North Dakota's December production fell by 50,000 bpd, or 5.3%. Was it all weather-related or a sign of our future when drilling activity slows?
This opinion piece presents the opinions of the author.
Data published by the North Dakota Industrial Commission’s Department of Mineral Resources (DMR) showed a 48,305 barrel-a-day decline in the state’s production for the month of December. The report attributed the production decline primarily to the severe winter weather that hit the state at the end of last year. According to the DMR, the state experienced low temperatures of 21 to 31 degrees below zero, four major snow storms and five major wind storms in December. Oil production for November had climbed by 31,278 barrels a day to 911,292 barrels a day, for a 3.6% increase over October’s level. The production drop in December was 5.3%. The production decline, which was clearly impacted by weather, may also be demonstrating that there is a fundamental slowing in output and activity underway, which is not a good omen for the future for America’s oil output.
During December, the drilling industry, according to the DMR, operated 190 rigs, up from 184 in November. The January rig count was 188. There were 119 wells completed during December, down from the 138 wells reportedly completed in November. The monthly report stated that the days from spud to completion for wells drilled during December increased to 132 days, for an increase of 18 days from the length of time it took to drill wells in November. Another very interesting observation from the DMR report was that there were a total of 635 wells that had been drilled and were awaiting completion at the end of December, an increase of 125 wells during the month. What the report doesn’t show, however, is how many of the wells being drilled were Bakken horizontal wells versus vertical wells in other producing formations. If we assume that 100% of the current drilling activity is for Bakken oil, which is not an unreasonable assumption given how hot the play is, then we can look at the change in the number of producing Bakken wells to see what is actually happening to activity in North Dakota. The December Bakken producing well count showed a 40-well increase from November, which if we compare against the 119 wells reportedly completed during the month of December leaves us with 79 wells that would have been added to the drilled-but-uncompleted total. That leaves us with 46 unaccounted wells from the figures for wells drilled, in production and added to the drilled-but-uncompleted pool. We are not sure whether we should be worried about this number of unaccounted for wells, or attribute them to weather-related counting issues.
An analysis by Douglas-Westwood shows that the growth rate in Bakken production is slowing and that they forecast the basin’s output will peak at 900,000 barrels a day in the 2016-2017 timeframe. Another analysis concludes that the Bakken requires 120 new wells a month merely to sustain the current production level, which was essentially equal to the number of wells drilled in December. That study found that each drilling rig contributed to 0.84 wells being completed in a month, meaning the industry must operate a minimum of 138 rigs per month to sustain its minimum producing well total. The bad weather coupled with slowing oilfield activity, caused by weather-related movement restrictions, contributed to the largest monthly production decline in 30 years in December. Some analysts suggest that what we saw in North Dakota’s statistics for December, even though it was partially due to bad weather, may be a precursor of the nation’s future shale oil production profile if drilling and well completion activity slows down. The only offset would be if the future production output from wells can be boosted meaningfully either from higher initial production volumes or slowing the steep production decline rates. Technology, wherefore art thou?
To better understand drilling industry dynamics, we assembled the chart in Exhibit 7. We used the chart to illustrate a point in a recent speech we delivered about the impact of the shale revolution and the challenges it faces. The chart shows the number of wells drilled each month from January 1973 through December 2013. (The last three years of wells drilled had to be estimated from Energy Information Administration and Baker Hughes (BHI-NYSE) data.) We also show the average monthly rig count and the average oil price. The increase in oil prices during the 1970s was accompanied by a sharp rise in the number of wells drilled as the rig count climbed in response to increased profitability from drilling. We then moved into a period of a much lower level of wells drilled, rigs working and average monthly oil prices that started in the early 1980s in response to the economic recession caused by the high oil prices of prior years and then the sudden collapse of global oil prices in 1985. As we entered the early 2000s, the well count began rising along with oil prices. The rig count also increased but at a much slower pace than the well count. After recovering from the global financial crisis of 2008-2009, the well count has climbed in response to the high level of shale oil drilling.
As the industry has come to better understand how to drill shale wells, both oil and natural gas wells, drilling rig efficiency has increased, thus reducing the need for as many rigs to drill the large number of wells necessary to boost the nation’s oil and gas output. Drilling rig efficiency has increased in the past few years, which can be attributed to improvements in drilling rigs, drilling tools, the use of pads to reduce drilling rig mobilization time and the drilling of multiple lateral producing wells from the same surface wellbore. If this drilling proficiency improvement can be sustained, then as the rig fleet expands through the addition of new modern rigs, the capability of the American drilling rig fleet will continue to grow, meaning we can drill more wells per month in the future than we are drilling now. This shift in drilling rig efficiency is one of the major changes impacting the oilfield service industry as a result of the shale revolution.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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