(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Nov 21 Crude production from the Bakken
and Three Forks formations could rise by another 50-100 percent
in the next three years, and not start to decline until 2020 or
even 2025, according to official projections from the North
Dakota Oil and Gas Division.
Output from the Bakken, Three Forks and Sanish formations
hit a new record of 662,000 barrels per day in September. But
production could reach 900,000 or even 1.2 million barrels per
day by 2015, according to the Oil and Gas Division, based on
estimates of probable (>50 percent) or possible (>10 percent)
reserves of 10 or 15 billion barrels respectively.
Output could be sustained at this level until 2020 or even
2025, before starting to taper gently. By 2050, the state could
still be producing as much as 650-950,000 barrels of oil per
These illustrative production profiles were contained in a
presentation to the United Tribes Tribal Leaders Summit in
September by Lynn Helms, director of the North Dakota Oil and
Gas Division (link.reuters.com/nup24t).
Much of the Bakken play is on land that is part of the Fort
Berthold Reservation administered by or on behalf of the Three
Affiliated Tribes (Mandan, Hidatsa and Arikara or Sahnish),
which is why Helms was speaking at the annual tribal conference
in Bismark, North Dakota.
Helms' optimistic projections for further growth are a
direct challenge to some of the more pessimistic predictions
published by some leading oil analysts about the state's future
Much of the scepticism about the sustainability of North
Dakota's oil boom stems from concerns about the rapid output
declines observed from fracked oil wells after the first six or
12 months. As the play matures, sceptics believe ever more rigs
will be needed to drill ever more holes just to replace
declining output from the existing wells.
Following a careful analysis of decline rates at hundreds of
Bakken wells, Rune Likvern described it as the "Red Queen"
problem. In Lewis Carroll's book "Through the Looking-Glass",
the Red Queen warns Alice: "It takes all the running you can do
just to keep in the same place."
In a similar way, Likvern concluded the exponential growth
in oil output since 2007 had only been possible by starting up
an accelerating number of new wells.
But the strategy is reaching its natural limit as the best
parts of the play have already been developed and new wells are
yielding less than their predecessors. Diminishing returns has
started to plague the play with a vengeance, according to
"It is challenging to find support for the idea that total
production of shale oil from the Bakken formation will move much
above the present levels of 0.6-0.7 million barrels per day on
an annual basis," Likvern wrote in a much-cited report posted on
"The Oil Drum" and other websites (www.theoildrum.com/node/9506).
He also cast doubt on the economics of the Bakken. The
breakeven price for an average new well is as high as $80-90 per
barrel, he wrote. At current prices "the commercial
profitability for new wells is barely positive."
HIGHER FOR LONGER
Likvern's decline rates are confirmed by state officials.
The typical Bakken well produces 904 barrels per day in the
first year, falling to 427 barrels per day in the second, 149 in
the third and just 82 by the fifth, according to Helms.
But the state expects the industry to continue drilling
2,000 wells per year for the next 16 years to develop the play.
Assuming each rig drills eight wells per year, it would need 225
rigs to meet the drilling target. There are currently 180
operating in the state, down from just over 200 earlier in the
year, so the drilling target implies only a very modest increase
Under the state plan, the total number of Bakken wells will
rise from around 4,000 at present to between 40,000 and 45,000
by the time Bakken is fully developed, based on spacing of eight
wells per 1,280-acre spacing unit. It envisages plenty of new
wells will be drilled over the next few years to infill the
existing areas, helping offset declines from older ones.
Bakken wells are far from as marginal according to the
state. Bakken wells are expensive to drill and complete, at
around $9 million each. But the average Bakken well drilled in
2012 will produce roughly 615,000 barrels of oil over 45 years,
Helms explained to the tribal leaders.
In its lifetime, an average well will pay $4 million in
taxes to the government and $7.3 million in royalties to mineral
owners, as well as operating expenses of $2.3 million and wages
and salaries of $2 million. But after all those deductions, and
the high upfront drilling cost, the average Bakken well will
still generate net profits of about $20 million, Helms said.
Bentek, the energy consultants owned by Platts, also found
Bakken wells were highly profitable. Bakken wells have some of
the highest internal rates of return for any shale play in the
country, notwithstanding high drilling costs, the firm explained
in a recent study for the North Dakota Pipeline Authority.
BEST IS YET TO COME
Even allowing for the massive decline rate after the first
12 months, North Dakota officials still believe daily production
could rise by another 200-500,000 barrels within the next three
years to reach 900,000 or even 1.2 million barrels per day and
sustain that level for 5-10 years before starting to decline
Only time will resolve the dispute over peak production. But
state officials have repeatedly proved more accurate than
outsiders in forecasting production and the need to build out
related infrastructure such as rail and pipelines, so it would
be unwise to dismiss their views as overly optimistic.
If they are right, the Bakken play is far from mature.
Unless crude oil prices fall much lower than they have been in
2011 and 2012, Bakken will continue transforming the supply
outlook in the United States and globally for at least the next
couple of years, meeting a significant proportion of global
(Editing by Jason Neely)