Peak Oil is You

Donate Bitcoins ;-) or Paypal :-)

Page added on March 21, 2015

Is the Red Queen outrunning Bakken LTO extraction?

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.

In short, LTO extraction at present prices ($45/Bbl, WTI) makes little commercial sense!

From December 2014 to January 2015 LTO extraction from Bakken(ND) declined from 1.16 Mb/d to 1.13 Mb/d.

NOTE: Actual data used for this analysis are all from North Dakota Industrial Commission (NDIC). For wells on confidential list, data on runs were used as proxies for extraction.

Production data for Bakken, North Dakota: Monthly Production Report Index

Formation data from: Bakken Horizontal Wells By Producing Zone

Data on wells kindly made available by Enno Peters’ excellent and tireless work.

Cash is now King

Since last summer world oil prices have come significantly down and I hold it likely they will remain low if not OPEC curtails their supplies and/or until the global supply/demand balance tightens.

As of writing the wellhead price in Bakken is around $30/Bbl and the point forward breakeven for the “average” well has been estimated at $65/Bbl at the wellhead, which is about $80/Bbl WTI.

This with a 7% discount rate, average well first year flow of 90 kb [as of writing the average for 2014] inclusive income from natural gas sales, well cost at $8.5M and exclusive of assets retirement obligations, the plugging and abandonment of oil/ gas wells and production installations.

The low oil price causes a noticeable reduction in companies’ total netted cash flows from operations, which now is estimated at about $550M/month for Bakken (ND) (this includes income from natural gas sales, around 1Mcf/Bbl).

CAPEX funding may be increased through selling more debt, assets and issuing new shares of stock.

The Bank for International Settlements (BIS in Basel, Switzerland) in their quarterly review for March 2015 had a special feature on “Oil and debt” where they wrote:

“Where a substantial portion of investment is debt-financed, higher costs and tighter lending conditions may accelerate the reduction in capital spending. Highly indebted firms could even be forced to sell assets, including rights, plant and equipment. As regards production, highly leveraged producers may attempt to maintain, or even increase, output levels even as the oil price falls in order to remain liquid and to meet interest payments and tighter credit conditions.”

This ($30/Bbl at the wellhead) cash flow from operations [about $550M/month] would unabridged fund 65 wells/month.

My model (also presented in the “Red Queen” series at The Oil Drum) estimates it now takes around 130 – 135 net well additions/month in Bakken (ND) to sustain present LTO extraction levels.

If monthly net well additions fall below the “Red Queen” number, Bakken(ND) LTO extraction will decline.

What made LTO extraction in Bakken a success was a high oil price that allowed to leverage with debt to accelerate growth in extraction. A sustained low oil price comes with the reality of lower CAPEX (fewer well additions), deleveraging and decline in LTO extraction. A lasting, low oil price feeds a self reinforcing feedback in search of a new equilibrium.

Companies borrowings capacities

Companies in Bakken levered up (with debt) as higher oil prices resulted in a higher valuation of their assets and likely with the expectations that the oil price would remain elevated.

The companies’ assets are subject to revaluation (performed twice a year) and borrowing capacities becomes subject to redetermination.

If, borrowings in excess of the revised borrowing capacity are outstanding, companies could be forced to immediately repay a portion of the debt outstanding under the credit agreement(s).

This is important as companies that have to repay some of their debts at an earlier point in time following a redetermination, may be left with no other alternative but to take this from the operational cash flow, which further reduces their abilities to fund well manufacturing.

The LTO Break Even Price

Another parameter which is important to keep an eye on is the development to the break even price that meets the companies’ return expectations/requirements. The LTO wells come with individual designs (costs), flow rates and EURs and the break even price is subject to a range of return requirements [my presented numbers are discounted at 7%].

Actual well data from NDIC is used to make estimates of what I will continue to refer to as the “reference/average well”.

Since I started following the Bakken LTO developments this “reference/average well”, and notably since 2013, has experienced some improvements to its total first 12 months LTO extraction and the judges are still out there if the deployment of improved (and likely more expensive) technologies allows for some faster extraction and/or increased total extraction (higher EURs).

Changes in the oil price are the dominant source for changes to the financial returns of LTO wells.

A sustained oil price below $50/Bbl (at the wellhead) will, with a time lag, slow well manufacturing as this is below the profitability threshold for the “average” well. Some companies may for a combination of reasons continue to bring in wells to remain liquid.

Some early indicators for changes in extraction levels is to follow the development of the number of rigs drilling, monthly additions of producing wells and developments in the backlog of wells awaiting fracking/completion.

The 4 counties with the biggest oil extraction

The chart illustrates how growth in McKenzie made it the most prolific county since 2013 and McKenzie has now the wells with the best productivity, refer also figure 05.

What follows is a presentation of the developments as per January 2015 the oil extraction for McKenzie, Mountrail and Willams, 3 of the 4 counties with the highest oil extraction in Bakken(ND).

The presentation of the 3 counties contains two charts each;

Development in oil extraction by vintage as from January 2008 and of January 2015 where the color gradients represent developments in monthly extraction by year. The dark blue line (on top) shows total oil extraction inclusive of wells pre 2008.
Each chart also shows the development of the nominal oil price, WTI [black line and left hand scale].
The charts illustrate the initial steep declines from legacy wells and how the decline slows with time.
The second chart shows developments in average well productivity by vintage.
Note how the productivity developments change with time and the differences between the counties.

McKenzie County

In McKenzie around 59% of its oil extraction in December 2014 was from wells that started to flow during 2014. NDIC records show that 56 new wells started to flow in January 2015 while total oil extraction declined with 27 kb/d from December 2014.

NDIC records now show that 815 wells started producing in McKenzie in 2014.

In McKenzie there has, with time, been a steady improvement in well productivity. Earlier I presented developments in McKenzie in this post.

Mountrail County

In Mountrail around 42% of its oil extraction in December 2014 was from wells that started to flow during 2014. NDIC records show that 24 new wells started to flow in January 2015 while total oil extraction declined with 4 kb/d from December 2014.

So far Mountrail had a high of 292 kb/d in September 2014 and 279 kb/d in January 2015. As shown in figure 03 Mountrail was where LTO extraction in Bakken took off in 2008.

NDIC records now show that 433 wells started producing in Mountrail in 2014.

The NDIC data show that the best wells in Mountrail came early, those started in 2008. Then follows 2013.

So far “average” 2014 wells in Mountrail have been poorer than those started in 2013 and in my post “Are Mountrail’s sweet spots past their prime?” I presented a more detailed analysis of well productivity developments in Mountrail.

Williams County

In Williams around 49% of its oil extraction in December 2014 was from wells that started to flow during 2014. NDIC records show that 36 new wells started to flow in January 2015 while total oil extraction declined with 1 kb/d from December 2014.

NDIC records now show that 402 wells started producing in Williams in 2014.

The NDIC data show that the developments in productivity for the average well in Williams has remained more or less stagnant since 2009 with a trend towards lower well productivity in recent years

fractional flow

13 Comments on "Is the Red Queen outrunning Bakken LTO extraction?"

Plantagenet on Sat, 21st Mar 2015 4:23 pm

If the average well produces ca. 100,000 bbls in its first year, then @ $50 per bbl the well produces about $5,000,000 of product. But the cost to drill, frack, and install site infrastructure is about 8-12 million, i.e. most Bakken wells are losing a lot of money due to the current oil glut.

penury on Sat, 21st Mar 2015 5:11 pm

I guess it is just me, but the more I read and hear about the oil wells in the Bakken, the more it seems that they all lose money. I guess that I don;t understand why people would continue to “invest” billions of dollars into projects which only lose money. Somehow I think someone is making money even at 44.00 dollars a barrel. In which case most of the kvetching is meaninless.

Plantagenet on Sat, 21st Mar 2015 6:52 pm

The math is pretty straight forward. At $100 bbl the first year’s oil production will about pay for the well, so any oil that dribbles out in years 2, 3, 4 etc. goes towards making profit. Thats why people were investing prior to the oil glut causing prices to collapses.

Now that we’re in an oil glut and oil prices have collapse to ca. $44 bbl, new drilling and production isn’t profitable and new drilling will quickly slow and eventually completely stop if oil prices don’t come back up.

Cheers!

rockman on Sat, 21st Mar 2015 8:15 pm

“At $100 bbl the first year’s oil production will about pay for the well…”. A company’s profitability isn’t determined by a well paying out in one year. It’s based on the total amount of capex used to create all of its production. That includes all overhead, lease costs, interest on the capex loans, the production costs and in the case of some pubcos dividend payments . In addition while some wells pay out faster then a year others take longer. And some never payout. Last time I checked 10%+ of the EFS never paid out. In fact some never recovered even 20% of their cost before they depleted. Yes: there are some wells that lost money at $100/bbl just as some wells can make a decent profit at $50/bbl.

And, of course, not all companies achieve the same results. Some will survive at $50/bbl just as some floundered at $100/bbl. And some made a fortune selling out their EFS leases and ran from the play like a scolded dog as Petrohawk did with $15 BILLION in their pocket. LOL.

dave T on Sat, 21st Mar 2015 9:11 pm

The shale fracking bust we are witnessing was predicted from the get go by the folks that know the oil biz. The bust will continue as long as people are willing to invest in it. That is, not much longer. A few years with existing wells, however, I doubt the investment capital will return once the over supply of the LTO loses momentum.

Brent on Sat, 21st Mar 2015 11:34 pm

Oh they are starting to loose money and investors are starting to leave. I think this trickle will eventually turn into a flood that will have most of the running with their tail between their legs. And then nobody will want to invest in them again. This took only a very short search and their will be more to come. http://www.shtfplan.com/headline-news/pink-slips-100000-jobs-wiped-out-amid-oil-price-collapse-spreading-like-cancer_03212015

https://www.youtube.com/watch?v=FQkPIeK-tik

rockman on Sun, 22nd Mar 2015 2:13 am

“they are starting to loose money”. A picky point but better said as “not making as much revenue”. All the producing shale wells have positive cash flow. Otherwise they would be plugged. Companies aren’t going to make the rate of return used to justify drilling the existing wells but most are still returning their investment to some degree. But there will be some companies unable to meet debt repayment schedules. And many more won’t have sufficient cash flow and c

Jimmy on Sun, 22nd Mar 2015 2:14 am

Thanks once again Plant for pointing out what is painfully obvious. Your basic math skills are clearly up to snuff.

rockman on Sun, 22nd Mar 2015 2:18 am

…won’t have sufficient cash flow and credit to do much drilling even if they have viable prospects at today’s prices. But they won’t loose money drilling wells going forward for the simplistic reason that companies don’t drill if the economics aren’t acceptable. Which obviously means that fewer wells will be drilled.

yoananda on Sun, 22nd Mar 2015 5:02 am

@penury
it’s a ponzy.

Pops on Sun, 22nd Mar 2015 10:40 am

I’m pretty sure the whole thing is paying out fine for the individual participants; from general labor up to CEO; otherwise they wouldn’t be doing it.

Just like the mortgage bubble paid out very well to every vendor from agent to paper trancher.

Whether it is a profitable business venture in the end or a bust exactly like the mortgage scam is yet to be seen.

In my less than humble opinion, anyway.

Northwest Resident on Sun, 22nd Mar 2015 1:56 pm

glutster says: “…prior to the oil glut causing prices to collapse.”

In the glutster’s twisted world, everything was going just fine for the oil producers — prices were great and consumers had no problem paying those high prices, profits were rolling in, junk bonds were soaring, fracking companies we’re contributing significantly to a booming economy — UNTIL, suddenly, those enterprising fracking companies became a victim to their own success. They started producing far more “oil” than the awesome economy could absorb. THE GLUT started building and suddenly, despite booming demand and eager consumers flush with good paying jobs and lots of money to burn, the price started dropping.

In the glutster’s world, THE GLUT caused oil price to fall. It had nothing to do with hundreds of trillion$ in debt, with record unemployment, with plunging price for nearly all commodities, with low-to-zero net energy return on fracked oil, with extreme depletion of worldwide resources. Nope. Just the OIL GLUT.

For the glutster, the OIL GLUT is what explains everything. And that is why the glutster is widely recognized on this forum and no doubt everywhere else he goes as a major world class dumbass — or a troll with an agenda — or both.

roman on Sun, 22nd Mar 2015 3:04 pm

Why are they investing? Because $ debt supply and stupidity is infinite and oil is not.

Is the Red Queen outrunning Bakken LTO extraction?

Leave a Reply Cancel reply