North Dakota’s oil production continued to increase in October but at a slower pace than previous months, due to less drilling and a substantial backlog in hydraulic fracturing jobs.
Much of the slowdown can be attributed to temporary setbacks. But it also may be signaling the end of the chaotic Bakken oil boom and the beginning of more stable growth.
“We think that this next year is going to be that transition year when the rig count stabilizes in the 200 range and the truck traffic stabilizes,” Lynn Helms, director of the state Department of Minerals Resources, said in a conference call with reporters.
But the Williston Basin rig count averaged just 190 in September, 188 in October and 186 in November, slipping again to 182 by Dec. 17, when the department released it latest oil patch statistics by way of Helms’ “Director’s Cut” report. The record high of 218 rigs was reached on May 29 of this year.
All-time high productionOil production averaged 747,239 barrels per day in October, a new all-time high for North Dakota, but just 2.5 percent above September’s average of 729,248 barrels per day. November’s production numbers were not available.
“That is a smaller increase than we’ve seen in probably the previous six to nine months — all were closer to 4 percent production increases,” Helms said in the conference call. “Probably the biggest thing is the reduced drilling.”
The production slowdown also is reflected in the slight increase in the number of producing wells that came on line — 8,025 in October compared to 7,899 in September.
In another unusual turn of events, natural gas production showed hardly any increase, largely due to dry gas wells and high gas-oil ratio wells in units being shut in. Daily output was 795,806 cubic feet in September versus 796,042 cubic feet in October.
“Construction of processing plants and gathering systems is now affected by weather,” Helms said. “U.S. natural gas storage is up to 8 percent above the five-year average. This indicates low prices for the foreseeable future. North Dakota shallow gas exploration is not economic at near term gas prices.”
Meanwhile, additions to gathering and processing capacity are helping with the well flaring problem, but the percentage of gas flared remained the same in October at 30 percent. The historical high was 36 percent in Sept. 2011.
Transition to ‘walking’ rigsHelms said the rig count fell into the low 180s as companies transitioned to more efficient “walking” drilling rigs and began implementing year-end cost cutting. But the department also registered a big spike in idle wells, indicating an estimated 340 wells were awaiting hydraulic fracturing services.
“Rapidly escalating well costs that consumed capital spending budgets faster than many companies anticipated and uncertainty surrounding future federal policies on taxation and hydraulic fracturing are impacting capital investment decisions,” Helms said.
However, the department anticipates that oil production will regain its footing, increasing to around 830,000 barrels per day by the middle of 2013 and to 850,000 barrels per day by the end of next year.
“We expect those barrels to just keep marching right on up,” Helms said. “We really expect drilling efficiencies and hydraulic fracturing to keep that oil production going up 3 or 4 percent every month.”
Rig count back up in JanuaryHelms said companies have told him that with the approval of their 2013 capital budgets, they probably will take the rig count back up to about 200 beginning in January.
“We’ve talked to some of the biggest Bakken drillers and producers,” Helms noted. “So we believe that shortly after the first of the year we will start to see that rig count increase again. We’ll see a lot of hydraulic fracturing trying to catch up with that drilling rig count.”
He noted that the expected increase in the rig count should be aided by the delivery of the new walking rigs over the next six to 12 weeks, allowing operators to actually drill more wells per rig per year. These rigs are specifically designed to move laterally along a well pad to install multiple wells on a single pad, a practice known as cluster or pad drilling. It only takes a walking rig about an hour to move the 25 to 30 feet from one well to another, while conventional rigs must be broken down prior to moving.
“Most of the companies want to get to the place where they have only one or two conventional rigs in their portfolio and the all the rest walk,” Helms said.
The number of drilling permits also fell dramatically from October (370) to November (211), but the decline was primarily attributed to the department’s efforts to build a large permitting inventory in the fall before moving into the harsh winter months. The inventory stands at around 1,400 issued permits.
But the department also wanted to make sure companies had plenty of permits in hand in the event of brief delays due to the writing of any new hydraulic fracturing rules.
Takeaway capacity adequateIn other developments, crude oil takeaway capacity remains adequate to keep up with near-term production projections, the department said, noting that a majority of Bakken oil now ships by rail to East Coast, Gulf Coast and West Coast destinations.
The price of a barrel of North Dakota sweet crude averaged $80.66 in November, compared to $87.00 in October and $84.98 in September. The price was $75.25 per barrel on Dec. 17.
Helms said the Bakken oil boom is playing out pretty much as the department had anticipated.
“The curve seemed to be going straight up in terms of rigs, people, trucks and production and then basically flatten and become a nice plateau,” he said. “And that is what we’re trying to achieve.”
However, he said that while hotel demand has leveled off, there is continuing demand for apartments and even more demand for single family housing in the oil patch.
“I think we can expect to see continuing transition from roughnecks to people that are working fracking crews and working workover rigs and production jobs,” he added. “The other thing I think you have to face is massive amounts of road construction.
“So (there will be) less intense drilling activity, fewer trucks than we had in the first half of this year, a lot of road construction and a lot of pipeline construction, really a tremendous amount of pipeline construction.”