Another forecast for Bakken production – we have probably already hit the peak

Since I’ve started to pay attention to forecasts for the Bakken field, I’ll make note of one that is not so optimistic.

The Oil Drum has a post, Is Shale Oil Production from Bakken Headed for a Run with “The Red Queen? that doesn’t see substantial increases in future output.

The forecast in that post is for production to stay at roughly the current level, which for July 2012 was 674K bopd state-wide and 609K bopd for Bakken only. Here are two key comments, the first from the findings and the second from immediately after the findings:

  • Now and based upon present observed trends for principally well productivity and crude oil futures (WTI), it is challenging to find support for the idea that total production of shale oil from the Bakken formation will move much above present levels of 0.6 – 0.7 Mb/d on an annual basis.

Authoritative research companies (like Bernstein Research) and widely acknowledged specialists/institutions like USGS and SPE have recently and in general arrived at identical conclusions by applying different sets of methodologies and from studying other areas. I am of course in no position to rule out that the required breakeven price in the future could be lowered driven by technological innovations and improvements in well design and operations. However recently there have been a flow of reports that casts a reasonable doubt that this will become a given.

There’s enough qualifiers in those comments for the post to be a teaching moment for any CPA or attorney. However, the forecast is for Bakken output to never be much above the current levels, which I mentioned at the start of this post.

The statistical analysis behind the post points out two major reasons supporting the conclusion there won’t be continued growth in output. First, the wells have a very sharp drop off rate. Second, newer wells aren’t even starting out as strong as earlier wells. From the findings:

  • The “average” well now yields around 85 000 Bbls during the first 12 months of production and then experiences a year over year decline of 40% (+/-) 2%
  • The recent trend for newer “average” wells is one of a perceptible decline in well productivity (lower yields)

Thus the analogy to the Red Queen, who says you have to run as fast as you can just to stay in place. One of the other main points of the post is that an increasing number of wells have to be completed merely to maintain the current level of production. If the number of new wells slows, total production will quickly fall.

Let’s all see what happens.

A simple forecast

By the way, let’s do a really simple forecast for one well. Let’s take the above numbers of ‘average’ production of 85,000 barrels in year one and a continuous 40% drop per year. I’ll assume only $85/barrel price.

Here’s what a simple 6 year forecast would show:

assume: 60% $85
year bbl/yr annual cumulative
1     85,000      7,225,000        7,225,000
2      51,000      4,335,000       11,560,000
3      30,600      2,601,000       14,161,000
4      18,360      1,560,600       15,721,600
5      11,016         936,360       16,657,960
6        6,610         561,850       17,219,810

Assuming a modest $85/bbl rate, that’s only $12M gross income in the first two years and a mere $16M gross in the first 4 years. Not bad payback time for an $8M or $10M investment. Even if only at 7K bbl/year, the income stream will continue for 2 or 3 more decades. I’m just making a wild guess, but there’s likely a lot of places in the corporate world where managers wish they could get those kind of returns on a capital project.

Update 2-21-13:

  • 7-12 – 676,400 bopd state – 611,834 Bakken only
  • 12-12 – 768,853 bopd state – 704,360 bopd Bakken only
  • 5 month increase 13.6% statewise – 15.1% Bakken only.

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