Analyst: North Dakota production will increase in 2015

By Patrick C. Miller | June 03, 2015

Mark Twain once allegedly said, “Reports of my death are greatly exaggerated,” and from Jonathan Garrett's perspective, the same is true of the Bakken.

Garrett, a principal analyst with Wood Mackenzie in Houston and the company’s Bakken expert, acknowledges that while low oil prices have slowed oil and gas activity in western North Dakota, they haven’t spelled the end of the Bakken as some predicted. In fact, he believes North Dakota’s overall oil production will increase from 1.1 million barrels per day in 2014 to 1.2 million per day this year.

“There are three parts of the country that are moving the needle in this whole unconventional oil and gas revolution: it’s the Bakken, the Eagle Ford and the Permian,” Garrett said. “Because North Dakota’s so far away from a lot of the major markets and transport costs can be a concern, people were calling for the Bakken to really come to a screeching halt.”

There are a number of reasons why Garrett expects production to go up when the overall activity is down. The first is that the Bakken’s sweet spots are still profitable, even with crude prices hovering around $60 a barrel

“The three parts of the play that we would consider most economic at today’s prices would be—using the Wood Mackenzie sub-play characterization—the Parshall-Sanish area, the Nesson Anticline and then the Fort Berthold Reservation,” he said.

According to Garrett, producers are no longer drilling their fringe acreage.

“Everyone’s drilling their best rock,” he noted. “ConocoPhillips’ best rock might look different from Oasis Petroleum’s best rock. Either way, everyone’s hitting their most prospective pieces of rock right now.”

Two other factors that have helped producers are increases in well completion efficiencies and reduced costs from oil service providers.

“You went from 30 days to drilling and completing a well to doing that in the low 20s,” Garret explained. “From the completion side, any time you do something in a batch—on a per-unit basis—the price goes down. Now you’re drilling 10 or 12 wells from the same pad. Those efficiencies shave $800,000 to $1 million off the cost of a well.”

In addition, Garrett said oil service companies have been reducing their costs by up to 20 percent to maintain market share and avoid laying off employees, which has the effect of shaving around $10 off the break-even price of crude. However, he doesn’t see that as a trend that can continue for long.

“A lot of these service companies are running so deep in the red just trying to hold on to market share that it’s a question of how long they can offer these types of cuts before they either close up or have to start increasing prices again,” he noted.

Garrett doesn’t see that happening this year, but 2016 could be different when some oil service companies might be forced to consolidate.

“Maybe by the middle of 2016, you might see some pricing power coming back into the hands of service companies that have been squeezed so tight since November and December of last year,” he said.

Changes in fracking techniques have not only resulted in cost savings, but also resulted in increased production. For example, Garrett said more producers are using slickwater fracks instead of gels and sand instead of synthetic proppants.

“Another completions trend is that more operators are tending to use more plug and perf with cemented liners as opposed to open hole sliding sleeve completions,” he noted. “Companies like Whiting have shown increased IPs anywhere from 30 to 40 percent.”

An improved global economy that increases oil demand and raises crude prices would be the best formula for recovery, but even without that, Garrett said the near-term outlook for the Bakken is far from gloomy.

“There’s still a sizeable well backlog that we believe is starting to get narrowed a little bit, probably starting around the summertime,” he noted. “Plus, we’ve seen a decent rally in oil prices. At $60 oil, with these price concessions, there’s still a lot of great running room left in the core of the play.”

 

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