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Smaller operators push Bakken output outward

Washington (Platts)--24 Jan 2018 1007 pm EST/307 GMT


For years, large public companies have produced crude oil in North Dakota largely in an area known as "the core of the core" of the Bakken shale play. Faced with low, stagnant oil prices, the big producers have focused largely on drilling in McKenzie and Dunn counties, Fort Berthold Indian Reservation and other acreage within the southern portion of the Nesson Anticline.

But rising prices, along with the start of the Dakota Access Pipeline and well productivity improvements, have pushed new companies, mainly smaller operators backed by private equity firms, into acreage long ignored by the state's prominent producers.

While NYMEX WTI prices have nearly doubled over the past two years to around $65/b Wednesday, Bakken differentials have also been on the rise, especially over the past year. Bakken at the wellhead has averaged WTI minus $1.43/b so far in January, compared with discounts of close to $5/b back in January 2016, S&P Global Platts data shows.

Better prices have given drillers the opportunity to expand.

"What we would've considered a fringe area a year ago are now considered economic territory in the state of North Dakota," Justin Kringstad, director of the North Dakota Pipeline Authority, said last week during a conference call.

Relatively smaller operators, either unable or unwilling to acquire so-called Tier 1 acreage in the core of the core, are looking at less costly Tier 2 and even Tier 3 areas and considering adding rigs on the outskirts of the Bakken's most prolific plays.

"Their business model is to prove up acreage, drill some great wells, show that the acreage works on a consistent basis and then have some company buy them out," said Jonathan Garrett, director of US upstream research with Wood Mackenzie. "The nature of the beast is not to really ramp up it's just to show that the acreage works consistently."

The move by smaller operators could shift the Bakken away from its recent trend favoring high grading amid relatively low prices, but may lower the state's overall production rate per well, as less prolific wells get drilled.

State officials expect operators to add as many as 10 new rigs in 2018 and the amount of new acreage being considered is growing, according to a new analysis by Kringstad's agency.

"We should expect to see those rigs start to move outward," said Kringstad.

Producers are eyeing roughly 44% more Bakken acreage than they were a year ago, but output in the play will be less prolific than recently seen as operators shift to lower output wells outside of the core drilling area, according to Kringstad's analysis.

Climbing prices are expected to increase both the Bakken's rig and well count as tracts ignored by operators when prices were lower, but the new wells will have an initial production rate roughly 200 b/d below the wells with minimal initial output sought by producers amid lower prices.

Essentially, operators will likely produce from more wells, but the rate of growth could actually slow.

"As prices have risen they're able to move to portions of the play that aren't capable of these high-producing wells, but they can still produce good wells at the right price point and become economic," Kringstad said.

Kringstad estimates that more than 11,800 square miles within the Bakken offer wells with breakeven prices at current levels, compared with about 8,200 square miles a year ago and less than 5,500 square miles in 2016. While North Dakota is now competing with the Permian in Texas and New Mexico for operator interest, counties within North Dakota are also competing with each other for capital. While Kringstad stressed that higher prices do not guarantee expanded drilling, producers are already moving into new areas, according to Graham Walker, a research data analyst at Petrologica.

"There have been a few recent wells in relatively marginal counties like Golden Valley, so we might expect forays further afield in 2018 rather than the kind of activity levels from before the price collapse," Walker said. But increased prices may not translate into a significant producer migration to frontier areas of the Bakken. "As I understand it, there are still enough locations in core areas that moving out is additive, rather than imperative," Walker said.

IP RATES SEEN DROPPING

And while operators are moving to new areas, the wells they are likely to drill are expected to have a lower initial production rate, according to the North Dakota authority's study. For example, in 2016, operators would not produce wells which average below 900 b/d for peak 30-day production. Operators in 2018 are expected to operate wells with initial production rates as low as 500 b/d, according to the analysis.

Smaller companies looking to drill these less prolific wells outside the Bakken's core may initially get initial production rates which mirror those in Tier 1 acreage, according to Pablo Prudencio, an upstream analyst at Wood Mackenzie.

These smaller, private equity-backed firms are likely to use the same enhanced completions with more water and more proppant than larger, publicly-traded companies operating in the core use as well.

"They've been following the trends," he said.

Taylor Cavey, an energy analyst with Platts Analytics, said growth outside the core could be complicated by new drilling techniques and technologies.

"It's hard to know how a well will perform in areas that haven't been produced using high frac volumes and longer laterals," Cavey said. "Assuming that those techniques lead to higher output, it could mitigate the cost to explore in unknown territory. If you are drilling an area that you are unfamiliar with you will likely spend more on geological and seismic surveying to be sure you know what you're getting into before you drill."

Still, Cavey said there was an increasingly likelihood of more development in the Bakken as operators consider existing acreage amid better economics and higher upside.

"They are running out of proven acreage in the Bakken," Cavey said. "Which isn't to say they won't make further discoveries, but it could take some time."

In a note last month, analysts with Morningstar wrote that fears over that it could take decades for drilling opportunities in the Bakken and other shale plays to be exhausted.

The Bakken is smaller than the Permian and "relatively mature" after years of development, the analysts wrote.

"Even so, we don't expect meaningful productivity declines in the next 10 years," they wrote.

And, the core acreage will ultimately remain the most prolific, according to Wood Mackenzie's Prudencio.

"The geologic difference between Tier 1 and Tier 2 is going to remain," Prudencio said. "Even if we're now seeing these new enhanced completions in Tier 2, Tier 1 will remain better because of the geology."

-- Brian Scheid, brian.scheid@spglobal.com -- Edited by Valarie Jackson, newsdesk@spglobal.com




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