Tuesday, August 17, 2010

ND's Record-Setting Oil Production Fuels Economic Boom with Record Employment, 3.6% Jobless Rate

Following an ongoing pattern that I have been following all year, North Dakota set more new records in June for monthly oil production (see chart above, data here).

According to a report earlier this year from Bloomberg, "Drilling advances are enabling producers to tap the Bakken, where rocks lack the porosity and permeability of conventional oil fields. The Bakken contributed to last year’s 7.5 percent gain in U.S. crude output, the biggest since 1955 and the first in 18 years. 

Output may reach 300,000 to 400,000 barrels a day by mid-2011 and stay at that level for 10 to 15 years, said Lynn Helms, director of the North Dakota Mineral Resources Department. The state’s previous estimate was 220,000 to 280,000. "

The following are new, all-time record highs set in June:

Daily Oil Production: Record high 315,282 barrels in June, which has already exceeded the previous forecast mentioned above that oil output in North Dakota would reach 300,000 in mid-2011; that's a 5.8% increase from May, a 46.6% increase from June 2009, and a 89.7% increase from June 2008.

Total Monthly Production: Record high 9,458,455 barrels in June, almost double the amount produced two years ago.

Number of Wells Producing: Record high 4,746 in June, 13.4% above last year.

Barrels per Well: Record high of 1,993 in June, 29.3% above last year.

Daily Oil Per Well: Record high of 66 barrels in June.

As a direct result of the oil boom, North Dakota's economy is booming as well, with the lowest state jobless rate in the country of 3.6% in June, and recent jobs gains that completely offset all of the jobs lost during the recession, bringing North Dakota's employment to a record high in June of 371,300 (see bottom chart above).    

22 Comments:

At 8/17/2010 5:39 PM, Blogger Buddy R Pacifico said...

What does it cost to recover a barrel of oil in the Bakken? Probably about $20 a barrel. That seems favorable considering they are drilling horizontally at depths reaching up to two miles.

 
At 8/17/2010 7:38 PM, Blogger morganovich said...

time to open anwar.

 
At 8/18/2010 12:37 AM, Blogger VangelV said...

How the hell will a production rate of 66 barrels per day provide a solution for a nation that has a serious depletion problem and has no hope of increasing its total production rates? Each well costs several million dollars so unless we have prices that are well over $100 a barrel the producers will not be able to generate a positive real return and this will turn out to be another great malinvestment.

What would be the worst case is having oil prices rise to well over $100 but we still have wells that fail to generate a decent economic return.

 
At 8/18/2010 1:00 AM, Blogger VangelV said...

What does it cost to recover a barrel of oil in the Bakken? Probably about $20 a barrel. That seems favorable considering they are drilling horizontally at depths reaching up to two miles.

If this is the case why are the original companies selling out right after they drill enough wells to prove up reserves? If you could produce oil for $20 you would not sell those properties.

 
At 8/18/2010 10:30 AM, Blogger juandos said...

"If this is the case why are the original companies selling out right after they drill enough wells to prove up reserves? If you could produce oil for $20 you would not sell those properties"...

I'm guessing that the 'original companies' don't want to have to deal with this clown...

Assuming to the DOE is correct (granted its a mighty big assumption) there's plenty of reason to bet on the Bakken formation: Technology-Based Oil and Natural Gas Plays: Shale Shock! Could There Be Billions in the Bakken?

 
At 8/18/2010 11:04 AM, Blogger VangelV said...

Assuming to the DOE is correct (granted its a mighty big assumption) there's plenty of reason to bet on the Bakken formation: Technology-Based Oil and Natural Gas Plays: Shale Shock! Could There Be Billions in the Bakken?

The DOE, IEA, CERA, and EIA were not all that credible when they were assuming that the depletion rates were around 50% lower than they really were. It took the late Matt Simmons to point out to the CIA that the assumptions that they were using were not based on reality to get the ball rolling. Once the agencies looked closely at the depletion rate they found out that all of their estimates were way too optimistic.

The current estimates for the EUR are about 100% higher than what the data indicates is reasonable. That makes the assumptions made by the DOE very questionable.

We have discussed this on this blobhere.

 
At 8/18/2010 11:57 AM, Blogger Bloggin' Brewskie said...

This comment has been removed by the author.

 
At 8/18/2010 12:04 PM, Blogger StVIS said...

"If this is the case why are the original companies selling out right after they drill enough wells to prove up reserves?"

While what you're describing is true of the shale gas industry, I haven't read a single article of companies selling Bakken assets in such fashion, despite numerous attempts. I had a discussion with you in the past (I was an anonymous commenter in the link you provided), and I recall you have a tendency to intertwine or switch around the topics of shale gas, shale oil and oil shale, even though only one was being discussed.

 
At 8/18/2010 12:20 PM, Blogger VangelV said...

While what you're describing is occurring in the shale gas industry, I haven't read a single article of companies selling Bakken assets in such fashion despite numerous attempts. I had a discussion with you in the past (as an anonymous commenter), and I recall you have a tendency to intertwine or switch around the topics of shale gas, shale oil and oil shale, even though only one was being discussed.

You have yet to address the one point devastating to your optimistic scenario. You can't have a solution from a process that produces an average of 66 barrels of oil per day out of multi million dollar wells that deplete rapidly and cost a great deal to maintain.

The math does not work. Get back to me when the price of oil goes over $150 a barrel and we can see if you can get the Bakken to produce in anything resembling a sustainable manner. And let me point this out again. These processes are very vulnerable to political pressure. All you need is one well to pollute the water supply and you can have Congress and state legislatures step in and stop drilling activity. Given the depletion rates, that would be devastating for American production because we would need every drop out of marginal shale fields to prevent a price explosion once the recovery begins to recover.

 
At 8/18/2010 12:24 PM, Blogger VangelV said...

While what you're describing is true of the shale gas industry, I haven't read a single article of companies selling Bakken assets in such fashion, despite numerous attempts. I had a discussion with you in the past (I was an anonymous commenter in the link you provided), and I recall you have a tendency to intertwine or switch around the topics of shale gas, shale oil and oil shale, even though only one was being discussed.

It is still too early in the Bakken game. Why would you buy oil reserves in Bakken when you can get them a lot cheaper in other areas?

 
At 8/18/2010 3:53 PM, Blogger StVIS said...

VangeIV,

I'm actually not interested in a another lengthy discussion and am more content to let the matter rest as is. I will, however, hit on two points:

"You have yet to address the one point devastating to your optimistic scenario."

What optimistic scenario? If you recall from our discussion, I actually agree with you about the long-term oil situation. The reports I've read conclude long-term Bakken production is expected to hit a peak plateau of a few hundred thousand bpd. If a 6.5% worldwide depletion rate is true, and if the long-term implications of this are correct, then an extra few hundred thousand bpd isn't going to make much of a difference - for the world or a country consuming 18 mbpd.

"The math does not work. Get back to me when the price of oil goes over $150 a barrel and we can see if you can get the Bakken to produce in anything resembling a sustainable manner. And let me point this out again. These processes are very vulnerable to political pressure. All you need is one well to pollute the water supply and you can have Congress and state legislatures step in and stop drilling activity."

As I told you before, Bakken producers were making money in the '90s when wells were much less productive, and oil was much cheaper; it's likely they're making money with the current price climate. The wells do exhibit high decline rates, but that's factored into the well economics.

Now could a polluted acquirer create a monster political uproar? This is a possibility. There are a few others who've made mention of this, so we'll see what happens.

 
At 8/18/2010 5:05 PM, Blogger VangelV said...

What optimistic scenario? If you recall from our discussion, I actually agree with you about the long-term oil situation. The reports I've read conclude long-term Bakken production is expected to hit a peak plateau of a few hundred thousand bpd. If a 6.5% worldwide depletion rate is true, and if the long-term implications of this are correct, then an extra few hundred thousand bpd isn't going to make much of a difference - for the world or a country consuming 18 mbpd.

The optimistic scenario is the one where investors make a decent return running Bakken wells. There is no empirical evidence that the average well is economic and producing a sufficient return to justify the risk taken when the capital is invested. The average investor could do a lot better operating conventional wells elsewhere.

Note that I did not say that one could not make a return due to a bubble in Bakken properties. I suspect that what we will see are Bakken players going after smaller oil producers in conventional areas and using their overinflated shares as currency.

 
At 8/18/2010 5:10 PM, Blogger VangelV said...

As I told you before, Bakken producers were making money in the '90s when wells were much less productive, and oil was much cheaper; it's likely they're making money with the current price climate. The wells do exhibit high decline rates, but that's factored into the well economics.

There was little in the way of profit in the 1990s. Once the well costs were written off profits could be claimed by the acquirers but capital was largely wasted drilling shale in a vertical drilling era. While anyone can point to the exception the rule was no profit for the average producer.

Now could a polluted acquirer create a monster political uproar? This is a possibility. There are a few others who've made mention of this, so we'll see what happens.

This has been discussed for years. It did not gain traction until the BP uproar and the release of the documentary about gas and pollutants in well water.

Given the unstable American legal system the risks for most producers are magnified so it makes little sense to risk capital when conventional oil is much cheaper to produce and more profitable.

 
At 8/20/2010 10:30 AM, Blogger StVIS said...

VangeIV,

If the producers aren't making money in the Bakken and if they are selling large assets (as some have done in shale gas), then link some material that proves it.

 
At 8/20/2010 9:53 PM, Blogger VangelV said...

If the producers aren't making money in the Bakken and if they are selling large assets (as some have done in shale gas), then link some material that proves it.

Do the math. It costs $4 to $5 million to drill a well that will wind up producing an average of 66 barrels per month after a year or two. How do you make a profit doing that?

I gave a number of references to Arthur Berman's analysis about the recovery assumptions in a number of the shale locations. While the middle Bakken formation is more promising the entire Bakken formation isn't very good for reasons that I have given in a few other threads on this site.

As I wrote on other occasions, if they have not sold out already, the smart play would be to have the producers in the Bakken use their overvalued paper to acquire smaller conventional producers in proven areas.

 
At 8/21/2010 12:53 PM, Blogger StVIS said...

"Do the math. It costs $4 to $5 million to drill a well that will wind up producing an average of 66 barrels per month after a year or two. How do you make a profit doing that?"

The average considers all of the wells in the Bakken; wells in the '80s and '90s were not very productive, while the newer wells are far more productive.

"I gave a number of references to Arthur Berman's analysis about the recovery assumptions in a number of the shale locations. While the middle Bakken formation is more promising the entire Bakken formation isn't very good for reasons that I have given in a few other threads on this site."

But that pertains to shale gas, not the Bakken. While the production techniques of shale gas and shale oil have similarities, oil and gas currently do not share similarities in price.

You have yet to provide any evidence of Bakken producers selling assets in bulk or not making money. Everytime someone asks you for information on the matter, you link material pertaining to shale gas or claim "you have an article but need to find it." While it's possible nat gas prices are too low for shale gas, oil prices are considerably higher.

Considering some of the material I've corrected you on and considering you've yet to provide actual material backing your Bakken claims, it's left me to conclude that while you do bring valid points, some of your assertions are not as credible as you claim.

 
At 8/21/2010 2:48 PM, Blogger VangelV said...

The average considers all of the wells in the Bakken; wells in the '80s and '90s were not very productive, while the newer wells are far more productive.

First, most of the old wells have been retired. The bulk of the data is coming from horizontal wells with very high depletion rates. As Arthur Berman showed, the data for shale production does not support the assumptions about ultimate recovery. A new well will see a massive decline in productivity over the first year with more than half the decline coming in the first few weeks. When you plug the real production numbers into the model you find that the amount of oil recovered is about half of what is assumed. That means that the economics are not exactly what they are assumed to be.

And let us be clear. I can point to the Elm Coulee field and rightfully find some very nice wells that will make a lot of money for their owners. But that is a far cry from arguing that the rest of the middle Bakken, let alone the upper or lower Bakken will produce economic returns. While there may be some other small ares that are as good as the Elm Coulee, most of the Bakken is too uneconomic to be viable at anything south of $150 a barrel.

But that pertains to shale gas, not the Bakken. While the production techniques of shale gas and shale oil have similarities, oil and gas currently do not share similarities in price.

The type of assumptions are exactly the same. The original companies believe that they can produce a lot more oil per well than the production data suggests. In the end the produced oil cannot justify the investment so the companies either sell themselves off or use their inflated stock price to make acquisitions of viable oil and gas producers.

You have yet to provide any evidence of Bakken producers selling assets in bulk or not making money. Everytime someone asks you for information on the matter, you link material pertaining to shale gas or claim "you have an article but need to find it." While it's possible nat gas prices are too low for shale gas, oil prices are considerably higher.

I pointed you to Rigzone and to various energy publications for news as well as financial data.

http://www.torquayoil.com/reports

http://tinyurl.com/265e2sd

http://tinyurl.com/2cpl5zj

http://tinyurl.com/2dvder2

As I said, you need to do some of your own research and to listen in on some of the conference calls. If you had done the work you would have found that so far the Bakken is primarily an Elm Coulee story and one big accounting game.

Considering some of the material I've corrected you on and considering you've yet to provide actual material backing your Bakken claims, it's left me to conclude that while you do bring valid points, some of your assertions are not as credible as you claim.

As I wrote before, your ignorance of the facts is showing. You might try doing research instead of falling for the hype being spun by the area players trying to make a buck from promotion instead of production.

 
At 8/23/2010 11:27 AM, Blogger StVIS said...

VangeIV,

I will read your linked material. I will give you a response, but not today.

 
At 8/28/2010 1:32 PM, Blogger StVIS said...

VangeIV,

First, I'm going to have to say this is going to be my last comment on the matter. The comment pre-approval feature has been activated for this post, and I think Mark likes keeping discussions to reasonable lengths.

Secondly, I apologize for taking so long getting back. I will say you've done better with the linked material, and it prompted me to look into the matter. We will get to your info., but let's go through the discussion in order.

"First, most of the old wells have been retired."

Nope. This link documents the number of producing wells in N Dakota back to the '50s.

https://www.dmr.nd.gov/oilgas/stats/historicaloilprodstats.pdf

"As Arthur Berman showed, the data for shale production does not support the assumptions about ultimate recovery. A new well will see a massive decline in productivity over the first year with more than half the decline coming in the first few weeks."

Again, Arthur goes into shale gas. Yes, Bakken wells possess a high depletion rate, so there is that similarity, but Aurthur's skepticism of shale gas is his belief selling costs are too low to match production costs, and that gas needs to rise to $8.00 per mcf or higher to be profitable. His analysis is good, and you may be right about shale gas.

"And let us be clear. I can point to the Elm Coulee field and rightfully find some very nice wells that will make a lot of money for their owners."

I've seen where rig operators are most active. They like the middle portion very much. If that's the best area, that's where they'll drill.

http://www.rigzone.com/data/analysis/2010_Q1_landRigReview_ND.pdf
(Go to page 2.)

"The type of assumptions are exactly the same."

Aurthur made no mention of the Bakken in his analysis. I looked through his blog; he's all over shale gas, but I found nothing on the Bakken.

http://petroleumtruthreport.blogspot.com/

"I pointed you to Rigzone and to various energy publications for news as well as financial data."

Before I hit the links, I'm going to say I combed through the previous discussion and found nothing knocking financial or production data in the Bakken. The links you posted pertained to:

- Several pieces that mentioned the Middle Bakken as the most productive.

- Some critical pieces of shale gas production and the current price climate.

- An Oil Drum analysis of Bakken's historical production (which asserted in '08 that reaching 225,000 bpd would take "considerable effort," and such production would last "a year or less.")

- An old Time Magazine article touting Colorado Shale.

- Four more articles critiquing shale gas optimism.

- a description of Colorado oil shale extraction methods.

- Data showing Montana oil production peaked in '05.

 
At 8/28/2010 1:33 PM, Blogger StVIS said...

(Continued)

But nothing asserting oil's price is too low for Bakken's viability. Now, maybe I bit into you a little hard last time, but I believe my skepticism is reasonable considering I:

- Proved CBM is not the primary reason for the recent gas production surge.

- Proved your assertion that the "N Dakota only had 200 producing wells in the late '90s" was wrong.

- Indicated plenty of old N Dakota wells are sill active.

- Caught you last year warning about possible gas shortages and "people freezing to death" in the upcoming winter during a gas glut.

http://www.torquayoil.com/reports

http://tinyurl.com/265e2sd

http://tinyurl.com/2cpl5zj

http://tinyurl.com/2dvder2

The links are better. I appreciate you sending them. Let's go through the companies.

American Oil & Gas is involved in natural gas (which some companies have had trouble making money in)in Wyoming; it's Bakken operations appear to be in the western portion, away from the Middle.

http://www.b2i.us/profiles/investor/fullpage.asp?f=1&BzID=992&to=cp&Nav=0&LangID=1&s=0&ID=11164

Primary Petroleum's operation is in Montana - way in the West Bakken.

Maybe I missed something, but Torquay Oil's sole Bakken operation appears to be 4 test wells in Lake Alma. This isn't enough for me to deduce anything.

Voyager seems to be the most invested in N Dakota itself and in the mid portion, to boot.

Overall, while eggs will get cracked in a free enterprise system, and some areas prove risky, I don't believe this disproves the Bakken's all around viability. While I clearly see some companies have had trouble making money with shale gas (big ones, too), I don't see the same for the Bakken. The largest operator, EOG Resources, appears okay.

http://www.reuters.com/article/idUSN0516425520100805

As is Continental Resources, the largest lease holder.

http://www.reuters.com/article/idUSSGE6730O720100804

And Hess Corp.

http://www.rttnews.com/Content/TopStories.aspx?Id=1373047

 
At 8/29/2010 9:39 PM, Blogger VangelV said...

Nope. This link documents the number of producing wells in N Dakota back to the '50s.

The link has a column for 'producing' wells. Once a well is capped it is no longer counted. As I wrote before, the shale wells produce very little oil in comparison to conventional wells.

Again, Arthur goes into shale gas. Yes, Bakken wells possess a high depletion rate, so there is that similarity, but Aurthur's skepticism of shale gas is his belief selling costs are too low to match production costs, and that gas needs to rise to $8.00 per mcf or higher to be profitable. His analysis is good, and you may be right about shale gas.

The shale gas story was getting the same run as the shale oil story. Arthur has not exactly been high on Bakken oil either for the same reasons. While some areas in the Middle Bakken formation will be excellent producers for their owners the average well in the Bakken will not be and requires much higher oil prices to produce much of a return.

The big problem is that a lot of oil that should have been extracted when prices were much higher is already gone. That will make the development less economic than it should have been.

I've seen where rig operators are most active. They like the middle portion very much. If that's the best area, that's where they'll drill.

If they do not drill they will lose their lease rights. That is driving production even as it makes little sense at these prices. The situation is even worse for the natural gas players. They are trapped destroying their capital because they are forced to drill in order to keep their leases even if production means big losses.

The big problem is that the Bakken projections do not just depend on the middle formation but on the entire area. If the middle formation is not all that profitable why should we get excited about the rest of it?

And keep in mind that so many more drills means so much more depletion. Oil shale wells deplete very rapidly so a meaningful increase in production, which is needed to offset declines in Alaska and the Gulf, requires many more rigs. But the greater demand puts price pressures as drill rates go up and the price needs to go even higher to make the wells profitable.

 
At 8/29/2010 9:39 PM, Blogger VangelV said...

Aurthur made no mention of the Bakken in his analysis. I looked through his blog; he's all over shale gas, but I found nothing on the Bakken.

Arthur has made a number of commentaries on BNN so I will try to locate the video. (The point may have been made by Henry Groppe, Matt Simmons or another analyst but I will get it.) The issue was exactly the same. While some operators could make money at the current price the Barnett shale play cannot be developed economically at the same price because most areas are not productive enough and have depletion rates that make the economics unworkable.

The analyst made it very clear that we should stop looking at the hype and see what the players are actually doing. Two strategies were pointed out. One dealt with companies drilling enough wells to prove up reserves so that they can sell themselves off. The second strategy was using the high priced paper to buy conventional reserves that were economic. Examples were given of how various players took part in both strategies.

There have also been other issue brought up. The first was the need to build a new pipeline so that the drillers can have sufficient water to perform the fracture operations. The costs that are thrown around assume access to sufficient quantities of cheap water. At this point of time that has turned out to be wishful thinking. The second issue is one of pollution. There was the issue of the hydrocarbon emissions specific to the Bakken formation but there is also the fear of the damage done by the fracture process to aquifers.

But the worst problem that was revealed was was the economics. A few years ago the Bismark Tribune reported that a senior manager for Marathon admitted that the Middle Bakken formation was a marginal play that required very precise execution and required high oil prices. Clearly if the middle Bakken is marginal the lower and upper Bakken are not viable at anything close to today's prices. I am sorry but you have to connect the dots yourself. Little profit is being made from Bakken shale operations by most of the players. Until there is an improvement the boom that is driven by the lease conditions is going to end in disaster unless prices go much higher. But even if they do, the Bakken will not produce enough oil to offset depletion from conventional American fields.

 

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