Shale Update from the Bakken - Completions down 73% m/m

davefairtex
By davefairtex on Thu, Jan 15, 2015 - 12:06am

North Dakota's Department of Mineral Resources released their monthly production statistical update today.  To me, the biggest news was that well completions were down 73% - October saw 146 wells completed, and November saw only 39 wells completed.

https://www.dmr.nd.gov/oilgas/directorscut/directorscut-2015-01-14.pdf

As the Director reported:

The number of well completions decreased from 145(final) in October to 39(preliminary) in November. Oil price is by far the biggest driver behind the slow-down. Operators report postponing completion work to avoid high initial oil production at very low prices and achieve NDIC gas capture goals. There were no major precipitation events, but there were 11 days with wind speeds in excess of 35 mph (too high for completion work) and 7 days with temperatures below -10F.

And even with modestly reduced rig counts (3 fewer in November, 7 fewer in December, and 25 fewer by early January), the drillers continued drilling but the completions were put on ice waiting for higher prices.

The drillers far outpaced completion crews in November. At the end of November there were about 775 wells waiting on completion services, an increase of 125.

Remember, "completing" a well has about a $4M price tag - about the same cost as drilling.  So if you have a rig out there already paid for sitting on a pad, you might as well drill the well, cap it, and put off the completion until the oil price recovers.  Its not like the oil will be going anywhere.

Prices in the Bakken for sweet crude have dropped precipitously.  Note that the price for Bakken oil is substantially lower than WTIC, which is the price for a particular grade of oil delivered at the big oil hub of Cushing, OK.  It is the Bakken oil price that matters for the shale drilling companies income statements.

  • October: $68.94
  • November: $60.61
  • December: $40.74
  • January 14th: $29.25

Check out the January Bakken oil price - less than $30.  If only 39 wells were completed in November with Bakken oil prices at $60, imagine what happens in January with prices below $30?  My prediction: zero.  Zero wells will be completed in January.  Why spend $4M of your company's suddenly scarce money and burn through that juicy initial production just to sell oil for less than $30/bbl?

Overall production in the Bakken during November was up 3,691 bbl/day, to 1,187,216 bbl/day total production.  I'm guessing that bump up came from the 136 October well completions.  In most months of 2014, the monthly production increase was between 20k and 50k bbl/day.  Given the stark drop in completions in November, I'm predicting we have just seen Peak Bakken oil production.  December will almost surely show a decline, which I project will be around 30-40k bbl/day.  If January completions are zero, I project production will drop 60k bbl/day per month.  That's the full 5.6% monthly decline rate applied across the total regional production.

While the rig count numbers are important, it is completions that will drive the short term response to oil prices.  Even if the rigs keep drilling, based on what occurred in November the wells won't be completed until oil prices rise again. And our data lags current reality by about 45 days.  Realized oil prices have to double to get back up to the low completion rates seen in November.

I project that overall Bakken production will drop faster than people are currently anticipating, as long as oil prices remain low.  Unlike previous oil glut situations, shale production will respond very quickly to low prices, because of the ability (and the $4M motivation) to suspend completion work.

We may not see this impact when the shale drillers all report their 4Q 2014 earnings - about three weeks from now.  For those earnings statements, I predict roughly flat production, that hedging gains will be a big contributor to the top line (except for CLR, where they cashed in their hedge book because the CEO thought oil prices couldn't drop below $80/bbl), but mass "one-time" writedowns of reserves will make sure none of them pay any income taxes for 2014.  They can't afford to spend the cash to make themselves look profitable any longer.  Its now all about corporate survival.

Assuming WTIC oil prices remain at around $50, I project the big production impact will show up in May 2015, when the shale drillers will all have production drops of perhaps 20% quarter-over-quarter.  It is at that point - May 2015 - that people will fully realize just what the shale decline rate really implies for the value of all these shale companies.

I also project that nobody will be talking about shale being profitable at $50/bbl.

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9 Comments

aggrivated's picture
aggrivated
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a question regarding shale wells

Dave

You point out that its the completion phase of the wells that is being suspended at present.  Since I am ignorant of the drilling/finishing process I have a couple of questions.  What problems are encountered is a well is drilled and not completed until much later.?  Can the process be resumed @ that point or is there a set of complications that must be dealt with first?

Thanks

Stan Robertson's picture
Stan Robertson
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shale wells

I am not Dave, but having worked in the oil fields, I can tell you that no one would leave an open hole for any longer than necessary. It would need casing to keep the hole from collapsing. Drilling and casing a well without completing the perforations and fracs might hold a lease that would otherwise expire, but it would unproductively tie up a very large investment of capital. If a well cannot be drilled, completed AND produced profitably at the current product prices, a company would be well advised to save its capital or spend it on other prospects.

For wells currently producing, it is usually possible to slow the production rate to some extent in hopes of better prices later, but complete shut-ins run some risks. It is also often the case that companies that have been very active in the shale plays have debts to service. They may have no choice but to keep producing at maximum rates on the grounds that half of something is better than all of nothing. That is like sawing off limbs to feed the pursuing wolves.

davefairtex's picture
davefairtex
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drilling vs completions

Not having worked in the industry, I don't know how long a shale well can sit around without being completed.  I do know the queue of pending completions is about three months long, and it has been like that for a while now, so it does seem to be standard practice to have drilled wells sit unfinished for at least that amount of time.

In addition, in an attempt to reduce costs, many shale companies have their own drilling crews and rigs, which presumably have a lower per-well cash cost than if they had to pay for a given drilling effort using a subcontractor.  They likely also bought some amount of the materials necessary to do the drill work, so for some of these wells, cash has already been paid for the materials and the rigs bought, so they might just as well finish drilling the well since most of it is already paid for.

 

 

aggrivated's picture
aggrivated
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physical and financial pressure

Thanks for the information on drilling and completions.  I had not really thought about the two separate stages of getting a well going.  The primary impetus to drill and complete is obviously financial. However, if we start to see wells sitting for months after drilling and not completed it would indicate a pretty dire situation. When the financial side becomes untenable you stop where you are. Nobody works when you can't make payroll.  It reminds me of seeing multi-storied building projects in 2009 halted before being topped out and roofed. 

stevejermy's picture
stevejermy
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OIL & US GDP

Fascinating blog, and follow ups. I think the big strategic question is what will be the impact, in US GDP figures over 2015, of shale - and offshore energy, too - falling off a cliff? And when might this impact show up? And what then will be the 2nd order effects.

Currently, the US GDP is about the only sign of hope in the world economy, even if the US government figures are untrustworthy: EU is in deflation; Abenomics failing in Japan; China's out of steam.

But if US growth falters, what's left to keep the asset bubbles inflated? Apart from more QE? 

Stan Robertson's picture
Stan Robertson
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normal lag

That 3 month que of shale oil wells awaiting completion is a pretty normal lag. In other tight formations where there is too much gas production to just flare and burn, there is typically another few months delay while gas pipelines are laid and connections made.

The shale oil companies often do rely on subcontractors to do the completions. In active times there is a backlog of work for them, so waiting for a completion rig is normal. That wait time will go up now as completions will be deliberately delayed for wells that had been drilled, but not completed, when the oil price collapsed. I would be surprised if drilling continues at anywhere near the previous pace.  The way to slow the bleeding is to quit drilling.

 

Dwig's picture
Dwig
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Posts: 141
Shale and volatile prices?

This is a bit off-topic, but does anyone have any insights as to whether and when the price bottom will hit, and turn into a rise?  If I remember rightly, in 2009, the rise from the bottom back to ~$100/bbl was fairly quick.  Of course, given the complex of factors involved this time, it might look

So, if the price stays low for another month, say, then rebounds, what will that do to/for the frackers?  Especially if it looks like it might be a "dead cat bounce"?

davefairtex's picture
davefairtex
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when will oil bounce

dwig-

does anyone have any insights as to whether and when the price bottom will hit, and turn into a rise?  If I remember rightly, in 2009, the rise from the bottom back to ~$100/bbl was fairly quick

Boy, if I could nail that one with any degree of reliability, I'd load the boat up with oil futures contracts and retire rich to my own private Island somewhere.  :-)

Article I read by Euan Mearns suggested that the reason oil bounced rapidly in 2009 is because Saudi Arabia cut back production dramatically, and that facilitated the low.

This time around, the Saudi oil minister is out there saying how oil will be $40 - and how he's happy about that, wants it to last for as long as possible, etc.  I exaggerate, but not by much.

So we probably can't expect a Saudi production cut to drive prices higher.  We need a shale production cut, and we're likely to get one, but so far one hasn't happened yet.  We have another 30 days to wait to see if Bakken December production drops off after the completion counts dropped in November.  US production should follow Bakken.

But then the Saudi oil minister can always come out and say he's going to increase production (gotta maintain market share, you see) and bam, down we go again.

My guess is, until traders can establish the degree of the US shale production decline, it will be hard to make a bottom here.  But that's only a guess.

However, watching prices is probably a lot better than listening to me opine.  :-)

Our fracking friends are in long term trouble unless oil rebounds to at least $70, at a minimum.  ($70 WTIC = $60 Bakken).  So while stock prices might bounce off the lows (and the bounces might be pretty exciting, actually) I don't see the happy days of 1H 2014 (i.e. actual production growth) returning for shale companies until oil moves back above $100.

Stan Robertson's picture
Stan Robertson
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History lesson

For those with long memories, we learned in 1985 that the oil price is exactly what the Saudis want it to be. OPEC has never functioned as a cartel that was able to control the price in the face of excess productive capacity. To maintain the price of oil, the Saudis cut their production from about 12 million barrels per day in 1980 to about 2.5 million barrels per day by late 1985.  When they had enough of their quota cheating comrades they opened the spout. These days the excess productive capacity came from the U.S. shale producers and the Saudis again do not intend to be the world's swing producer. Not to mention that the present low prices are killing Iran and Russia and the shale companies.

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