Keeps on giving

Hess Corp. finding the Bakken a far better play that initially thought

Mike Ellerd

Petroleum News Bakken

There is significant Bakken upside — it’s basically gotten bigger and better,” that according to Hess Corp. Chief Executive Officer John Hess speaking at the Bank of America Merrill Lynch Global Energy Conference in Miami, Fla., Nov. 21.

And in response to an analyst’s question at the conference, Hess Corp. Chief Operating Officer and President of Worldwide Exploration and Production Greg Hill referred to the Bakken as “the gift that keeps on giving,” and added that the Bakken “just keeps getting better and better and better, not only for Hess, but also for the industry — so a fantastic position.”

North Dakota’s second largest oil producer has good reason to be optimistic about its Bakken prospects. Not only is Hess Corp. on track to meet its 2013 Bakken production guidance of 64,000 to 70,000 barrels of oil equivalent per day, but it is also on track to meet its 2016 Bakken guidance of 120,000 boepd, nearly doubling its 2013 production. And beyond 2016 that guidance could increase even more.

“We think we are going to be in a position very shortly to update and increase our guidance in terms of production,” Hess said. “So you see the 120,000 barrel a day number there for 2016 (referring to a slide) — that number will be going higher and be extended in time.” Furthermore, Hess said, the company’s 2,500 Bakken drilling locations will go up, as will “the estimated recoverable resource of over 1 billion barrels.”

The company’s optimism is the result of ongoing downspacing successes along with additional positive Three Forks results. According to Hill, when the company put out its 2016 guidance of 120,000 boepd some two years ago, which he said was considered a peak on Bakken production, it was based on three Bakken and three Three Forks developments and at that time, he said, very little was known about the Three Forks. “What’s happened in the two years since then,” Hill said, “the Three Forks has gotten bigger and better than we thought. And we’re now developing on a five and four. So just those two changes will give the first increment of substantial increase in that production guidance. So it will be higher … and longer on the peak.”

Hess Corp. will be further experimenting with densities of seven Bakken and six Three Forks wells per pad. “And we’re also going to be trying about 17 pads next year where we actually do seven middle Bakken and six wells for the Three Forks, either going on a 250-acre spacing on the five and four, or 180-acre spacing on the seven and six,” Hess said. Hill added that if those higher densities are successful, and he is optimistic that they will be, “then there will be another significant upgrade to the guidance on the Bakken.”

Hill said the possible guidance grade doesn’t include any enhanced recovery, which he said “will be further down the road, obviously.” Collectively, those upsides are what led Hill to refer to the Bakken as a gift that keeps giving.

Bakken performance

Hess said his company is becoming one of the best operators in the Bakken, noting that the company’s well costs have decreased from $8.4 million in the second quarter to $7.8 million in the third quarter, a 7 percent reduction. And since the first quarter of 2012 when the average well cost was $13.4 million, the company has reduced its average well cost by 42 percent (see chart).

The company has also cut its spud-to-spud time in half in three years, from 45 days in the first quarter of 2011 to 24 days in the third quarter 2013.

Hess noted that the company’s initial production, IP, rates have been improving over time, which he said is not only a result of the company’s acreage position, but is also due to “superior” completion techniques. Hess Corp. has completed 16 of the top 50 performing Bakken wells in terms of 30-day IP rates since 2012, and its 90-day IPs have been improving and are approximately 20 percent above the industry average (see charts).

“So in essence … our focus in the Bakken is about value,” Hess said. “It’s not about drilling the lowest cost well, it’s not about drilling the highest IP well — it’s about optimizing the two to create the most value and increase returns to our shareholders. And I think this track record is an impressive one, and it shows the point.”

Hess Corp. is currently running a 14-rig drilling program and is on track to meet its 2013 Bakken capital expenditure guidance of $2.2 billion. The company is planning to run approximately 17 rigs in 2014 and 20 or more in 2015.

Infrastructure investments

Hess said the investment his company has made in infrastructure has given it a competitive advantage in the Bakken. “Our company invested in infrastructure over the last several years and early in the play, and it provides a competitive advantage to get higher value for both our crude oil and natural gas production.”

The company, he added, has spent approximately $100 million acquiring nine unit trains, each one carrying approximately 72,000 barrels of oil out of the Williston Basin. The company spent another approximately $100 million on its Tioga rail loading facility which has a capacity of some 54,000 barrels per day. Hess said the company has already recaptured approximately $180 million of its approximately $200 million rail export investment since beginning rail export operations a year and a half ago.

The company also has two pipeline options in the Williston Basin, one to the Tesoro refinery in Mandan and the other to the Enbridge system. However, Hess said the company is currently optimizing its unit trains because that option offers the highest returns. “And with spreads where they are, right now about a third of our trains carrying oil go to the East and West Coast refineries and about two thirds go to the Gulf Coast.” Hess said the company’s marketing capability has resulted in a $4 to $5 per barrel net back advantage in the first three quarters of 2013 versus other Bakken producers.

Tioga gas plant expansion

In addition to oil export infrastructure, Hess Corp. has been expanding the capacity of its Tioga natural gas processing plant from 110 million to 250 million cubic feet per day. That expansion, Hess said, is well under way. “We expect to take the plant down to tie in starting right after Thanksgiving, and hopefully bring the plant up right after New Year.”

That expansion, Hess said, will further increase the company’s margins because Bakken natural gas is very liquids-rich. In addition, Hess said that expansion will “also allow us to have a competitive advantage and reduce our gas flaring, which is a very important priority of our company as well.”

As Petroleum News Bakken reported on Nov. 3, Calgary-based Alliance Pipeline recently completed its Tioga Lateral pipeline which connected the Hess Corp. Tioga gas plant to Alliance’s main gas transmission line that runs from western British Columbia to Chicago.

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John Hess on global crude oil prices

In response to an analyst’s question at the Bank of America Merrill Lynch Global Energy Conference in Miami, Fla., on Nov. 21, Hess said the U.S. currently produces some 2 million barrels of unconventional oil per day, and that production, he believes, will likely, with reasonable assumptions, increase to 4 million bpd by 2020.

Hess said U.S. refineries have sufficient capacity to keep up with domestic production for a few years, assuming the U.S. can work out logistics of better rail unloading facilities on the East and West Coast refineries, but because many Gulf Coast refineries were built for heavy crude, the increasing output of domestic light crude may necessitate the need to export some of the country’s light crude and import more foreign heavy crude.

“Ultimately, I think this country has got, as part of its energy policy, to decide to allow exports of light crude and bring in heavy crude instead because a lot of the Gulf Coast refiners have built themselves for heavy crude. I don’t think there would any diminution of competitive advantage for the U.S.,” he said. “I think we would be probably optimizing our GDP, if we did it.”

But it is a political issue that needs to be addressed in Washington, D.C. The Commerce Department, Hess said, has the authority to allow crude exports but at the present time the department doesn’t allow crude exports. “And yet, we allow petroleum product exports with … no limitations and we’re also moving forward natural gas exports. So I think it’s a matter of time before that occurs, and I hope it does occur, because I think it’s in our national interest, but … the debate is just starting.”

Filling the global gap

“Supply in this country is increasing, so where people thought non-OPEC was maybe plateauing to decreasing, now it’s increasing. I think that’s good for the world,” Hess said. “If you think about it, with the Libyan production off about 1,200,000 barrels a day, curtailments in Iran for political reasons, Iraq as well, Saudi is producing probably between 10 million and 10.5 million barrels a day, maybe has 2 million barrels a day of spare capacity. Well, where would we be as a world, if you didn’t have the 2 million barrels a day being produced from shale oil in United States? You’d be out of spare capacity, and oil prices right now would be skyrocketing.”

Hess said in addition to helping the U.S. economy as well as the trade balance because of fewer imports, domestic unconventional oil production “is also helping the world, basically enhancing and strengthening and extending surplus capacity to deal with any other supply interruption.”

What does it all mean?

—Mike Ellerd