Is The Bakken Close To Breaking?

While the Permian has experienced a drilling boom and has received tons of media attention, a lesser-known but still remarkable revival has been underway in the Bakken this year. At the same time, the increased rates of drilling in North Dakota are starting to reveal signs of strain on the basin, as drillers are increasingly forced into less desirable locations.

The Bakken was hit harder than the Permian during the oil market downturn that began in 2014, with rigs and capital diverted away from North Dakota and rerouted to West Texas. Oil production hit a temporary peak in late 2014 at 1.26 million barrels per day (mb/d), declining for much of the next two years.

However, production began to rise again in early 2017 before accelerating this year. In October, the EIA expects Bakken production to hit 1.33 mb/d, a new record high.

In some ways, the Bakken is enjoying a bit of a revival because the Permian has become overcrowded. The pipeline bottleneck, the strain on rigs and equipment, completion services, labor, water and even on road traffic has caused a lot of headaches for shale drillers in West Texas. Some shale executives have decided to shift resources elsewhere, and the Bakken has received a boost as a result.

The Bakken took over as the most profitable place for shale drillers on average this summer, at least temporarily surpassing the Permian. That may not last as the steep discounts for WTI in Midland drags down the profitability of the Permian, a situation that will resolve itself over the next few years as pipelines come online. But the improved outlook for the Bakken is notable nonetheless.

However, despite the resurgence in the Bakken, the basin is starting to suffer from its own strains. Production is still rising, but the crowded field is increasingly pushing shale E&Ps onto the periphery. The result is that the average well in the Bakken is producing less oil at its peak performance, as fringe areas are dragging down the average. Related: Iran Starts Air Force Drills Near The World’s Crucial Oil Chokepoint

For instance, the majority of wells in the Bakken may soon come from wells with a peak monthly performance of less than 500 bpd, down from the current makeup in which most wells have a peak monthly performance of over 1,000 bpd, according to a report from the North Dakota Pipeline Authority.

S&P Global Platts reported on the findings, noting that absolute decline is not necessarily likely in the near-term, but that the shale industry will have to ramp up drilling activity by two or three-fold to keep growing production. “The production decline is inevitable, but the timing is uncertain as to how this is going to play out,” Justin Kringstad, director of the North Dakota Pipeline Authority, said in an interview with S&P Global Platts. “The big unknown right now is how much new technology is going to impact the fringe areas of the play.”

Most existing wells are located in areas with performance above 1,000 bpd, while most of the remaining wells will likely be located in acreage that will have a peak performance below 500 bpd. In other words, over time, as the best acreage is tapped out, companies will be forced to drill in less desirable locations, which means the overall production base deteriorates. S&P Global Platts estimates that moving from the core to the periphery can cut average initial production rates by 80 percent.

The conclusions mirror those of David Hughes of the Post Carbon Institute, who has repeatedly warned that the EIA and mainstream energy forecasters are overestimating how much oil and gas can ultimately be produced from U.S. shale. In a February 2018 report entitled “Shale Reality Check,” Hughes said that the major shale plays won’t live up to the aggressive forecasts. “EIA projections of production through 2050 at the play level are highly to extremely optimistic, and are therefore very unlikely to be realized,” Hughes concluded. He cited flat-lining in productivity improvements, well interference and dwindling number of sweet spots available as key reasons why production levels will likely disappoint. Related: Iran: We Won’t Let OPEC Boost Production

The leading indicators could leave one with an optimistic impression. The rig count in North Dakota is up only slightly this year, while production has climbed quite a bit, suggesting that drillers are producing more oil with each given rig. No surprise there, given the advances in drilling techniques, including longer laterals and more proppant use. In fact, the average rig is estimated to produce around 1,500 barrels per day from a new well in October, double the volume from two and a half years ago.

But that doesn’t mean the ultimate recovery of oil and gas reserves will be any higher, only that it might be front loaded. Moreover, declines from legacy production is also more significant, with the region set to lose 68,000 bpd in October compared to a month earlier from these existing wells. That is up from 50,000 bpd month-on-month declines from two years ago. In other words, drillers need to add even more production these days than they used to in order to offset decline. As fringe areas take on a greater role, the industry will have more trouble keeping up with legacy decline.

This could be somewhat of a long-term problem. The North Dakota Pipeline Authority says that an absolute peak in production could still be 15 years away, when the agency expects production to top out at between 1.9 mb/d and 2.3 mb/d.

For now, Bakken drillers are seeing a resurgence and are basking in the limelight as the Permian hits the pause button.

By Nick Cunningham of Oilprice.com

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