Superb intro to the Bakken

Million Dollar Way has a great overview of the Bakken that gives a great introduction to the 21st century gold rush that is happening now in North Dakota.

Bruce Oksal’s post is For Newbies.

There’s a lot of great comments and explanation. Here’s a few of the biggest points described from my just-past-newbie-stage perspective.

It is a big deal

A very big deal:

No matter how much hype you think there is about the Bakken, the fact is: it is huge. It now accounts for 12% of US oil production.

One out of 8 barrels of oil produced in the U.S. is from North Dakota.  

1 in 8. 

Even though some say it will end this afternoon (tomorrow morning at the latest) and others say that much oil is no big deal, it is a big deal. A game changer.

Increasing tension

There is growing tension between ranchers and farmers on one hand and the drillers, oil workers, and lease owners on the other hand.

Mr. Oksal thinks that will get worse.

Describing someone you pass by in the store as “oil trash” is not a compliment. Neither is it an indication that everything is rosy in North Dakota.

Lots more drilling to come

To this point there has been a frantic rush to get wells drilled. That pace will slow down as the amount of drilling sustains for a long time.

There is a reason for both sides of that idea.

The drilling cycle begins with getting lease rights, which takes time, effort, and money. If there isn’t a well on the site in a certain amount of time, the lease expires. Once oil is moving, the lease is secured for the life of the well. So, there is a rush to get all your lease rights secured.

Once that is done, the drillers can focus on efficiency of drilling instead of spending whatever it takes to secure the lease.

Will there be more drilling on each lease? Oh yeah.

One idiosyncrasy of tight oil is that oil only flows from a hundred feet around the well bore. Move over a couple hundred feet and you can get another productive well.  That means you could put a lot of wells on a 640 acre section of land.

Also, there’s multiple layers to drill. The Bakken formation is only one layer. There are three layers of the Three Forks formation below that and another layer below that.

Speculation is there could be many wells in every place there is one today:

But it is not going to be one or two wells per spacing unit. The number of wells per spacing unit will go to 2, 4, 6, 8 – who do we appreciate — wells per spacing unit. This summer there are two or three projected test projects to see if 24 wells, and then 48 wells, can be placed on one or two pads for one spacing unit

More tension

Go back to that tension issue I just mentioned. Let’s extend the concern… Just picture one rancher’s field which had 2,000 round trips from big rigs. All the noise and dust.  Things finally settled down and oil is flowing.  

Over the next several years or decade, picture another 12,000 or 40,000 round trips to the same field.

Lots more noise and dust.

Multiply that picture by the several thousand wells already drilled.

The upside potential for production is huge. The downside potential for some really bad conflicts is also huge.

Three big oil plays

The article touches on the three biggest energy booms in the U.S. now and the issues of water and drilling capacity:

The Bakken is an oil play. Currently the Bakken has two competitors for rigs and workforce: the Eagle Ford in the West Gulf Basin, south of San Antonio; and the various formations in the Permian Basin, west Texas.

All three (the Bakken, the Eagle Ford, and the Permian) require water for fracking. It remains to be seen whether water will be the discriminator among the three but there is no lack of water for fracking in the Bakken. There may or may not be a “true” water issue for fracking in Texas but it could certainly become a political issue. Time will tell. But again, there is no shortage of water in western North Dakota for fracking.

Don’t know where anyone else stands, but I’ll be cheering on all three plays. Go Bakken! Go Eagle Ford! Go Permian!

This is not a win/lose competition. This is a win/win/win.

Revenue from one well

Post also touches on how much oil will come up from each well:

Over time, the estimated ultimate recovery (EUR) for Bakken wells has gone up. It now ranges from 300,000 bbls to more than one million bbls over the lifetime of a Bakken well.

Let me do a quick back-of-the-envelope calc for you:

  • Range of EUR – 300K to 1,000K
  • Current price – $90/barrel (I’m assuming low)
  • Gross revenue over life of a Bakken well – $27M to $90M
  • Assume lower price – $60/barrel (I just picked a number out of thin air)
  • Gross revenue over life of a Bakken well – $18M to $60M
  • Cost to drill a well – $5M to $14M (that’s the extreme spread in the linked post, typical is probably $8M or $10M)
  • Margin – depending on your set of assumptions, the range of margin for a well is somewhere between home run and grand slam

With those potential margins, I’ll make a really safe prediction there will be a ton more wells drilled.

More to read

Lot’s more in the post at Million Dollar Way.

If you already ‘get’ the oil industry, there may not be much news in the article. If you are like me and still trying to get your arms around the oil boom, you really oughta’ check out the post.

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