Bakken Break-Even Prices Threaten Profits
The Bakken Shale play is following the same pattern of declining well performance that I have shown for the Permian and Eagle Ford in recent weeks. Bakken break-even prices have risen almost 70% as a result. If this pattern continues, it threatens the play’s future commercial viability.
Bakken EUR (estimated ultimate recovery) has fallen almost 50% in barrels of oil equivalent from 2020 levels over the last two years (Figure 2).
Oil EUR decreased -151,000 barrels of oil per well (-37%) in 2022 compared to 2020, and -263,000 barrels of oil equivalent (-67%). Oil and gas EURs for 2023 were even lower but a less-complete production history adds some uncertainty to those values.
At the same time, Bakken production is increasing! How can that be?
Bakken production has risen 300,000 barrels per day since December 2022 (Figure 3). That’s largely because 1,459 new producing wells were added. Production will increase even if new wells are not as good as those in earlier years if more wells are put on line.
Also it took a long time for producers to fully restore wells that were shut in during the Pandemic recession. Bakken output only recovered to its 5-year average in May 2023 (Figure 4). Even so, It remains -240,000 barrels/day (-16%) less than its November 2019 peak of 1.54 million barrels/day.
Lower well EURs have a profound effect on Bakken operator margins. That’s because wellhead prices in the Bakken are discounted about $5/barrel to WTI as a result of transport costs to refineries. Bakken break-even prices for 2022 wells have increased 65% since 2020, and have doubled for 2023 wells.
Figure 5 shows break-even prices for a range of discount rates. I have included 15% and 20% rates since investors now demand those returns because of higher perceived risk and price volatility. Present-value prices of $73 to $90 for the last two years are troubling especially compared to break-evens in the $40- to $50-range as recently as 2021.
In the Permian and Eagle Ford plays, I suggested that over-drilling might be a cause of declining EURs. That does not appear to be the case for the Bakken. Bakken bottom-hole locations are about 1000 feet apart on average compared to only a few hundred feet apart in the Permian and Eagle Ford plays (Figure 6). The average well density for the Bakken is about one well per 200 acres. For the Permian, it is about one well per 40 acres.
I did observe, however, a change in the pattern of average well decline beginning in about 2018. Figure 7 shows production histories for wells with first oil in 2014, and then for wells from 2018 through 2020. The chart in the upper left represents typical Bakken “hyperbolic decline“–a smooth progression from steep initial decline to flattening rates after the early flow period.
More recent vintages of Bakken wells show very different decline histories. The plot in the upper right, for 2018 wells, may be divided into two discrete, relatively straight-line “exponential decline” segments.
The two charts at the bottom of the figure, for 2019 and 2020 wells, represent hybrid versions of those in the top row but with stronger exponential than hyperbolic patterns of decline.
Neither well density nor lateral lengths changed appreciably among the years shown in the figure. Something in the reservoir, completion or production management of the wells changed.
Whatever the explanation, Bakken well performance has decreased and break-even prices have increased. In November, Continental Resources Chair Harold Hamm suggested that core areas of the Bakken play were reaching their peak, and that deeper “tough rock” objectives would be needed to sustain production. This study supports Hamm’s public comments.
U.S. tight oil has accounted for all world production growth since 2010 (Figure 8). Despite that, crude oil and condensate output has not yet recovered to late 2018 levels. That suggests a period of relative supply scarcity going forward unless something changes
The implications of this Bakken study and recent evaluations of the Permian and Eagle Ford plays are clear—this is the beginning of the end for the tight oil plays. There are probably decades of remaining production but at lower rates. A long-term decline in shale play oil production suggests a future that may be quite different from the present.
The current over-supply of oil is almost certainly a short-term phenomenon. Since the world economy emerged from the Pandemic recession, supply urgency has always been the song playing in the background. I doubt it will remain in the background much longer based on trends in the Bakken and other U.S. shale plays.
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