Rail booming in North America, but will not displace pipelines: Continental CFO
Houston (Platts)--8Nov2012/237 pm EST/1937 GMT
Even while rail transport for crude oil shipments continues on a
spectacular growth track in North America, it will not displace the need for
more pipeline infrastructure, the chief financial officer of upstream
operator Continental Resources said Thursday.
"There will definitely be a need for pipelines," John Hart said during a
quarterly earnings conference call. "The production growth forecast for the
[Williston Basin area] is in excess of 1.5 million b/d, and could reach 2
million to 2.25 million b/d. It will require a full platform of
The Williston Basin is the large region which encompasses the giant
Bakken Shale oil field in North Dakota and Montana.
Currently, rail infrastructure to handle over 1 million b/d of
production from the region is being planned, said Hart.
As a result, there will be a "huge shift" in markets during the next 2.5
years, he said, including the price differential between West Texas
Intermediate and Gulf Coast crudes which Hart said looks poised to disappear
in first-quarter 2013.
Meanwhile, two key pipeline projects have emerged to bring Midcontinent
crude south, Hart noted. The 150,000 b/d reversed Seaway pipeline, jointly
owned by operator Enterprise and partner Enbridge, started to deliver
Cushing, Oklahoma, crude shipments to the Gulf Coast last June. Under an
initial expansion plan, its capacity should reach 400,000 b/d in early 2013.
Also, Seaway plans to add a parallel pipeline to more double capacity to
850,000 b/d by mid-2014.
In addition, in mid-to-late 2013, TransCanada's Gulf Coast Project,
originally part of its Keystone XL design, will start up with the initial
capacity to bring 700,000 b/d of Cushing crude to Nederland, Texas.
Continental's Hart said his company already is shipping 65% of its
operated Bakken-produced crude -- which totaled nearly 62,500 b/d in the
third quarter -- by rail.
Hart called rail "wonderful" and said it has given industry the ability
to find new markets on the East Coast, West Coast and Gulf Coast for
Midcontinent oil. "Our refineries understand the value of our barrels and
they're coming to us readily now," he said.
At the same time that Continental is growing its Bakken production, it
is lowering costs through a slew of efficiencies, company Chief Operating
Officer Rick Bott said. Continental is one of the pioneers of the Bakken
Shale which is one of the US' largest oil fields.
"We're looking at every aspect of our operation and improving them
individually and collectively," Bott said.
Multi-well pad drilling, allowing more wells to be drilled from a single
site instead of having to move a rig from site to site each time a new well
is drilled, is a big efficiency driver, he said.
For example, Continental has designed "larger and larger" multi-well
projects, with up to 14 wells on a site, he said. In the first quarter, for
example, 10% of the company's operated rigs were on multiwell pads, which has
grown to 45% today.
"We save on access and site construction costs by using and extending
existing roads and infrastructure built for the original well," said Bott.
"Incremental site construction costs for additional wells from an existing
pad are much lower."
And even though newer, more efficient rigs cost more to lease more per
day, they allow operators to accomplish more work with fewer rigs. For
instance, Continental's average wells drilled per rig increased 33% to 1.2
wells/rig month in the third quarter compared to the first quarter. Average
number of days required to drill a lateral -- a well's horizontal leg and
"the most critical part of the hole," according to Bott -- dropped 18% in
that time through efficiencies and improved execution, he said.
Also, the length of time to complete a well after drilling has dropped
25% in terms of days from rig release to first production, from an average of
76 days last year to 57 days in 2012, said Bott. And the cost of both ceramic
and sand proppants, which keep a fracture open during or after hydraulic
fracturing, have dropped as much as 40% over 2012, he said.
"This has helped us reduce stimulation costs per stage from a high of
$124,000/stage in fourth-quarter 2011 to $98,000 per stage in third-quarter
2012," he added.
Late Thursday, Continental reported net income of $44.1 million or 24
cents/share for third quarter 2012, compared with net income of $439.1
million or $2.44/share in the same 2011 quarter. The large drop in net income
in the 2012 period stemmed from a non-cash net unrealized gain of $332.5
million in the comparable 2011 quarter on mark-to-market derivatives.
--Starr Spencer, email@example.com
--Edited by Katharine Fraser, firstname.lastname@example.org