For many of you who own minerals in the Bakken Shale, you might be asking why the drilling process is moving at a slow pace while thousands of “proven” production acreage has been untapped and awaits drilling. Here are some facts which has effected this area since the discovery of massive oil reserves in regards to this formation. First, the lack of sufficient drilling rigs in the area in proportion to the number of acres to be drilled. Currently, 160 plus rigs are active in the North Dakota area while few exists in the mostly untapped areas of Montana. This rig count has expanded over the last several months due partly to companies moving their operations from gas to oil. Samson Oil and Gas just recently sold their Green River Basin gas assets to a group of private investors in order to focus on the Bakken and Niobrara plays. Second, there is a lack of frac crews in this area which has resulted in a backlog of wells waiting for frac jobs. This seems to be a growing problem which is resulting in the completion of wells. Third, a lack of water in the area due to heavy demands in the drilling process. Currently, state and industry officials are waiting for federal permission to tap the Missouri River or risk hitting the ceiling on how much oil they can produce. Record levels of drilling activity in this area has contributed to this problem over the past serveral months. Currently, it has been reported that 7 million barrels of water is available daily and much more is needed to keep pace with this growing drilling activity. In conclusion, in order to maintain current drilling operations at a reasonable pace , these problems will have to be addressed along with the transportation matters in regards to the minerals.
Charles,
To add to your nice blog post.
With companies owning both acreage available for exploration with the clock running (lease not held by production) and HBP acreage, the land strategy is to protect as much acreage as possible with exploratory drilling and when the acreage is protected (placed in a big unit to hold as much acreage as possible), to come back for the densifying wells in the units at their leisure, perhaps even staggering drilling to take advantage of dollar cost averaging on the price of oil.
Buddy:
Very well put in regards to holding leases. I appreciate your posts on this forum as I learn from each of them.
When exploring causes for thousands of mineral acres remaining unproductive, we must factor in the most nefarious cause: Anti-Competitive Conduct in Restraint of Trade
Creating oversized spacing units doesn't serve any legitimate purpose. Creating oversized spacing units allows companies to hold unproductive mineral acres "by production" and thus thwart competitors from acquiring acreage--from bringing in more rigs--from bringing in more crews--from bringing in more solutions to our housing and water issues, etc., etc., etc.
The monopolistic greed of the companies that acquired far more acreage then they can possibly develop is causing great harm to our state and to mineral owners whose interests they have diluted to a miniscule fraction of what they are worth.
Mr. Mallory: I saw EOG Resources CEO Mark Papa on Jim Kramer’s “Mad Money” show discussing EOG’s activities in the shale plays as well as the Bakken. He said one of the draw backs is having to used rail tank cars to transport the oil to a refinery in Oklahoma. Also similar problems with the oil from the Eagle Ford. There is not enough refining capacity in Corpus Christi so it will have to be shipped to the refineries on the upper Gulf Coast.
And yet, we somehow manage to refine all those barrels of foreign oil that are shipped in from across the world.
DG:
I was thinking the same thing!!
Mike:
I wonder why EOG leased all that acreage in Montana if they knew this would be a problem.
Charles: About EOG and rail tank car transportation issue, I am thinking they will eventually have more pipeline capacity. Papa did not elaborate on that as I recall. I have seen this problem with gas in the Barnett. There were not enough gathering systems and this delayed marketing and transportation where wells had to be shut in until the infrastructure caught up.
I have read that some of the rail cars are continuing to La. to refineries that may be underutilized due to La.'s declining production. It was also said that that the better price received, more than offset the cost of shipping a greater distance, resulting in more profit.
Mike:
That makes sense according to the articles I have read in regards to transportation infrastructure or lack thereof in Bakken area. I believe too much has happened too fast in regards to production but as time goes on, this problem should be taken care of as additional pipelines are added.
I wonder if there is some way to utilize the water from Devils Lake.
I am not crying foul, yet, but alot of wells are coming off the confidential list unfraced. I do think it could be convenient for a cash strapped operator rushing about drilling wells to hold acres by production, ahead of lease expirations, to not have to pay out 4.2 million per well [ my operators numbers ] to simply not seek a frac crew, for awhile. The shortage of frac crews would be a perfect excuse, and delaying the cost of fracing one well would free up about 75% of the cost of drilling a new hole somewhere else, to hold by production another 1280 spacing. It could be a variation on what is described in Mr. Mallory’s excellent blog on the possility of drill and run. Just food for thought.
With more publicly traded exploration companies in the mix and limited rig availability, infill drilling may actually take priority over some expiring leasehold in order to meet SEC proved reserve guidelines.
Al:
I agree with you in that companies may begin allowing leases to expire and the winner in the long run will be the some of the mineral rights owners who leased back in 2008 when bonuses and % royalties were much lower than present figures. I see alot of top leasing occurring in the next year in areas of both ND and Montana.
Al, all my wells are from publicly traded companies. The smallest is KOG. Significant infill drilling, isn’t going to happen for a long time. The best you can hope for, in my opinion, is an eco pad and multiple wells in the initial drilling. Why would the oil co’s want more production from lands already HBP; they are having a hard time getting the production they already have to market. I think 1 well per 1280 will be the norm untill oil co’s no longer have to compete for the acres they want to hold in reserve for the future. If you don’t lease it today and drill it before the leases run out, some other company will and those acres won’t be yours to drill in the future and your company’s slice of the pie gets smaller. Some people have been making hay that oil co’s are not the bad guys because they are not showing a huge profit. The only reason they are not showing a huge profit is because they are stockpiling reserves for the future. Most of the money they make and as much as they can borrow, including mortgages on acres they have leased but not HBP, that they could still lose if they don’t drill, goes to expanding the acres they hold by production. So my single wells on 1280’s that have been there for 4 years already are still going to be lonely for another decade, at least. The infrastructure to move the oil could be alot farther along, except that money invested towards moving the oil more efficiently would be money diverted from acquiring more acres held. Greedy and shortsighted. One company invested in a rail terminal early on and has been reaping huge rewards. The other co’s have to pay dearly to use that terminal. Pigs get fat and hogs get slaughtered.
I think that economics will be the final factor in whether multiple wells are drilled or companies elect to move rigs to another location in order to hold production. As more rigs move into the area, some of the larger companies will benefit from the increase in rigs allowing some to be “dedicated” for multiple well drilling while others could be assigned to the “holding of leases”.
Tomorrow, August24; on cnbc Jim Cramer of Mad Money will be doing the show from western ND. Also reporters will be doing interviews from the area, with companies and residents about the changes.
Thank you, Charles for this info. I and many others have had questions in regards to the above. Very good message.
Yours,
Wes Luke
Wes:
There has been several changes since my blog. The frack crew numbers have increased and several operators now have their own dedicated frack crews. The abundant amount of water in the area has eased the water supply situation unlike the drought I'm dealing with in Texas. Improvements in the infrastucture (rail/pipeline) is a slow progress but with the amount of well completions, it is hard to keep up with the demand. One of the next problems over the horizon is the winter months. This has and will continue to be a huge factor in the drilling and transporting of oil in the Bakken. All we can hope for is a mild winter but in this area of the country, sometimes that's a big wish. The growing pains in the Bakken have been felt by everyone involved but I believe as time goes on, the problems will work themselves out. Glad you enjoyed my post.