Bakken shale production in some counties viable at $60

New study examines break even costs for Bakken shale wells in 12 counties

A new report from London-based GlobalData says the “sweet spots” of Bakken shale production are still profitable at $60 oil.

Not all Bakken wells are created equal, according to Jonathan Lacouture, GlobalData’s Upstream Analyst covering Onshore Americas.

“While well productivity and cost efficiency have seen substantial gains over the last six years, some areas of the Bakken relied on prices higher than US$80 per barrel to keep operations profitable,” Lacouture writes.

He says that initial production rates affect economic viability more than any other variable in the Bakken. His study broke down wells in 12 North Dakota and Montana counties into three tiers, with Tier 1 being the most productive, with the “top two tiers possessing substantially lower average break-even prices than the third tier regions,” Lacouture wrote.

According to the study, Bakken horizontal wells averaged costs of US$8.5 million in 2014, which makes nearly all wells drilled in Tier 3 counties uneconomic.

“Even though the top two tiers possess break-even limits which still generate profit in this market, the margin of this financial gain is still dramatically lower than the same date last year,” according to Lacouture, who notes that a well’s IP30 – the average production over its first 30 days of active life – is an important metric for measuring economic viability.

Bakken shale well efficiency has improved significantly since 2007/2008, largely due to companies refining their drilling, fracturing and packing methods.

“More productive wells have led to substantial gains in IP30 rates,” writes Lacouture.  “In 2014 the average IP30 in the Bakken stood at 540 bd, 250% greater than 2007 and 30% larger than the mean rate in 2008. On a year-over-year basis, the average IP30 from the Bakken has increased by 15% in the same timeframe.”

Bakken shale IP30 rates, by production volume, rose 23% each year from 2008. Of the 238 wells brought online recently, 226 have been in core counties (Mckenzie, Dunn, Mountrail, Divide and Williams).

There are clear productivity differences between counties: Mountrail and Mckenzie both boast median IP30 of 550 bd, 17% higher than T2 counties and 53% greater than T3 counties.

“Favorable break-even prices are especially vital in the current price environment where few areas of liquids-focused shale production are still economical,” wrote Lacouture. “Lateral wells in the Bakken, on average, incurred costs of US$8.5 million in 2014. Based on this, nearly all wells drilled in T3 counties are uneconomical even as the oil price slowly rebounds.”

Bakken shale drilling rig count drops

The active horizontal rig count in the Bakken shale dropped by half after the price decline. Daily production quickly followed, decreasing by over 50,000 barrels per day between Dec. and Feb.

Lacouture says that some areas of the Bakken shale relied on US$80 per barrel or more to keep operations profitable. He says caution will be the watchword for Bakken shale operators going forward.

“Even with prices exceeding the break-even values for tier one and two counties, growth in production and rig activity will likely remain depressed until prices are perhaps even twice what their break-evens are,” he wrote.

“If a given Bakken well produces over 50% of its total EUR in the first nine months of activity, then withholding on drilling and completing wells by a few months to a year until prices climb to over US$70 per barrel will prove more economically fruitful than the alternative. Bakken crude also sells at a relatively large discount to WTI crude due to high transportation costs, contributing further uncertainty to already wary investors and operators.”