Well costs for Bakken producers beginning to abate?

2013.02.28 - ND Oil ProductionEnlarge GraphThe Bakken region in North Dakota and Montana (also called the Williston Basin) has been one of the most rapidly developing oil producing regions in the US. Oil production there has grown exponentially as new drilling technologies have allowed previously uneconomic geologic formations to be developed. The above chart shows growth in North Dakota oil production over the past several years. As a result of the rapid development, demand for all types of oilfield services has increased, pushing up costs in the region. However, recent commentary from Bakken names notes that costs may have begun to abate as a result of producer efficiencies, which could prove to be a medium-to-long term positive if the trend holds.

Continental Resources (CLR) is one of the major names in the Williston Basin, and a recent company presentation noted that CLR was the number one oil producer in the region. The company had been experiencing rising well costs for some time as seen in the below graph.

2013.02.28 - CLR Bakken Well CostsEnlarge Graph

Note: Data points were not available for ECO-Pad well costs in the 10/12/10 presentation or for single well costs at the 2/27/13 press release. ECO-Pad is the name CLR uses for a drilling method in which four wells are drilled from a single drilling pad.

However, in its latest press release Continental noted, “Continental also achieved progress in reducing average drilling and completion costs per well in the fourth quarter of 2012… Continental recently completed its six-well Florida-Alpha project for $46.8 million, or less than $8 million per well. This compares with an average ECO-Pad® well cost of $8.5 million per well in 2012, as disclosed at Continental’s Investors Day in October 2012… Pad drilling is the future for full-field development, and, given our transition to more pads, we are on track to meet our goal of reducing average operated well costs in the Bakken to $8.2 million per well by year-end 2013, a reduction of $1 million per well in early 2012.”

CLR is not the only operator in the region that has touted declining well costs. Kodiak Oil and Gas (KOG), another Bakken-centric producer recently noted, “We have driven our well costs down to a range of approximately $9.5 million to $10.2 million per well, and expect further well cost improvements through the efficiencies gained by drilling more wells per pad on our contiguous acreage blocks.” This $9.5-10.2mm per well cost falls significantly below the $10.5mm average well cost KOG stated in a November 2012 presentation. Oasis Petroleum (OAS), another Bakken-centric driller, noted on its 4Q12 earnings call, “We drove down average well cost from $10.5 million in the first half of 2012 to approximately $8.8 million while maintaining our EURs (estimated ultimate recovery). As we move into 2013, we expect 60-70% of our wells to be on pads, which should continue to improve efficiencies and reduce costs.”

Positive for energy firms in Bakken region

Given this recent commentary, it is likely that operators across the Bakken region are realizing increasing efficiencies and therefore reduced well costs, which is a positive catalyst in the medium-to-long term if the trend holds. Names with major assets in the Bakken include CLR, KOG, and OAS as aforementioned, as well as Whiting Petroleum (WLL), Hess Corp. (HES), Enerplus Corp. (ERF), and Newfield Exploration (NFX). Additionally, some names with Bakken assets are components of the S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select SPDR Fund (XLE).