By April 11, 2015 Read More →

Bakken: Who’s Got The Best Wells?

. Oil & gas, commodities, long/short equity, research analyst.

With over eight thousand horizontal wells drilled to date in the Middle Bakken and Three Forks formations of the Williston Basin, the data set of drilling results and production histories would seem more than sufficient to draw conclusions with regard to expected drilling economics and investment returns in the play. Still, establishing a meaningful economic model for the Bakken often proves to be a challenging task. Three major factors contribute.

First, there is hardly a single “type curve” that one can use for the play as a whole. In fact, it would be appropriate to think of the Bakken as an assembly of many operating areas often with distinctly different geologic and petro-physical characteristics (depth; over-pressuring; the presence of specific pay zones; each pay zone’s thickness and hydrocarbon charge; gas-oil ratio – just to name a few). As a result, decline rates and curve shape vary from area to area, often quite substantially. So does the cost of drilling and completing wells.

The situation is well illustrated by the slide from a recent presentation by WPX Energy (NYSE:WPX), a Bakken operator with acreage concentrated primarily in the Dunn County (below). (Worth noting, WPX ranks various areas within the Bakken in accordance with the F&D cost, not the EUR.)

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(Source: WPX Energy September 2013 Investor Presentation)

Second, operating techniques – including well and completion design – have evolved continuously over the play’s history, rendering performance comparisons between different generations of wells complicated or plainly not meaningful. Lateral length, frac size, and the use of ceramic proppant versus sand are just a few of many factors that need to be taken into consideration. Moreover, well completion “style” differs, often substantially, from operator to operator. As a result, well performance – which reflects those differences in addition to the underlying rock quality – does not correlate perfectly with productive potential of the formation in each specific area.

Third, well performance and cost structure change as companies transition to pad drilling. Such transition is typically accompanied by inventory high-grading: as operators are no longer under pressure to drill every spacing unit to hold acreage by production, they have the ability to allocate capital solely to “sure bet” areas. As a consequence, on-going drilling results for operators who have transitioned to full development mode may be dominated by a small number of multi-well pads in carefully selected locations that may not be representative of the acreage as a whole. Simplistic drilling location math – (current NPV per well) x (well density) x (number of units under lease) = (value of operator’s position in the play) – simply does not work.

Perhaps the greatest challenge of all is the statistical nature of horizontal shale wells. The shape of actual decline curve varies from well to well, even within relatively small areas. Initial production (IP) rates are notorious for being a misleading indicator of a well’s future economic value.

With all these uncertainties in mind, drilling statistics summarized by WPX are quite valuable and deserve a close review.

The chart below from WPX’s presentation provides a performance summary for wells drilled in the Middle Bakken formation by various operators since January 2011. The slide shows average cumulative production per well over the first 180 days and 365 days by operator. The samples include only wells with laterals of 5,000 feet or greater.

· The 180-day performance sample covers 26 operators with at least 15 wells producing for at least 180 days. The 1,828 wells included in the sample had average cumulative production of ~57,200 barrels of oil in the first 180 days.

· The 365-day performance sample includes 23 operators with at least 10 wells producing for at least 365 days. The 1,132 wells in this group had average cumulative production of ~92,100 barrels of oil during the first year.

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Posted in: North Dakota

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