Occidental Petroleum Corp. is reducing its exposure in the Bakken because of stubborn operating costs, but the company insists it still has long-term plans for the region.
Because the cost of drilling for oil in North Dakota has “still not come down to the level that’s appropriate” the Los Angeles, Calif.-based company has “a lot better places to put money right now than the Bakken,” CEO Stephen Chazen told analysts in late April.
In particular, Occidental will focus domestically on California and the Permian basin of West Texas and New Mexico, two regions where it is one of the most active players.
Although Occidental is reducing its rig count in the Bakken this year, “we don’t plan to exit it,” Chazen insisted. He invoked a famous bank robber to explain why the company still expects to eventually “add to the position and build it out as a long-term resource.”
“If you look at the United States … the oil is in California, the oil is in the Permian and the oil is in the Bakken,” he said, adding later, “It’s the Willie Sutton discussion. … We’re there because that’s where the oil is. … We’re a domestic oil producer fundamentally.”
The problem in the Bakken is finding workers in a sparsely populated boomtown. The current pace of drilling activity has “basically overwhelmed the small place,” he said.
Given that Occidental’s service costs have been “essentially flat” in both Texas and California, Chazen said it doesn’t make sense for the company to rush to develop the Bakken until costs come down. “It might be effective for somebody else to compete for capital, but it’s not effective for us to compete for capital. That’s why I’m slowing it down, because that money is much better used in either California or West Texas.”
Once bullish on BakkenAs one of the five largest U.S. oil companies, Occidental made headlines in late 2010 when it sold its Argentinean oil interests to a subsidiary of China Petrochemical Corp. and spent $3.2 billion on unconventional acreage in North Dakota and South Texas.
In 2011, Occidental increased its holdings in the Williston basin to 277,000 acres.
At the time, the company said it expected to grow Williston basin production to at least 30,000 barrels of oil equivalent per day (from 6,000 boe per day) within five years.
With some predicting that service costs in the Williston basin are on the brink of falling, a recent Reuters article questioned whether Occidental — one of the first major U.S. oil companies to invest heavily in shale oil — had suddenly “lost its clairvoyance,” but the decision to scale back its presence in the play appears to have more to do with the other opportunities in Occidental’s portfolio than with the standalone merits of the Bakken.
In a recent investor presentation, Occidental said it wanted to achieve at least a 15 percent return from its domestic plays and at least a 20 percent return from its international properties. For its production in the first quarter of this year, Occidental reported a 16 percent average return on equity and a 14 percent average return on capital employed.
The decision to pull back in the Bakken is also not unexpected. Earlier this year, Occidental said it expected to run six rigs in the Williston basin through the rest of 2012, but also planned to shift capital from its Midcontinent plays to California and Texas.
“This may also encourage well costs to decline,” Chazen said in January.
At the time, he said Bakken well costs had been holding steady between $8 million and $8.5 million. While far below some players in the region, that range is much higher than other regions. In the Permian, the company is spending between $2 million to $2.5 million per well in the Wolfberry play and between $6 million to $7 million per well in the Bone Springs play. In California, its unconventional wells cost around $3.5 million.
Occidental spent 38 percent of its $7.5 billion capital budget in the two plays last year and plans to spend 40 percent of its $8.3 billion budget in the two plays this year. The company plans to run at least 73 rigs in the United States through the remainder of the year, including at least 26 rigs in the Permian basin and at least 31 rigs in California.
California and PermianAlthough Occidental came on strong in the Bakken, it has not yet established as strong a position in the play as it currently holds in California and in the Permian basin.
On its home turf in California, Occidental holds about 1.7 million acres of conventional and unconventional acreage. It drilled 675 wells and performed 500 well workovers last year and plans to bring two gas processing plants online in the next two years.
Its 78 percent working interest in the Elk Hills field near Bakersfield helped make Occidental the leading gas producer in California, but with production down 14 percent to 54,000 barrels of oil equivalent, the company is shifting to unconventional liquids.
That activity is reporting a 30 percent increase year over year to 91,000 boe per day.
Its unconventional program in the state calls for some 140 wells in the first half of the year and initial 30-day production rates have been between 300 and 400 boe per day.
In the Permian, Occidental holds some 3 million net acres. It drilled 409 wells on its operated properties in the basin in 2011 and plans to add three rigs this year. To accommodate increased activity planned for the Wolfberry, Bone Springs and Avalon plays, Occidental plans to increase its Permian budget by 75 percent over 2011 levels.
Of the 204,000 boe per day Occidental produced in the Permian during the first quarter of 2012, approximately 64 percent came from CO2-related enhanced oil recovery projects.