Bakken Will Never Be The Same Again

Welcome to the Bakken Edition of Oil Markets Daily!

One of the key US shale oil basins that surprised to the upside since 2017 was Bakken.

From 2017 to 2019, Bakken managed to add 354k bbls and that was the complete opposite of what we expected. But going forward, the future outlook of Bakken remains highly uncertain.

For starters, the oil bust has left the Bakken particularly vulnerable with producers like Whiting filing for Ch. 11 bankruptcy. Other producers like Continental (NYSE:CLR) is now pivoting towards debt paydown and balance sheet protection. So even without the demise of the Dakota Access Pipeline (DAPL), Bakken would’ve come out of this oil downturn wounded and damaged.

But the demise of DAPL is going to be an existential risk for many Bakken producers.

Source: Rystad Energy

The reason is that even with max rail capacity, Bakken would be producing in excess of ~300k b/d to its takeaway capacity.

According to Rystad’s estimate, rail capacity would have to reach ~600k b/d in order to support Bakken production of ~1.2 mb/d. Without the ramp of rail, Bakken production will be structurally lower by ~300k b/d and many of the smaller producers will be forced to consolidate or close shops.

The threat of DAPL going down and lower oil prices will have very large and permanent effects on Bakken’s production profile going forward. We estimate that even though DAPL may only be gone for one year, the incremental implication for Bakken production in 2022 is ~250k b/d.

Lack of investment and well completion in 2021 despite higher oil prices will wreak havoc on Bakken’s existing production profile.

Implication on US oil production

With the Bakken structurally wounded and Eagle Ford suffering from parent-child well issues, US oil production growth going forward will be carried solely on the Permian’s back. And even in the case that Permian producers start producing all out again, the growth rate for the US will be reduced by half.

While we have Permian oil production returning back to all-time high in 2022 amidst much higher oil prices, the other basins will not, making Q4 2019 US oil production likely the peak.

This was also echoed by Parsley CEO today in an interview with FT.

We are now finally entering the bull phase of the energy stock rally. With valuations still completely disconnected with oil market fundamentals, we think investors should be positioned to take advantage of the oil bull market. We are now offering a 2-week free trial and if you wish to read our WCTWs this week, please see here.

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