Crude Oil Prices Are Up Sharply, But Is The Bakken Shale Play Back?

INVESTOR’s BUSINESS DAILY

Three years after the start of the global oil glut, crude oil prices are rising

and oil industry momentum is picking up.

U.S. benchmark West Texas Intermediate traded on Wednesday 55% above a June 2017 low. In January, crude oil prices recovered above $65 a barrel for the first time since December 2012.

During the downturn, Texas’ Permian and Eagle Ford basins rose to become the star shale oil performers with investors. Now, as industry earnings and crude oil prices continue to recover, investors are looking further afield.

The shale oil fields of the Bakken stretch north from Montana and North Dakota into Canada. The region hosted some of the first stages of the shale oil revolution. But Bakken output peaked in late 2014, then fell off sharply as crude oil prices collapsed due to a worldwide glut.

During the downturn, a number of Bakken producers declared bankruptcy. Others sold assets and shifted their focus to other regions. The Permian and Eagle Ford fields emerged as the premier U.S. shale oil plays. More than a few boomtowns fell quiet in North Dakota and Montana.

Today, the Bakken is regaining steam. Production levels are approaching their 2014 peak. Analysts are turning bullish on Bakken shale play holdouts, including Oasis Petroleum (OAS), Continental Resources (CLR), Marathon Petroleum (MPC), Hess (HES) and ConocoPhillips (COP).

It’s “the number one play” for investors looking to diversify beyond Permian holdings, said Derrick Whitfield, managing director at Stifel.

Politics & Crude Oil Prices

A meeting a week ago between President Trump and a member of the Saudi royal family sent crude oil prices higher. The reason: speculation that the U.S. planned to withdraw from the Iran nuclear deal and impose fresh sanctions. Trump’s appointments of John Bolton and CIA Director Mike Pompeo, both aggressive hawks, bolstered this view.

In addition, the Organization of Petroleum Exporting Countries and Russia are reportedly discussing a production deal that could range to 20 years. Their current agreement props prices by trimming 1.8 million barrels of oil per day from the market. It runs through the end of this year.

Production in Texas’ Permian has been going gangbusters for some time. But the recent rise in crude oil prices has prompted increased activity in shale oil fields with higher break-even prices. That includes the Bakken.

WTI oil at $55 to $60 per barrel means “things start to get interesting in the Bakken,” said Benjamin Shattuck, research director for Wood Mackenzie’s Lower 48 unit. Crude prices closed the week at $64.94 a barrel.

Five years ago, the break-even price for a barrel of oil in the 200,000 square mile Bakken play ran between $70 and $80. Today, that break-even price is closer to $50 to $60, according to Wood Mackenzie data.

That’s still significantly higher than the Permian’s average break-even. Mackenzie says that runs from the high $30s to mid-$40. But it still provides a healthy profit when prices provide enough margin.

The Bakken is one basin that “will be incredibly sensitive to price, the most sensitive of the big three oil plays. But what’s unique and interesting is that it’s very predictable. We know when we drill a well, what it will be like,” Shattuck said.

Geology & Crude Oil Price

The geology of the Bakken is more straightforward than that of the Permian, according to Trisha Curtis, president and co-founder of PetroNerds, an energy analytics and advising firm. Curtis says the Bakken is “like an Oreo cookie:” made up of a main reservoir, held in place by two shale areas on either side.

That well-defined geology has allowed Continental Resources and other key Bakken players to stake out the basin’s prime acreage. New players can’t infiltrate these areas unless they buy assets from owners looking to head south to Texas.

The Permian, on the other hand, has a “muddy layering”of  sub-basins and subplays. This allows operators to find top-producing wells outside the core acreage, but only after risky and expensive exploration.

The Bakken has benefited from advances in well drilling and completion techniques. They are essentially the same advances that have helped lower costs and break-even prices across most shale oil basins.

“The completion design has changed. There is some degree of geosteering that has improved the (Bakken),” Whitfield said. “Proppant loads have increased. You’re more effectively stimulating the reservoir today.”

EIA data show a rising number of drilled but uncompleted wells being restarted in the Bakken. Those DUC wells were drilled, then capped, before the downturn. They come back online as prices rise, needing only to be “completed” by services companies. Prices for pressure pumping and other completion services related to hydraulic fracturing are lower now than they were as production peaked in 2014. Those costs will eventually rise. But, for now, they help to lower producers’ break-even costs.

Bottlenecks And Break-Even Prices

The Permian and the Bakken are the most well-developed U.S. shale oil basins. But both continue to face bottleneck issues. Those issues relate primarily to the takeaway capacity of rail terminals and pipelines. Water supply limitations and truck congestion can also be problems.

The Bakken went through the worst of that phase in 2008 to 2010, Whitfield says.

“A lot of the Bakken from the logistical perspective, like rail and pipe, was all established back during the period,” Whitfield said. “It’s very capital efficient to grow in the Bakken now. You don’t have to build more terminals.”

Outflow from the Bakken received a boost in June last year. That’s when the Dakota Access pipeline — the subject of a year-long protest at South Dakota’s Standing Rock Sioux Reservation — launched operations. The line delivers Bakken oil to a hub in Illinois. The hub then feeds Midwestern refineries around the always thirsty Chicago market.

The Dakota Access has a total eventual capacity of 570,000 barrels per day. Rail transport, such as that which supplies oil to the Philadelphia Energy Solutions refinery, still accounts for as much as 70% of Bakken’s take away. But the new pipeline helps drive down the delivery cost of Bakken oil.

Another price benefit may come from sand. The Permian’s soaring demand for local sand in Texas could help lower fracking sand costs in the Bakken. Some high-quality northern white sand once shipped out of Wisconsin to Texas is now likely to be redirected to the Bakken, Whitfield suggests. The increased supply could force competing sand vendors to lower prices.

Is The Bakken Back?

Last month, Texas-based Smart Sand (SND) announced a $15.5 million deal to expand its facilities in the Bakken. The deal provided rights to the Van Hook train terminal for unloading sand. That outlet will help digest added supply from the Wisconsin frac sand mine it expanded earlier this year.

The Bakken’s recovering production follows a shift among exploration and production companies away from spending to chase rising oil prices.

“Producers are more focused on bringing cash to the bottom line than in the past, when they were more interested in developing proven resources,” said James Williams, an economist at energy consultant WTRG.

While the Bakken is getting increased attention, Curtis said there won’t be a rush of new players, such as has been the case in the Permian.

“I wouldn’t say it’s back. I would say you have core players in the Bakken that are running with it, that it was their baby and that’s going to drive it,” Curtis said.

But so long as prices hold near $60, the Bakken will play a critical role in keeping U.S. shale oil production on an uptrend into the 2020s, Williams says.

“I mean, we are going to keep increasing production at well over 1 million barrels per day a year unless prices collapse,” Williams said. “If they collapse the whole game changes.”

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