Bakken, Oklahoma Plays Boost PADD 2 Production

BENTEK Energy reports that crude oil production in the U.S. PADD 2 (Midcon) region is on pace to increase 60 percent over the next five years, with continued Bakken drilling activity and emerging oil plays in Oklahoma expected to push oil production in PADD 2 to 1.4 million b/d by 2016.

The Montana and North Dakota Bakken will contribute 418,000 b/d over the five-year period, while the continued development of conventional resources in PADD 2, especially in Oklahoma, contributing 90,000 b/d to the total growth. "This rapid increase in oil production is expected to put additional pressure on the already constrained Cushing market," BENTEK noted.

PADD 2 is home to some of the hottest unconventional oil and rich-gas plays in the U.S. Besides the Bakken, PADD 2 is home to several Oklahoma plays, including the Granite Wash, Cleveland Sandstone, Tonkawa, Cana Woodford, Arkoma Woodford and Mississippi Lime plays.

"Historically, thousands of wells were drilled in the region, often bypassing the oil trapped in these tight, unconventional reservoirs," BENTEK said in its Crude Oil Production Monitor Report for June 2011. "The transfer of shale gas technology has opened the door of opportunity and producers are now employing horizontal drilling and multi-stage fracturing techniques in order to release the once reluctant oil."

The unconventional oil play focus in PADD 2 has pushed the active oil-rig count to a recent high of 528, passing the peak reached in the summer of 2008, mostly due to horizontal rigs moving into PADD 2. The region currently has 313 horizontal rigs drilling, compared to 199 at the peak in summer 2008.

The rapid commercialization of liquids-rich U.S. shale plays has buoyed expectations for domestic U.S. oil production, with a large part of that volume making it way to the oil pipeline hub at Cushing, Oklahoma, Barclays Capital noted in a June 21 report. While production growth from Midcontinent reservoirs is not significant yet, it has been dramatic for the localized market around PADD 2, depressing WTI prices relative to other light, sweet crude oil benchmarks.

"WTI prices recently have widened to discounts of more than $20/bbl versus Brent, unheard of until recent months," Barclays said. Barclays said it sees U.S. Midcontinent crude oil production as the biggest factors influencing WTI differentials over the next few years.

Oil-directed drilling has spread across the Midcontinent, with more drilling in the Permian and Williston basins and expansion in the Anadarko and Eagle Ford basins. The shift to oil drilling has been "steady and relentless", not surprising given current pricing differentials between oil and gas. Barclays said two main constraints, the availability of high horsepower rigs that are capable of drilling horizontally, and the scarcity of oil acreage versus gas acreage, could moderate the pace of growth in the oil rig count.

The key unconventional plays to watch in the early stage of development are the Bakken Shale and the Eagle Ford shale, Barclays said. "We foresee U.S. liquids production from these locations expanding at a rate of 200-250 thousand b/d in the coming years. We would expect to see the bulk of the growth to come from Bakken and Eagle Ford shale areas (around 100,000 b/d and 70,000 b/d) respectively."

While the presence of oil in the Bakken formation in the Williston Basin has been known for years, production did not take off until 2006 due to higher oil prices and advances in drilling techniques. North Dakota's production growth resulted in a record high of 5,200 active wells in March, and the state's oil output had grown to 350,000 b/d, 70 percent of which is Bakken production. The state has seen previous drilling booms in the past, but the current cycle has been the most prolific, thanks to horizontal drilling and enhanced recovery methods, "and is likely to be sustainable for longer, in our view."

Local and state government officials in North Dakota, where 80 percent of the Bakken play lies, welcome the oil and gas industry and the jobs and revenue it brings to the local economy, said Dan K. Eberhart, chief executive officer of Frontier Energy Corp., at Platts' 6th Annual Oil & Gas Shale Developer conference in Houston this week. The Bakken drilling boom has created a renaissance in rural North Dakota, providing revenue that's allowing the state a chance to update schools, traffic lights and other infrastructure.

Oil and gas activity is not only creating job within the sector, but creating demand for more restaurant workers, teachers, park rangers an ancillary services. The state government has had trouble filling government jobs in Williston as workers are attracted to the higher-paying oil and gas jobs, and has moved positions back from Williston, the hub for drilling activity, to Bismarck and Fargo to find workers.

However, the need to transport water, rigs and other supplies to and from drilling sites has pushed the average Bakken well cost to $6.5 million, and the combination of winter snow, heavy rains and heavy truck traffic has taken a significant toll on the state's road system. With vehicles 5,000 to 6,000 times heavier than the roads were designed to handle, roads are breaking down, with buckling and large holes as deep as six feet or more, said Eberhart.

Companies such as Hess have taken initiatives to support the local road system in North Dakota and communicate with local officials on rig movements, Eberhart said. Efforts such as Adopt-A-Road programs are needed, Eberhart said, and oil and gas producers should donate manpower and supplies to help maintain road infrastructure.


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