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Spotlight: Bakken new well profitability challenged by low oil prices

Highlights

Oil prices are plunging on fears of low demand, surging supply

Bakken shale operators are sitting on a DUC inventory of ~420 wells

How many wells could be brought online at current prices?

This Spotlight from S&P Global Platts Analytics was first published March 20, 2020

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While WTI crude oil prices continue to plunge on fears of low demand and surging global supply, North Dakota shale operators currently sit on a drilled but uncompleted inventory of ~420 wells (eliminating older vintages that are unlikely to ever be completed).

Assuming a sunk cost of ~25% total drilling and completion, how many of these wells could be brought online in the current price environment while still breaking even?

Currently ~33% of the North Dakota DUC inventory sits within McKenzie County, which produces the most efficient wells in terms of production per completion in all of the Bakken shale.

While DUCs are dispersed through a wide range of exploration and production companies, Continental, Whiting, and ExxonMobil currently hold ~37% of North Dakota's total DUC inventory and must make a decision on whether to bring these wells online in 2020–21 or defer completion given crude price uncertainties.

Historically, the vast majority of DUCs brought online in the North Dakota region are completed within 720 days after drilling, as many of these "legacy" vintages are tracked but highly unlikely to ever be completed.

Bakken new well profitability challenged by low oil prices

While the Bakken produces some of the best wells in the US with respect to total oil production per completion, the current low price environment makes it uneconomic to drill and complete most new wells.

The cost to bring a DUC online is ~25% cheaper than a new horizontal well, however even with this cost reduction, very few DUCs would come online with an initial production (IP) rate needed to break even with WTI at $30/b.

With 2019–2020 wells having an average IP of ~800 b/d, this would equate to a WTI breakeven price of ~$45 for a newly drilled and completed well and ~$39 for an already drilled out DUC well, both well below the current price environment, as only ~15% of the DUC inventory if completed will be economic in a $30/b WTI environment.

Since completing a DUC is more profitable than drilling and completing a new well, operators should focus on completing their ~420 DUCs only if they are drilled in a highly profitable region of the Bakken, knowing superior IP rates will be needed, otherwise E&P companies will be losing money with each completion.

Based on recently revised Capex guidance, most Bakken operators plan to reduce 2020 spending by 30–55%.