well understood, what lacked was documentation from authoritative sources about the scale of the continued accommodative policies from major central banks’ (balance sheet expansions [QE] and low interest rate policies) and as important; global total credit expansion, which in recent years was driven by China and other emerging economies.
I have described more about this in my post World Crude Oil Production and the Oil Price.