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Vol. 18, No. 5 Week of February 03, 2013
Providing coverage of Bakken oil and gas

Hess Bakken output up by 87%; well costs, capex down by 30%

Bakken oil and gas production for Hess Corp. was 87 percent higher in 2012 than in 2011, while well drilling and completion costs were cut by more than 30 percent during 2012, from $13.4 million per well in the first quarter to $9 million in the fourth quarter.

In a Jan. 30 conference call with analysts, John B. Hess, chairman and chief executive officer, said North Dakota Bakken net production averaged 56,000 barrels of oil equivalent per day in 2012, and is likely to average between 64,000 and 70,000 boe per day in 2013.

“We have built a strong position in the Bakken, which is arguably one of the best shale oil plays in the world,” he said.

Earlier in the month Greg Hill, vice president, director and president of worldwide exploration and production for Hess, said capital spending in the Bakken would drop from approximately $3.1 billion in 2012 to $2.2 billion in 2013, a reduction of about 30 percent.

“This reduced level of spend is driven by lower well costs associated with our transition to pad drilling from hold-by-production mode and decreased investments in infrastructure projects. In addition, we plan to increase our expenditures in the emerging Utica shale play to $400 million from $300 million last year,” Hill said.

Hess plans to operate 14 rigs in the Bakken this year, as well as complete the expansion of its Tioga Gas Plant, which is scheduled to be commissioned late in the fourth quarter of 2013, enabling the company to capture more value from its gas and third-party volumes.

In the Jan. 30 conference call, Hill said part of the drilling cost reduction was accomplished in the first half of 2012, when the company “transitioned from a higher cost 38-stage hybrid completion design to a lower cost sliding sleeve design. This, along with other efficiency gains, allowed us to drive our drilling and completion costs down by more than 30 percent over the course of the year.”

One-time flattening of production in first half 2013

The transition to pad drilling from hold-by-production mode “will enable us to drive further improvement in capital efficiency and financial returns,” Hill said. “However, as we mentioned in our third quarter conference call, this change will result in a one-time flattening to slightly declining production during the first half of 2013 as the number of new wells online will be skewed to the back half of the year.”

In the first half of 2013, Hess plans to bring 70 wells to production, whereas, in the second half of 2013, it expects to bring 105 wells online, he said. In 2012, the company drilled 176 wells and completed 206.

The average 30-day initial production, or IP, rate for the wells completed was “750 to 900 barrels of oil per day,” Hill said. The company’s estimated ultimate recovery, or EUR, per well “averaged between 550,000 and 650,000 barrels of oil equivalent per well.”

Total buildout in the Bakken will “eventually … be on the order of 2,000 to 3,000 wells,” Hill said.

Two-thirds will target Middle Bakken

In 2013, “we plan to drill 185 Hess-operated wells and complete 175, of which approximately two-thirds will target the Middle Bakken, and the remainder will target the Three Forks. With regard to our Bakken infrastructure, in April of 2012, we commissioned our Tioga crude oil rail loading facility, and in the second half of the year, we shipped an average of 41,000 barrels per day via rail to higher-value markets,” Hill said.

‘Small amount of appraisal work’ in Three Forks

When asked whether or not Hess was going to pursue Three Forks formation targets “earlier or later in the year versus the Middle Bakken” formation member, Hill said the company was “going to where the best wells are” in 2013.

“We have some outstanding wells in the Three Forks, and they’re going to be part of our normal mix of wells. We’re doing … a very small amount of appraisal work in the Three Forks (part of the Bakken petroleum system), so that most of the Three Forks drilling next year is in proven high-profitability, high-return areas.”

No MLP in the works

With the announced potential terminal sales in the U.S. as part of Hess’ reconfiguration into primarily an E&P company, company officials were asked whether they intended to form a master limited partnership, or MLP, particularly in the Bakken.

John B. Hess said no.

“Obviously, we’re going to look at all strategic options to maximize value in terms of the divestiture of our terminal network in the United States. Most likely, it will be as outright sale. I think it’s important that we will take the appropriate steps to ensure supply, security, competitive prices and to maintain the high quality service for our customers in Retail and Energy Marketing businesses, which are very profitable and a good source of U.S. income. But at the end of the day, we’re just starting the sale process for those terminals. … All options are on the table, but most likely, we’re looking at an outright cash sale. … In terms of an MLP in the Bakken for our infrastructure, this is not new. This idea, it’s been in the industry for some time. We’ve done study on it, constantly. We’re very aware of the benefits that it might create. And so as a consequence, if it makes sense to create long-term shareholder value, it will be given serious consideration. But we certainly do not believe that an MLP in the Bakken is appropriate at this time,” Hess said.

—Kay Cashman

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