Kodiak Oil & Gas Corp. may have hit on a company game changer with a well-completion procedure that appears to strengthen production of nearby wells while increasing the amount of reserves that can be recovered from the field.
The theory began to unfold for Kodiak during the second half of last year, when the company said it observed evidence of “communication” between wells during fracture stimulation procedures.
“As a result of that, we decided to revise our completion procedures,” Lynn Peterson, Kodiak’s chairman and chief executive officer, said during a May 1 conference to discuss fourth quarter and year-end 2012 financial and operating results.
Temporarily shutting in wells helpBased on the observations, he added, Kodiak decided to temporarily shut down all producing wells within the immediate vicinity of new wells being completed.
“With this approach we are seeing a positive response from the shut-in wells once they are returned to production, which leads us to believe that we are initiating new fractures into the old well bores and finding new reserves,” he said.
Though the procedure has resulted in a delay of some production, it is Kodiak’s view that the new approach “will help us prudently manage the reservoir and enhance our expected long-term results,” Peterson said.
He said Kodiak would continue to monitor production through the first quarter of this year and would provide “additional clarity at the end of the quarter as to the impact, if any …”
Possible far-reaching benefitsThe well completion procedure adopted by Kodiak may have far-reaching benefits for companies holding properties with similar characteristics. However, it is unclear whether any other company employs the same or similar completion technique.
Kodiak’s communications theory will be further tested using tight well spacing in two North Dakota pilot projects, called Smokey and Polar. The pilots are expected to consume about a third of the company’s entire 2013 drilling budget. Kodiak’s assets are primarily located in the Williston Basin.
Kodiak feels it’s important to test the concept throughout an entire 1,280-acre drilling unit, and in each pilot the company plans to drill six wells in the Middle Bakken and six wells in the Three Forks.
Wells in the Middle Bakken are to be placed about 800 to 850 feet apart, while vertical spacing between the Middle Bakken and Upper Three Forks are to be situated about 70 feet apart. Spacing between the Upper three Forks and Middle Three Forks is about 50 feet.
Staggering the fracturesKodiak believes that by staggering fractures, the benches may communicate better and open up the entire interval. The work is spread over the entire unit because, if the procedure works, the company will have a better interval to work with and more oil to recover.
Completion operations at Polar are scheduled to begin mid-year. Smokey will be done throughout the year with full development completed after the Polar project. Information collected from the pilots is expected to have a major impact on how Kodiak designs future development programs.
Kodiak said that drilling in the Bakken continues with seven operated rigs. Currently, four rigs are running in the Polar area in southern Williams County, with one rig in each of the Smokey and Koala project areas in McKenzie County and one rig operating in Dunn County.
Kodiak completes 19 wellsCompletion operations in the Williston Basin also continue with two full-time, 24-hour per day crews. Since the last operational update on Jan. 11, Kodiak has completed 10 gross (7.9 net) operated wells, bringing the year-to-date completions to 19 gross (13.5) operated wells.
“Ongoing Williston Basin infrastructure build-out is resulting in more gas being sold and processed and greater volumes of crude being hauled by rail to strong pricing points through the U.S. and Canada,” Peterson said.
Due in part to the proliferation of rail terminals and their access to premium markets, he added, “we are currently experiencing historically low Williston Basin (commodity price) differentials. We expect the contracted … differential to continue to the benefit of most operators.”
18,200 boepd in 2012Meanwhile, Kodiak reported average sales volumes of 18,200 barrels of oil equivalent per day for the 2012 fourth quarter, a staggering 153 percent increase of 7,200 boe per day for the fourth quarter of 2011 and a 15 percent increase over third-quarter 2012 sales volumes of 15,850 boe per day. Crude oil accounted for 89 percent of fourth-quarter 2012 sales volumes, the company said.
For full-year 2012, Kodiak reported average sales volumes of 14,400 boe per day, representing a 267 percent increase over average volumes of 3,900 boe per day in 2011.
“Last year was transformational for Kodiak and it shareholders,” Peterson said, noting that largely because of key acquisitions completed in October 2011 and January 2012, the company was able to double the size of its operations while increasing production.
To deliver 100 percent growthHe said Kodiak is on track to deliver about 100 percent sales growth in 2013, with projected sales expected to range from 29,000 to 31,000 boe per day.
Kodiak anticipates capital expenditures of $775 million for 2013, but that investment amount could increase as the year progresses. Last year the company ended up spending $810 million, up from an initial capex forecast of $738 million. The increase was attributed primarily to more wells drilled because of efficiencies gained during the year, spending related to non-operated activity and “unseasonably good weather” in the fourth quarter allowing for additional activity.
Kodiak also had a hefty increase in estimated proved reserves, reporting about 94.8 million boe at year-end 2012, a 138 percent increase compared to 39.8 million boe of proved reserves at year-end 2011.
Reserves hit 80.9 million boeThe reserve mix for 2012 consists of 80.9 million boe and 83.1 billion cubic feet of natural gas, or about 85 percent oil, along with 15 percent associated natural gas. About 46 percent of the 2012 total proved reserves are categorized as proved developed producing, and about 54 percent are classified as proved developed, according to the company.
On the financial front, Kodiak reported record net income for full-year 2012 of $131.6 million, compared to net income of just $3.9 million for all of 2011, pulled down because of a fourth-quarter 2011 net income loss of $33.8 million, compared to net income of $33.3 million in the fourth quarter of 2012.
The company noted that the net loss for the fourth quarter of 2011 included unrealized derivative losses of $31.7 million attributed to the non-cash charge in the value of derivatives used for commodity price risk management. Also included in the loss is $18.3 million in interest expense.