Hess Corp. doesn’t expect to meet its production targets in the Bakken Shale this year, but said the short-term setback shouldn’t overshadow its long-term goals for the region.
“It’s early stages in a major investment for our company,” CEO John Hess said in an earnings call. “It creates some volatility in being able to predict, both on the cost side and on the production side, but we’re very confident that we’re on a solid growth trajectory.”
The traditionally international player is increasingly focused on domestic unconventional oil plays and plans to spend $2.5 billion this year, or 37 percent of its $6.8 billion budget, on the Bakken, Eagle Ford and Utica. That includes $1.9 billion to operate 16 rigs and five dedicated hydraulic fracturing crews in the Bakken and expanding its Tioga gas plant.
Even with that major infusion of capital, Hess is in the process of selling overseas assets to direct even more money toward its domestic unconventional prospects. “We anticipate that proceeds from asset sales, along with internally generated cash flow, will fund the majority of our capital and exploratory expenditures in 2012,” said Greg Hill, president of worldwide exploration and production. “Our principal focus this year continues to be on execution and the sustained profitable growth of our reserves and production.”
Earlier in the year, Hill warned that daily production rates could fluctuate considerably because of the sharp decline curves that typically follow higher initial production rates from new wells, but said that “increasingly higher peaks, continued quarter-on-quarter improvement and continued reduction of the completion backlog ... give us pretty high confidence in our ability to achieve that 60,000-barrel a day average rate in 2012.”
Although first quarter production from the Bakken was up 11 percent quarter-over-quarter and 68 percent year-over-year to 47,000 boe per day in April, that target now appears unattainable, Hill said. “While we expect the monthly average to continue to increase throughout the rest of the year, we now expect the average for the full year may come in somewhat lower than our original estimate of 60,000 boe per day,” he said.
The company expects to issue a revised guidance in July.
Not drilling sweet spots
Hess blamed its weak performance on a combination of internal and external issues.
Internally, the company isn’t drilling its best prospects.
“We’re focused on getting acreage held by production rather than focusing on sweet spots,” Hill said. In addition to centering activity in lower-performing areas, drilling simply to hold acreage can also be cost inefficient. Because it usually requires only the first well on a pad, drilling to hold acreage ties up manpower and rigs and bypasses the opportunities for economics of scale inherent in drilling multiple wells on a pad. Hess is currently reporting average well costs of $10 million for single wells in the Bakken.
Because of that need to drill for logistical reasons rather than to target sweet spots, “we still have a backlog of wells to complete,” Hill said. “That backlog is coming down.”
In the first quarter, Hess drilled 37 wells and completed 52 wells in the Bakken. Of the 142 wells Hess has drilled in the play to date, 112 are currently producing and 86 have been online for at least a month with an average initial production rate of 900 barrels per day. Hill described those figures as “obviously very encouraging results,” but the company reported an average 30-day initial production rate of 1,000 bpd back in January.
Hess holds a 67 percent average working interest on its 800,000 net acres in the play.
Shortages and delays
Externally, Hess blamed permitting delays and material shortages for bumping up operating costs and tempering production growth during the first quarter.
First, Hess faced a shortage of white sand proppant, but the issue is “resolved,” Hill said. He also bemoaned a permitting backlog in North Dakota, “which resulted in delays in getting wells on production. … We’re working with the state to resolve these issues.”
In addition to the savings Hess expects to see from resolving those issues, “We expect our costs to drop as we transition to a full (34-stage) sliding sleeve completion,” Hill said.
From a midstream perspective, Hess is currently spending between $400 million and $500 million each year on major infrastructure projects in the Bakken, but expects those costs to alleviate toward the end of this year or early next year. Those infrastructure projects include $500 million on its Tioga gas plant and its recently commissioned rail facility to Louisiana that “is already showing its wisdom of revenue upgrade,” Hess said.
With the rail facility, Hess is now sending 25,000 barrels per day to St. James, La., and expects to be sending between 50,000 and 54,000 bpd by the end of the year. The facility allows Hess to capture a differential between $25 and $40 per barrel in crude oil prices.
