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Smaller operators push Bakken output outward

Washington — For years, large public companies have produced crude oil in North Dakotalargely in an area known as "the core of the core" of the Bakken shale play. Faced with low, stagnant oil prices, the big producers have focusedlargely on drilling in McKenzie and Dunn counties, Fort Berthold IndianReservation and other acreage within the southern portion of the NessonAnticline.

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But rising prices, along with the start of the Dakota Access Pipeline andwell productivity improvements, have pushed new companies, mainly smalleroperators backed by private equity firms, into acreage long ignored by thestate's prominent producers.

While NYMEX WTI prices have nearly doubled over the past two years toaround $65/b Wednesday, Bakken differentials have also been on the rise,especially over the past year. Bakken at the wellhead has averaged WTI minus$1.43/b so far in January, compared with discounts of close to $5/b back inJanuary 2016, S&P Global Platts data shows.

Better prices have given drillers the opportunity to expand.

"What we would've considered a fringe area a year ago are now consideredeconomic territory in the state of North Dakota," Justin Kringstad, directorof the North Dakota Pipeline Authority, said last week during a conferencecall.

Relatively smaller operators, either unable or unwilling to acquireso-called Tier 1 acreage in the core of the core, are looking at lesscostly Tier 2 and even Tier 3 areas and considering adding rigs on theoutskirts of the Bakken's most prolific plays.

"Their business model is to prove up acreage, drill some great wells,show that the acreage works on a consistent basis and then have somecompany buy them out," said Jonathan Garrett, director of US upstreamresearch with Wood Mackenzie. "The nature of the beast is not to reallyramp up it's just to show that the acreage works consistently."

The move by smaller operators could shift the Bakken away from its recenttrend favoring high grading amid relatively low prices, but may lower thestate's overall production rate per well, as less prolific wells getdrilled.

State officials expect operators to add as many as 10 new rigs in 2018and the amount of new acreage being considered is growing, according to anew analysis by Kringstad's agency.

"We should expect to see those rigs start to move outward," saidKringstad.

Producers are eyeing roughly 44% more Bakken acreage than they were ayear ago, but output in the play will be less prolific than recently seen asoperators shift to lower output wells outside of the core drilling area,according to Kringstad's analysis.

Climbing prices are expected to increase both the Bakken's rig and wellcount as tracts ignored by operators when prices were lower, but the new wellswill have an initial production rate roughly 200 b/d below the wells withminimal initial output sought by producers amid lower prices.

Essentially, operators will likely produce from more wells, but the rateof growth could actually slow.

"As prices have risen they're able to move to portions of the play thataren't capable of these high-producing wells, but they can still producegood wells at the right price point and become economic," Kringstad said.

Kringstad estimates that more than 11,800 square miles within the Bakkenoffer wells with breakeven prices at current levels, compared with about8,200 square miles a year ago and less than 5,500 square miles in 2016. While North Dakota is now competing with the Permian in Texas and NewMexico for operator interest, counties within North Dakota are also competingwith each other for capital. While Kringstad stressed that higher prices donot guarantee expanded drilling, producers are already moving into new areas,according to Graham Walker, a research data analyst at Petrologica.

"There have been a few recent wells in relatively marginal counties likeGolden Valley, so we might expect forays further afield in 2018 ratherthan the kind of activity levels from before the price collapse," Walkersaid. But increased prices may not translate into a significant producermigration to frontier areas of the Bakken. "As I understand it, there are still enough locations in core areas thatmoving out is additive, rather than imperative," Walker said.

IP RATES SEEN DROPPING

And while operators are moving to new areas, the wells they are likely todrill are expected to have a lower initial production rate, according to theNorth Dakota authority's study. For example, in 2016, operators would notproduce wells which average below 900 b/d for peak 30-day production.Operators in 2018 are expected to operate wells with initial production ratesas low as 500 b/d, according to the analysis.

Smaller companies looking to drill these less prolific wells outside theBakken's core may initially get initial production rates which mirror those inTier 1 acreage, according to Pablo Prudencio, an upstream analyst at WoodMackenzie.

These smaller, private equity-backed firms are likely to use the sameenhanced completions with more water and more proppant than larger,publicly-traded companies operating in the core use as well.

"They've been following the trends," he said.

Taylor Cavey, an energy analyst with Platts Analytics, said growthoutside the core could be complicated by new drilling techniques andtechnologies.

"It's hard to know how a well will perform in areas that haven't beenproduced using high frac volumes and longer laterals," Cavey said. "Assumingthat those techniques lead to higher output, it could mitigate the cost toexplore in unknown territory. If you are drilling an area that you areunfamiliar with you will likely spend more on geological and seismic surveyingto be sure you know what you're getting into before you drill."

Still, Cavey said there was an increasingly likelihood of moredevelopment in the Bakken as operators consider existing acreage amid bettereconomics and higher upside.

"They are running out of proven acreage in the Bakken," Cavey said."Which isn't to say they won't make further discoveries, but it couldtake some time."

In a note last month, analysts with Morningstar wrote that fears overthat it could take decades for drilling opportunities in the Bakken andother shale plays to be exhausted.

The Bakken is smaller than the Permian and "relatively mature" afteryears of development, the analysts wrote.

"Even so, we don't expect meaningful productivity declines in the next 10years," they wrote.

And, the core acreage will ultimately remain the most prolific, accordingto Wood Mackenzie's Prudencio.

"The geologic difference between Tier 1 and Tier 2 is going to remain,"Prudencio said. "Even if we're now seeing these new enhanced completionsin Tier 2, Tier 1 will remain better because of the geology."

-- Brian Scheid, brian.scheid@spglobal.com-- Edited by Valarie Jackson, newsdesk@spglobal.com