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Bakken – Hype Versus Reality

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As Wall Street, CNBC, and feckless politicians tout American energy independence from the miracle of shale oil, reality is already rearing its ugly head. Production grew by 24% over the first six months of 2012. Production has grown by only 7% over the first six months of 2013. That is a dramatic slowdown. The fact is that these wells deplete at an extremely rapid rate. Oil companies will always seek out the easiest to access oil first. They have already accessed the easy stuff. This explains the dramatic slowdown. Peak Bakken oil production will be below 1 million barrels per day. The last time I checked, we consumed 18 million barrels per day. I wonder when that energy independence will be achieved? Reality is a bitch.

Bakken Oil Production Growth Has Slowed Significantly In 2013

By: Devon Shire

The headlines ring of “booming” American oil production and “gluts” of oil (USO). I’m here to tell you that while the boom is real, there is no glut of oil and we need to be aware that the huge production growth of the past eighteen months is going to slow.

It already is slowing.

I’ve been watching what is going on in the Bakken pretty closely because I think it is going to be an excellent proxy for what will happen across the country.

Let’s take a look at what happened to production in North Dakota during the first six months of last year (2012). Here is the raw data detailing barrels of oil production per day:

December 2011 – 535,000 boe/day

January 2012 – 547,000 boe/day

February 2012 – 559,000 boe/day

March 2012 – 580,000 boe/day

April 2012 – 611,000 boe/day

May 2012 – 644,000 boe/day

June 2012 – 664,000 boe/day

Daily production in North Dakota increased by 129,000 barrels per day from December 2011 to June 2012.

Now let’s look at the same period for this year (2013):

December 2012 – 768,000 boe/day

January 2013 – 739,000 boe/day

February 2013 – 780,000 boe/day

March 2013 – 785,000 boe/day

April 2013 – 793,000 boe/day

May 2013 – 811,000 boe/day

June 2013 – 821,000 boe/day

Where last year production increased by 129,000 barrels per day in the first six months of the year, this year production is up by only 53,000 barrels per day.

Yes, the rate of growth in the Bakken has slowed considerably in 2013.

To understand why, a person needs to look at the production profile for these horizontal oil wells.

By the end of the first year of production, a new well is producing at a rate that is 30% of where it was the year before. That means a huge amount of drilling each year has to be done just to offset the production lost due to these steep decline rates.

Without a continuous step change each year in the number of wells being drilled and the capital available to do so, production in the Bakken is going to flatten.

Good things are still happening, but we can’t repeat every year the hyperbolic growth that we saw in 2012.

What this means for investors is that we shouldn’t expect oil prices to fall much from where we have seen them over the past three years.

For the past three years WTI oil prices have ranged from $85 per barrel to $105 per barrel. I think $85 is about as low as we can go for an extended period of time because that is likely just about the marginal cost of production for oil in the world today.

Production growth in the Bakken is slowing and so too will production growth in the Eagle Ford. That is the nature of these horizontal oil fields. We get an initial surge in production as capital comes into the play. Then that growth rate slows steadily until it flattens and enters a decline.

The Burning Platform blog

11 Comments on "Bakken – Hype Versus Reality"

  1. rollin on Tue, 24th Sep 2013 2:35 am 

    Yes the production will flatten and then fall if the number of wells completed per annum stays the same. The number of wells completed in the first half of 2013 was about 20 percent less than in the first half of 2012 due to weather and road conditions.

  2. BillT on Tue, 24th Sep 2013 3:24 am 

    Worth repeating …

    The Corporate world is desperate to keep BAU and will lie through their teeth to try to get you to do the same. Big Oil is the worst offender as they require confidence to keep their investors and money flowing. When it is generally accepted that the only way is down, their business plans will be shredded and the age of oil will be over for the most part. The sooner the better for the planet and us.

  3. Luke on Tue, 24th Sep 2013 8:38 am 

    Devon, thanks for your bright analysis of the fracking hype.
    I do agree, this is a short term play. In the long term people will be confronted with the effects of this type of plundering Mother Earth. Greenhouse, terribly polluted water tables and a devastated landscape. This mankind will only learn when it is too late.

  4. GregT on Tue, 24th Sep 2013 9:09 am 

    “Big Oil is the worst offender as they require confidence to keep their investors and money flowing”

    And Big Oil is in bed with Big Government, and Big Government requires confidence in the US dollar, to stop the rest of the world from dumping it as the world’s reserve currency.

    “US energy independence” looks really good on the FOREX.

  5. rollin on Tue, 24th Sep 2013 12:28 pm 

    BAU is a death march sung to the beat of the internal combustion engine. The chorus is “I want, I must have, I demand, I am better than them, get out of my way, it’s mine I own it all.”

    We can start singing other songs.

  6. shortonoil on Tue, 24th Sep 2013 3:16 pm 

    “Good things are still happening, but we can’t repeat every year the “hyperbolic” growth that we saw in 2012.”

    “Hyperbolic” – the magic phrase of the shale industry. Even though there is not one shred of evidence to support the conclusion that these wells ascend, or decline “hyperbolically” they have still managed to stuff that idea into the heads of most watching this serenade. If you tell someone something enough times, not matter how stupid, they will probably eventually believe it.

    But the complete idiocy of the shale game can be seen at the EIA. From 2008 to 2012 the industry invested $133.7 billion to bring 900,000 b/d online. That is $148,500 per barrel. On a $85 barrel can anyone really think that they will live long enough to recoup their investment! Truly a game of the Greater Fool!

  7. bobinget on Tue, 24th Sep 2013 4:13 pm 


    Sep 22, 2013

    Prime Minister Shinzo Abe and Canadian Prime Minister Stephen Harper are expected to agree to increase Canadian shale gas exports to Japan from around 2020, Japanese officials said Sunday.

    Canada’s envisioned shale gas exports are likely to total 40 million tons a year. The gas will be shipped after being processed into liquefied natural gas, the officials said.

    Abe and Harper plan to reach the agreement in a meeting on Tuesday in Ottawa during the Japanese leader’s five-day visit to Canada and the United States from Monday.

    Canada will be the second country to export shale gas to Japan. The United States plans to start shipping 6.7 million tons a year of shale gas to Japan from around 2017

  8. pezza on Tue, 24th Sep 2013 4:28 pm 

    Actually shortonoil, if it is 900000 b/d and they wish to pay off that investment (principal only) over 10 years, it is only ~$40 per barrel extracted. That is without interest. When interest is taken into account (assuming 2%) the yearly loan repayment totals around $14.8 b/yr. With an estimated 900k b/d this is around $45 per barrel. If the interest rate is 4%, the total per barrel in debt repayments is about 49%. Which would help explain why fuel is getting cheaper (I have no idea about the ongoing production costs or whether those have been factored into the above figure of $133.7 b). It is now the lowest I have seen it in a year or two.
    These are just ballpark figures (as taken from your post) and I don’t know what their assumptions are. It will be “interesting” to see if they have taken into account the drop in productivity that this article has been about. Maybe they have, maybe they haven’t.

  9. bobinget on Tue, 24th Sep 2013 4:37 pm 

    While we fret over limited oil resources worldwide,
    markets, world wide will turn to natural gas.

    Norway’s biggest oil company Statoil, while looking for
    peaked North Sea oil, found gas instead. In a rather
    disappointed announcement, Statoil reported they will continue to look elsewhere for oil in the same field. If as I predict, more gas will be their reward, the world will be forced to make adjustments.
    Railroads and long haul trucking are already finding CNG, cleaner burning and cheaper.
    It would be wise to make clear distinctions between oil, natural gas, biogas, coal gasification, LNG,
    LNG, availability and longevity.

  10. shortonoil on Tue, 24th Sep 2013 9:15 pm 

    “Actually shortonoil, if it is 900000 b/d and they wish to pay off that investment (principal only) over 10 years, it is only ~$40 per barrel extracted.”

    At a 30% decline rate the initial 900K b/d will be producing 25,422 b/d after 10 years. The total 10 year production will be 2.45 mb or $54,571 per barrel at $133.7 billion. Show me ONE well that is not displaying a constant decline rate, and I’ll sent North Dakota an apology.

  11. rockman on Wed, 25th Sep 2013 4:57 pm 

    Pezza/SOO – Good discussion. To get an accurate handle on the economics we need a daily production profile of each individual well for the next 10 to 15 years. Production beyond that time frame has no impact on the rate of return. With such a production forecast one can build a revenue forecast. The primary difficulty with that is accurately predicting oil prices 10+ years into the future. It also requires a fairly accurate decline estimate for each well.

    But you make the best guess possible. With this revenue model you can adjust the value of production over time by calculating Net Present Value. NPV calculations require selecting a discount rate. Typically a 10% to 15% DR is used. Which is why production beyond 7 or 8 years has little impact on rate of return: the NPV of production beyond that time frame is very small.

    This leads to the ROR for those wells. And no…I have no freaking idea what that might be in this case. LOL. Need a great more detailed data. But here is something of a meatball metric to consider. And that is the price paid for bbl of oil produced per day. Which makes that $149k per bbl/day interesting. When I looking at the potential acquisition of proved producing oil reserves there’s obviously a great amount of details that go into such an effort. But years ago I discovered that oil producing properties don’t tend to sell for what I estimate they are worth. Just like selling a house the value of oil production is a bit in the eye of the beholder. As poor a metric as it is that $ per bbl/day is a rather good predictor of what a property will sell for…but not necessarily what me or another company might think it’s worth. And if one looks at all the various oil properties sales that are closed, regardless of how diverse those different properties are, the $ per bbl/day metric tends to fall in a narrow range. I might value a property at $100 million and be completely confident in my number. But if the properties are producing X bopd and sales are closing around $Y per bbl/day it I would estimate the property will sell for $170 million. If I can’t figure how to bump my offer that high I won’t bother bidding on it because I know I’ll lose.

    Today proved producing oil production is closing at $120k to $140k per bbl/day. So for what it’s worth that $149k per bbl/day number should be close to what those wells would sell for on the open market. But, again, that doesn’t mean they are worth it by everyone’s standards.

    But let’s remember who the primary players are in all these hot plays: publicly traded oil companies. If a company spends $900 million drilling wells and in the end they make a 0% rate of return (IOW just make back what they spent) but in the process they increase their stock price from $5/share to $40/share they (the management and initial shareholders) have made a huge profit. Folks that bought their shares late in the game? Hmmm… maybe not so much. Might even lose money. The complete philosophy is: buy low…sell high…and don’t get greedy and stay in too long.

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