Answers From The Bakken Analyst

Jonathan Garrett, an oil and gas expert from globally renowned analytics firm Wood Mackenzie, talks prices, contracts and new strategies that upstream and midstream entities will deploy in 2016.
By Patrick C. Miller | March 02, 2016

Wood Mackenzie is known worldwide for its analysis of global markets in energy, metals and mining to provide businesses with the information they need to make strategic decisions. Forecasts based on the company’s proprietary data and modeling and global teams of experts are used internationally by governments and financial institutions.

Wood Mackenzie’s Bakken expert is Jonathan Garrett, a principal analyst on the company’s U.S. lower 48 upstream research team. Located in the Houston office, Garrett studies the Bakken’s operator activity, production trends, crude export capacity and enhanced completions. In the low-oil-price environment, he says there are certain parts of the Bakken that remain attractive for producers. 

“North Dakota is great and the footprint is huge and it’s very oily, but there’s only a very few number of sub-plays that are even remotely close to being economically competitive right now at $30 oil,” Garrett says. “The southern portion of the Nesson anticline is pretty good. The Fort Berthold Reservation area is pretty good, along with areas due west of the Nesson anticline. Other than that, there’s nothing that makes sense—even with the well costs below $7 million. Right now in North Dakota, it’s tough.”

Taking it on the road
Some oilfield services companies—large and small—are moving fleets and crews to the Permian and Eagle Ford shale plays in Texas.

Some oilfield service companies have stacked fleets in the Bakken and moved personnel to other plays, such as the Eagle Ford or Permian in Texas. Some have moved an entire fleet to Texas. As one oilfield service company told The Bakken magazine, this is indicative of what companies must do to survive.

“What you don’t want to have happen is that you get rid of people who have a lot of really good experience and you sell off the equipment at a fraction of what you paid for it,” Garrett said. “If you can keep those people working and that equipment well-maintained enough and working elsewhere outside of the Williston Basin, that’s a pretty smart move.”

He noted that many smaller service companies have a have a presence in most of the major oil and gas producing basins around the United States.

“Going where’s there’s activity, that’s the nature of the industry,” Garrett explained. “As of right now, if you’re looking at parts of plays that are the best returning throughout the country, most wouldn’t argue that the best parts of the Permian are probably more competitive than anywhere else in the country right now. That’s where you still see activity. And where you see activity, that’s where oil services will go.”

Hitting the floor on service prices
Garrett says there’s a limit to how far oilfield service companies can reduce their prices. When oil prices come up, it’s likely those costs will rise as well, but not to the levels previously seen. Optimization and improvements in efficiency will keep drilling costs lower overall.

“From 2014 to 2015, you generally saw at 30 to 35 percent decrease in oil costs, and most of that came on the back of deflation in the service sector, particularly in North Dakota because it’s so isolated relative to population centers,” Garrett explains. “What you saw over the last few years was a rapid buildup in equipment, services and people.”

Just as North Dakota was beginning to get a handle on the situation, world oil prices plummeted. 

“In 2016 it’s a bit different in that you’re starting see the pressure to begin to mount with the service companies,” he adds. “It’s our view that you’ll continue to see some consolidations and you might even see some bankruptcies.”

Garrett also says, “The well cost reductions that you’ll likely see in 2016 will be a function of the optimization of efficiencies—things done by the operators—and less so just rolling over on prices from the service companies. I think we’re getting close to the bottom.”

Service costs will go up when oil prices rise

When oil prices eventually go back up, operators shouldn’t expect to see the same pricing structure from oilfield services companies that they had when crude was low. However, Garrett doesn’t see those prices rising back to the levels they were at will when drilling operations were at a frenzied pace.

“When history is written, there’s going to be an anomaly we saw over a couple years back,” he says. “Those type of margins are likely over.”

In oilfield services, drilling and pressure pumping are being stressed the most. Companies are looking at artificial lift, flow assurance and specialty production engineering to make up for those losses, according to Garrett.

“If you have any extra money to spend, it might not make sense to put it into drilling or completing a well, but it would certainly make sense if you could slow the decline of the existing production,” he says. “That way, you might get more out of what you do as a result of drilling or completing a new well.”

Well completion costs will be lower

Garrett says that even if oilfield services costs rise with oil prices, the overall cost to complete a well in the Bakken be far lower than it was before the crude price collapse.

“There are two levers being pulled at the same time,” he explains. “You have the service sector in terms of deflation and then you also have this preference to enhance your completions. If you’re using a lot more of everything in your well—whether it’s water and sand—that’s costly. But the materials you’re using are becoming cheaper.”

When oil returns to $60 to $65 a barrel, Garrett expects to well completion costs to increase.

Infrastructure improvements matter
Lower oil prices have provided Bakken infrastructure to catch up to some degree, and Garrett sees that a positive long-term development for the play.

“From an infrastructure build-out, I think the Bakken’s in pretty good shape right now,” he says. “It seems that there a bit of an over-build in crude-by-rail loading facilities. Some of these facilities on the East Coast are relatively idle. There’s situation in Oregon where they switched from crude by rail to ethanol by rail. You’re not getting the expected volumes given the decline in the differential.”

Garrett notes that the completion of crude pipelines such as the Enbridge Sandpiper and the Dakota Access will also help lower the price of Bakken oil, but not enough to make a significant difference.

“It would make a good situation more favorable, but it won’t make a bad situation good,” he says.
A time for more science?

Production maintenance and flow assurance will continue to be the key services in the Bakken.

“How can you arrest or slow your declines? That’s pretty important,” Garrett says. “Those are the parts of the business that don’t get talked about as much, but your dollar is probably better spent there than anything else right now—unless you have the absolutely top-tier acreage.”

Wood Mackenzie’s global outlook
Earlier this year, Wood Mackenzie released its report on what to look for in the oil and gas industry global upstream sector in 2016. The report says that it will be a challenge for the industry as companies struggle through the oil price cycle.

According to the report, “Capital budgets will be further cut and only the more robust, or strategically important, new projects will get the green light. Exploration spending will be hit hard and will be less than half the 2014 peak.”

Wood Mackenzie believes a lack of new investment—combined with ageing, high-cost oil fields—creates a challenging situation for operators and governments, but that doesn’t necessarily translate into a lack of opportunities in countries such as Mexico and Iran. As Garrett predicted in the Bakken, merger and acquisition (M&A) activities are expected to increase globally “as the more financially sound players make counter-cyclical moves.”

The Americas
The inventory of drilled but uncompleted (DUC) wells is at an all-time high across most major plays in the lower 48 states with an estimated 2,500 to 3,000 horizontal DUCs. This will be an important variable in 2016 as wells are brought online

“The DUC count was closely watched last year but will be even more important in 2016 as the wells are brought online. It represents an important variable in Lower 48 production but is disconnected from the more scrutinized rig count,” says the company’s report.

“The growth in that backlog in 2015 signals that a disproportionate amount of capital was spent on drilling compared to completion, a trend we see reversing,” the report continues. “With independents striving for cash flow neutrality, it is unlikely that drilling competes with completion for capital. Most long term drilling contracts have expired and operators will drill primarily on spot contracts.”

Wood Mackenzie forecasts that the draw-down on DUCs will remain relatively flat through the beginning of 2016, but is expected to accelerate significantly in the second half of the year as operators “look to mitigate production declines in the most financially attractive option possible.”

Across the border, Canada will forego any oil sands project, but will see a construction start-up with the PETRONAS LNG project in British Columbia. “The LNG project is now advantaged by the depreciated Canadian dollar and lower wage costs brought on by low oil prices. Buoyed by the partner’ continue drilling efforts in the Montey play, the liquefaction project is making steady progress on securing the remaining regulatory and environmental approvals,” Wood Mackenzie says.

The downturn in China’s economy has been responsible for a reduced world oil demand and a glut in supply. Wood Mackenzie sees significant changes ahead in how the country’s five-year plan impact its oil and gas sector when marketization becomes a key theme.

“We’ve already seen significant policy changes in 2015; in natural gas pricing, licensing rounds and retail fuel pricing. We expect more moves to reduce NOC (national oil company) dominance, encourage new domestic players and diversify sources of investment,” the report says.

Wood Mackenzie says that PetroChina started asset divestments and strategic reorganization of its pipeline business in late-2015 and that big midstream asset sales are possible in 2016.

“Depending on the scale, this could have a profound impact on the gas market and reshuffle the entire industry value chain,” according to the report. “We expect more domestic companies will emerge in the upstream sector with government support through licensing rounds and mixed ownership.”

Author: Patrick C. Miller
Staff Writer, The Bakken magazine