In his opening remarks at the Barclays CEO Energy-Power Conference in New York on Sept. 11, Hess Corp. Chief Executive Officer John Hess said his board and management team have made significant progress since 2010 in transforming the company from an integrated oil company to a pure-play exploration and production company.
Hess said his company has built a higher-growth and lower-risk portfolio providing visible production growth of 5 to 8 percent over five years. That growth, he noted, is “underpinned” by several of the company’s key plays, including its “leadership position in the Bakken in North Dakota where we and our board were last week, and we continue to make great progress there.”
Among Hess Corp.’s key plays, its Bakken assets stand out in terms of growth, according to Hess.
“First and foremost is our world-class position in the Bakken shale in North Dakota,” he said. “It’s really the single largest contributor to 2013-2017 production growth, currently producing about 72,000 barrels a day of oil equivalent, and we are on track to meet guidance for the year of 64,000 to 70,000 barrels a day.”
Most of Hess Corp.’s acreage is concentrated in central and eastern McKenzie County, central and eastern Williams County, and northwestern Mountrail County. The company also has acreage extending from Billings and Stark counties north all the way to the Canadian border in western North Dakota.
North Dakota operations
Hess said his company has drilled approximately 600 wells in the Bakken and has participated in another 600 competitor wells, bringing the firm’s total inventory to some 1,200 wells.
Hess Corp., he said, has built a position of approximately 640,000 acres in the Williston Basin with an overall working interest of about 70 percent. The company, he said, has a material upside through downspacing, not only in the middle Bakken member but also in the Three Forks formation.
Hess Corp. reported a reduction in spud-to-spud time from 45 days in the first quarter of 2011 to 27 days in the second quarter of 2013. Drilling and completion costs have also declined, falling from $13.4 million in the second quarter of 2012 to $8.4 million in this year’s second quarter.
Hess said the company’s 2013 30-day initial production, IP, rates are running between 750 and 850 boepd, and he put 2013 estimated ultimate recoveries at 600,000 to 650,000 barrels.
Based on North Dakota Industrial Commission data, Hess said the company has 18 of the top 50 wells in the state in terms of 30-day IP rates. It also leads its peers in the liquid content of reserves at 79 percent and in liquids percentage of production, which for 2013 is estimated at 76 percent on a pro forma basis.
Hess Corp. is currently running a 14 rig drilling program, and has identified more than 2,500 operated drilling locations. Assuming five Bakken and perhaps four Three Forks wells per 250-acre spacing, Hess said the company has estimated recoverable resources of over 1 billion barrels, and added that the company has only booked about 300 million barrels to date.
“So there is a lot more upside to go forward here,” Hess told the Barclays audience. “We are currently in the process of doing an updated depletion plan for our future growth and we think there is a strong opportunity that we can down space more potentially to 180-acre spacing for the Bakken and about 210-acre spacing for the Three Forks. And therefore, there is upside above and beyond the billion barrels of oil equivalent here, and potential to increase our growth projections beyond our 120,000 barrels a day.”
Transportation and infrastructure
Hess Corp. has also invested heavily in infrastructure in North Dakota, an effort which Hess believes gives the company an advantage. “We also have a competitive advantage in our infrastructure,” he said. “We have invested in the infrastructure for the long-term to provide competitive advantage to get the highest value for our products.”
Hess Corp.’s Bakken rail exports are approximately 85 percent Brent-based, which Hess said is driven by the company’s Tioga rail facility which provides with access to all three U.S. coasts instead of selling oil at the well head.
The Tioga rail terminal, which has been in operation since April 2012, currently has 54,000 barrels per day capacity and the potential to expand to 120,000 barrels per day. That facility, said Hess, cost the company $200 million, almost all of which it has already captured.
Hess said the company also has pipeline access to Tesoro’s Mandan refinery and access for 30,000 to 40,000 barrels per day on the Enbridge pipeline system. But rail has given Hess Corp. an opportunity to take advantage of the Brent/West Texas Intermediation price spread. In August, he said, it was advantageous to move all the company’s crude to Gulf Coast refineries, but now the Louisiana light sweet market has “pretty much collapsed” in recent weeks and Hess Corp. is selling its crude to East and West Coast refineries. “So we’re able to arbitrage the best markets creating a lot of value here.”
The company is also expanding capacity at its Tioga gas plant from 110 million cubic feet, mmcf, of gas per day to 250 million, which should be completed by year’s end. Hess said that will increase the company’s competitive advantage on netbacks from a gas perspective as more liquids are stripped out of the natural gas stream.
He said that will also give the company an advantage in terms of flaring as flaring becomes more of a political issue in North Dakota, noting Hess Corp. wants to stay ahead of flaring and a reduction program is part of the company’s future capital spend.
Monetize, but control, Bakken midstream
In its transition to a pure-play E&P company, Hess Corp. has divested a significant portion of its assets, raising some $5.2 billion. Those divestitures include assets in Azerbaijan, Russia, Beryl in the North Sea and domestic assets in the Eagle Ford as well as downstream energy marketing assets. Other divestitures currently in progress include retail, energy trading, terminal network along with foreign assets in Thailand and Indonesia.
In addition to those divestitures, Hess Corp. is planning to monetize its Bakken midstream assets, including the Tioga gas plant, by 2015. However, the company will continue to control those assets. “It’s important to note, however, that we certainly intend to maintain operating control of these assets,” Hess noted.
Global operations
Hess Corp.’s other key plays are its Deepwater project in the Gulf of Mexico, the offshore Valhalla/South Arne project in Denmark, Equatorial Guinea offshore, and its JDA offshore project in the Gulf of Thailand. The company has identified four other new growth areas, which are the Utica in Ohio, Tubular Bells in the Gulf of Mexico, North Malay Basin in the Gulf of Thailand and Ghana.
Hess Corp.’s overall 2012 production averaged approximately 289,000 boepd. The company’s global pro forma 2013 production is estimated at between 290,000 and 305,000 boepd.
