Only 1% of the Bakken Play Breaks Even at Current Oil Prices

Posted in The Petroleum Truth Report on November 3, 2015

Only 1% of the Bakken Play area is commercial at current oil prices. 4% of horizontal wells drilled since 2000 meet the EUR (estimated ultimate recovery) threshold needed to break even at current oil prices, drilling and completion, and operating costs.

The leading producing companies evaluated in this study are losing $11 to $38 on each barrel of oil that they produce, the very definition of waste.

Although NYMEX prices are about $46 per barrel, realized wellhead prices in the Bakken are only $30 per barrel according to the North Dakota Department of Mineral Resources. At that price, approximately 125,000 acres of the drilled play area of 10,500,000 acres is commercial (green areas in Figure 1).

$30 EUR MAP $8 MM WELL COST 31 OCT 2015

Figure 1. Bakken Shale Play commercial area map at $30 per barrel wellhead price. Contours are in
barrels of oil estimated ultimate recovery. Contour interval = 200,000 barrels of oil. 

Source:  Drilling Info, North Dakota Department of Natural Resources & Labyrinth Consulting Services, Inc.
(click image to enlarge)

The break-even per-well EUR is 700,000 barrels at a $30 oil price.  The underlying economic assumptions are shown in Table 1.

Bakken Assumptions & Observations 3 November 2015
Table 1. Economic assumptions and outcomes used to determine the Bakken $30 per barrel commercial area shown in Figure 1.
Source: Company presentations and Labyrinth Consulting Services, Inc.
(click image to enlarge)

There has been much debate about the break-even price for tight oil plays in the U.S. This discussion is largely meaningless because there is no single break-even price for any play.

Break-even price depends on EUR and every well has a different EUR.  EUR depends on reservoir geology and geology varies geographically.

Drilling and completion technology cannot make up for bad geology. An area with poorer geology costs more to produce and will never perform as well as an area with better geology. And technology comes at a price. Longer laterals and more frack stages mean that a higher EUR is needed to to pay out the additional costs.

Leading Operators Analysis

I evaluated the leading operators in the Bakken Shale Play based on the greatest number of operated wells and highest cumulative oil production. The companies evaluated were Continental Resources (CLR), EOG Resources (EOG), Hess Corporation (HES), Marathon Oil Corporation (MRO), Statoil (STO), Whiting Petroleum Corporation (WLL) and XTO Energy Inc. (XTO), a subsidiary of ExxonMobil.

I used standard rate vs. time decline-curve analysis to forecast EUR for wells with first production in 2010 through 2014 and then calculated a weighted average-well EUR for each operator based on the number of wells for that operator in each production year (Table 2).

Bakken OPERATOR SUMMARY TABLE BY PROD YEAR 31 October 2015
Table 2. Summary of evaluated operator EUR by year of first production and the weighted average
well EUR based on the number of wells in each production year.
Source: Drilling Info and Labyrinth Consulting Services, Inc.
(click to enlarge image)

Table 3 shows the ranking of the evaluated operators by weighted-average oil EUR for all years evaluated, and the break-even realized oil price at that EUR.

BAKKEN KEY OPERATORS EUR & BE OIL PRICE TABLE 31 OCT 2015
Table 3. Weighted average EUR ranking of the evaluated Bakken operators, the number of
producing wells in the analysis and the break-even realized oil price at that EUR.
Source: Drilling Info and Labyrinth Consulting Services, Inc.
(click to enlarge image)

Average well EUR among top operators in the Bakken ranges between 312 and 513 MBO (thousand barrels of oil). The associated break-even oil prices range from $41 to $68 per barrel. Marathon has the highest EUR per average well and Whiting has the lowest among the evaluated companies. This is a considerable spread of EUR (64%), and the spread among the top 3 operators–Marathon, Statoil and XTO–is also considerable (32%).

Break-even prices (Table 3) are inversely proportional to EUR. Marathon’s break-even oil price is $41 per barrel while Whiting’s is $68 per barrel, the same percentage spread (64%) as for EUR before the effects of rounding shown in the above tables.

The weighted average break-even price for these 7 operators is $61 per barrel but, clearly, there is no single break-even oil price for the Bakken or any other play.

I compared the EURs in this study with company claims from investor presentations (Table 4–not all companies state an average Bakken EUR).

BERMAN BEST-YEAR EUR BOE VS COMPANY EUR BOE 1 NOV 2015
Table 4. Comparison of Berman best-year estimated ultimate recovery (BOE–barrels of oil equivalent using a 6 MMcfg:1 BOE conversion factor for gas) with company average EUR (BOE).
Source: Drilling Info, Company investor presentations and Labyrinth Consulting Services, Inc.
(click to enlarge image)

The differences are not large. Except for EOG, however, I was unable to match my best-year forecasts with a near-recent year claim by the companies. Look carefully at company claims. They often use an EUR that they anticipate in the future or that is from a limited area. For example, Continental uses a “target” Bakken EUR of 800 MBOE for 2015 despite the fact that their stated average for 2014 was only 550 MBOE (70% of the target EUR). The highest average EUR that I forecast for Continental is 470 MBOE (for 2011 in Tables 2 and 4).

What It Means

How should we understand the variance in EUR and break-even prices among the evaluated companies?

I believe that the different average-well EUR among companies reflects geographic changes in geology. This is mostly expressed in reservoir quality for the Bakken. Because the geology varies, better and poorer geology is embedded in the location of positions that the various companies acquired when they entered the play (Figure 2).

Bakken Operator Attribute Map 1 Nov 2015
Figure 2. Location map of wells operated by the companies evaluated in this study.
Source: Drilling Info and Labyrinth Consulting Services, Inc.
(click to enlarge image)

Sweet spots are found and not predicted. They are evident only after thousands of wells have been drilled and produced for some time. By then, all land has been captured. A company has to work with the position it was able to acquire in the land grab that characterizes shale plays.

Late entrants like Statoil in the Bakken or Devon in the Eagle Ford pay a premium to buy into an existing sweet spot. The failure of a late entrant like Shell in the Eagle Ford resulted from paying a premium for a position outside the sweet spot.

There are no significant differences in technology or operator competence among the companies evaluated in this study. Technical success in the Bakken is largely based on luck in the initial selection of a lease position.

The manner in which operating companies have managed their production growth, cash flow and balance sheets, however, differs considerably and is based on choice and not on luck. Figure 3 shows key financial data for companies evaluated in the Bakken Play.

Capex-CF Debt-CF Evaluated Companies 2 Nov 2015
Figure 3. Capital expenditures-to cash flow and debt-to-cash flow ratios for evaluated companies. Source: Google Finance and Labyrinth Consulting Services, Inc.

On average, the evaluated companies spent more than double their cash flow on drilling and completion (capex) in the first half of 2015. In other words, they lost more than a dollar for every dollar they earned. Companies like Whiting and Marathon outspent cash flow by a factor of more than 3-to-1 while a company like XTO (ExxonMobil) earned more than it spent.

Evaluated companies’ debt-to-cash flow ratio averaged 6.3. This means that it would take more than 6 years to pay off their debt if all revenue were used for that purpose. Many banks use a debt-to-cash flow ratio of 2.0 as the threshold for calling loans (debt covenant). The E&P industry’s average ratio from 1992 to 2012 was 1.58 (also see Assessing Systemic Risk With Debt to Cash Flow).

Every company evaluated in this study, therefore, is in the danger zone as far as banks are concerned. Marathon and Whiting have debt-to-cash flow ratios of 5 times greater than the threshold of 2.0, while EOG, Statoil and XTO are at least below the average for this group of companies.

A continuation of low oil pricing may have profound and negative implications for Whiting, Marathon, Hess and Continental based on this financial performance data.

Conclusions

Tight oil is expensive to produce. The biggest increase in Bakken production occurred after oil prices reached more than $90 per barrel in 2011 (Figure 4).

Bakken Prod & CPI WTI 2 Nov 2015

Figure 4. Bakken oil production and CPI-adjusted WTI oil prices (August 2015 dollars).
Source: Drilling Info and Labyrinth Consulting Services, Inc.
(click to enlarge image)

Since oil prices collapsed in 2014, capital and operating costs have fallen almost as much as product prices. Lower costs, hedges, a price rally to around $60 per barrel from March to early July 2015, and continued availability of outside capital have allowed most producers to survive. Higher-priced hedges are running out and service company costs cannot fall much further without bankrupting those companies. Also, I do not believe that efficiency gains are significant going forward.

All Bakken producers in this study can break even at $60-70 per barrel wellhead oil prices at current low drilling and completion costs. At $30 realized prices, they are all in serious trouble. Their investor presentations give little sense of how perilous their situation is in this price environment.

The path forward is uncertain. I expect even lower prices in coming months as the only logical market response to a persistent over-supply of oil in the world and a weak global economy. The principal unknown is whether or not the world’s over-supply of capital will continue to favor investment in U.S. tight oil considering its poor and worsening financial performance.

Bakken oil production has fallen only 26,000 barrels per day since its peak in December 2014 and the number of producing wells reached an all-time high of 12,940 in July. This makes no sense at all given the economics of $30 oil.

If producers cannot change their behavior and demonstrate discipline in their spending, the market will do it for them with much lower oil prices.


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38 comments on this entry


  1. Enjoyed it


  2. Thanks David.

    Art


  3. After reading your full report at Forbes, this Bakken post drill information will be a tough pill to swallow by the major operators. It will be interesting to see how this report/data is received by the various operators. Reading comments from the general public indicates that they still believe the Bakken shale oil play is economic and that the US is or could be energy independent drilling our U.S. shale oil.

    One question, how does the production from the Three Forks fit into assessing the EUR’s and economics of individual wells in the Bakken play area? Regards.


  4. Daniel,

    I have included Three Forks production with overall Bakken production. The ND DMR does not make a real distinction nor does Drilling Info so why should I?

    All the best,

    Art


  5. Great piece, Art. I’m a little surprised that Forbes published it, given their usual sensibilities.

    Best,
    Alan


  6. Alan,

    I am now a regular Forbes contributor. I choose the content and the frequency and they are pretty much hands-off.

    The Forbes Houston Bureau Chief, Chris Helman, invited me to become a contributor. He has published some great pieces on shale plays and some of its captains over the years.

    All the best,

    Art


  7. Fiscal break-even oil price for Iraq is $80 in 2015. Outlook for the second half of this decade:

    30/10/2015
    Iraq needs 1.3 mb/d additional oil exports and $70 oil to balance budget
    http://crudeoilpeak.info/iraq-needs-1-3-mbd-additional-oil-exports-and-us-70-oil-to-balance-budget


  8. Matt,

    I always appreciate the timely context that you bring to these comment pages. The point that I take from your post along with mine is that that oil prices must increase or else not just companies but entire countries and their economies may collapse. Both scenarios seem possible to me. It’s a kind of Schrödinger’s Cat experiment, isn’t it?

    All the best,

    Art


  9. […] in the U.S. and world economies.  This will put even more pressure on oil prices.  According to a recent article by energy analyst Art Berman, only 1% of the Bakken breaks even at current oil […]


  10. Sorry.

    Can I ask about hedge?
    If I understand right, when shale hedge their oil, other people will lose money and bankrupt for them in this environment?


  11. Bixem,

    Most public companies except major oil companies hedge their oil and gas prices. A hedge is a bet on price that a counter-party takes the other side of. If the hedge is for a higher price than the price on the dated contract, the counter=party loses and must make up the difference, and vice versa if the price is higher.

    Art


  12. Hi, Berman.

    Thank your for sharing

    I really know how is hedge, but I hear that many shale player hedged price in $80-90 for long-term, so if shale not bankrupt, insurer will.

    Thanks you again.


  13. Bixem,

    Hedges are ordinarily based on commodity futures prices. It is rare that anyone will take the other side of a hedge out more than a few months beyond the current contract. For example, the current January 2016 contract has 42% less volume (number of trades) as the December 2015 contract. The February 2016 contract has 77% less volume and March 2015, 90% less volume. In other words, there are few counter-parties with enough confidence in the future trajectory of oil prices to bet more than about 3 months into the future. So, while there is always someone who will take the other side of a hedge a year or more into the future, the percentage of a company’s production hedged at that price will be very small. Also, there is usually a premium charged for those longer-term hedges so they are not as lucrative as they appear assuming they are even winning bets.

    Look at the futures strips for yourself at this link.

    All the best,

    Art


  14. As usual Art, this piece was insightful and data-driven. I particularly like a couple of points that you make, which are generally dismissed or not understood by most industry observers; particularly the research analysts that tout shale drillers:

    1) there is no such thing as a “standard” EUR. I get so frustrated when I see all those graphics, regularly published by many research houses, that purport to illustrate the comparison of all the different shale plays on a single bar chart, when the reality is that every single resource play ever developed has a significant variability in results from well to well. If we were truly “manufacturing” gas/oil with these plays, then the results should be predictable and uniform, but in fact what you see across basins is that if you take all well results into account, you get a normal distribution, just like in conventional drilling.

    2) Sweet spots are only obvious after you have spent a whole lot of capital and some luck is usually involved in finding them. We’ve seen cases here in Canada (Montney) where well results differ dramatically when they are only a mile apart.

    3) There is a market focus on Opex and nobody fusses too much about capex as long as new capital comes in the top of the funnel to subsidize the losses. After all the upfront money is spent, it becomes “sunk” and it doesnt matter anymore in measuring “profitability”. You bringing a focus back on the gap between capex and cash flow is important because this industry has been running at negative cash flow for years and you wouldnt think it could last forever. Indeed, I saw an analysis yesterday that showed that 48 top US explorers had $33 billion in impairments in Q3. If you think about it, that is really the gap between the true full cycle economics and the “half cycle” economics that this industry has been promoting. But of course, “full cycle doesn’t matter”. Until you can float your next bond of course.

    Good work!


  15. Oops, should have said “until you can”t float your next bond”.


  16. It may get worse for the Bakken. According to Jim Stafford’s article found at the link below,
    It is cheaper for east coast refineries to buy imported oil because it costs less to ship by VLCC tankers.

    What are the consequences of this? Pressure on WTI prices? Dominos are beginning to fall all over the place and I am not talking about pizza either.

    http://oilprice.com/Energy/Oil-Prices/North-Dakota-No-Longer-Attractive-For-Drillers-Or-Refiners.html

    Art, congratulations on becoming a Forbes contributor.


  17. […] in the U.S. and world economies.  This will put even more pressure on oil prices.  According to a recent article by energy analyst Art Berman, only 1% of the Bakken breaks even at current oil […]


  18. […] economies.  This will put even more pressure on oil prices.  According to a recent article by energy analyst Art Berman, only 1% of the Bakken breaks even at current oil […]


  19. […] in the U.S. and world economies.  This will put even more pressure on oil prices.  According to a recent article by energy analyst Art Berman, only 1% of the Bakken breaks even at current oil […]


  20. […] Only 1% of the Bakken Play Breaks Even at Current Oil PricesArt Berman, Petroleum Truth Report Only 1% of the Bakken Play area is commercial at current oil prices. 4% of horizontal wells drilled since 2000 meet the EUR (estimated ultimate recovery) threshold needed to break even at current oil prices, drilling and completion, and operating costs. […]


  21. Art

    Where are these guys getting Capital?
    They keep claiming earnings with billions in
    debt! This entire shale Industry like the Dot com businees of the nineties,


  22. Vish,

    Capital sources include private equity, corporate bonds, leveraged loans and share offerings. Investors seeking yields above traditional sources–treasury bonds, savings accounts, CDs, etc.–are willing to accept the risk of U.S. energy companies largely because of the absence of alternative high-yield investments with what they see as manageable risk.

    Thanks for your question,

    Art


  23. […] and tight oil plays are commercial even at current low oil prices but data on the Permian basin and Bakken plays simply does not support that […]


  24. […] and tight oil plays are commercial even at current low oil prices but data on the Permian basin and Bakken plays simply does not support that […]


  25. […] and tight oil plays are commercial even at current low oil prices but data on the Permian basin and Bakken plays simply does not support that […]


  26. A few weeks ago, there was an analysis of the cost of Bakken oil, based an all non confidential wells drilled in 2014, presented in SeekingAlpha.
    seekingalpha.com/article/3740946-cost-of-bakken-tight-oil-a-transparent-analysis-based-on-a-comprehensive-data-set

    The page had also a link to empirical background data and a 2015 cost simulation http://www.en.org24.com

    Confirms what you say.


  27. A few weeks ago, there was an analysis of the cost of Bakken oil, based an all non confidential wells drilled in 2014, presented in SeekingAlpha.
    “Cost Of Bakken Tight Oil – A Transparent Analysis Based On A Comprehensive Data Set”

    The page had also a link to empirical background data and a 2015 cost simulation en.org24.com

    Confirms what you say.


  28. Thanks for the link, Ben.

    All the best,

    Art


  29. […] Кстати, по поводу себестоимости и цены на нефть, есть хорошая статья Артура Бермана, специалиста по энергетике, в которой […]


  30. […] Кстати, по поводу себестоимости и цены на нефть, есть хорошая статья Артура Бермана, специалиста по энергетике, в которой […]


  31. […] are shown. Economics also include an 8% discount. Details may be found at the following links: Bakken, Eagle Ford and Permian. Source: Drilling Info & Labyrinth Consulting Services, […]


  32. […] are shown. Economics also include an 8% discount. Details may be found at the following links: Bakken, Eagle Ford and […]


  33. […] are shown. Economics also include an 8% discount. Details may be found at the following links: Bakken, Eagle Ford and […]


  34. […] are shown. Economics also include an 8% discount. Details may be found at the following links: Bakken, Eagle Ford and Permian.Source: Drilling Info & Labyrinth Consulting Services, […]


  35. […] is continued business throughout the Bakken shale? According to one report, only one percent of “the Bakken Play area is commercial at current oil prices [and] four percent of horizontal wells drilled since 2000 meet the EUR (estimated ultimate […]


  36. Is it possible to receive the calculation of the break even prices more in detail? thank you very much


  37. Giacomo,

    I have provided the parameters and assumptions for the break-even economic prices. The rest is just formulas except the EUR forecasting and I have shown examples. To go farther is really beyond the scope of this blog.

    All the best,

    Art


  38. […] and tight oil plays are commercial even at current low oil prices but data on the Permian basin and Bakken plays simply does not support that […]