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Page added on February 8, 2014

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North Dakota Bakken/Three Forks Scenarios

North Dakota Bakken/Three Forks Scenarios thumbnail

Figure 1

blog1402fig1/

A recent post at Peak Oil Barrel by Jean Laherrere suggested an ultimate recoverable resource(URR) for the North Dakota Bakken/Three Forks of about 2.5 Gb based on Hubbert Linearization.  This conflicts with a recent (April 2013) USGS mean (F50) estimate of 8.4 Gb.  I decided to update my scenarios based on the range of USGS estimates from F95=6 Gb to F5=11.3 Gb for the North Dakota(ND) Bakken/ Three Forks.  Note that at year end 2011 there were 2.6 Gb of crude proven reserves in ND and at the end of 2007 about 0.5 Gb, I will assume all of this reserve increase came from the Bakken/ Three Forks, so 2.1 Gb of proven reserves added to 0.35 Gb of oil produced from the Bakken/ Three Forks gives us 2.45 Gb for a minimum URR.  The Hubbert Linearization points to about 0.05 Gb of undiscovered oil whereas the USGS suggests 3.5 to 8.9 Gb of undiscovered technically recoverable resource(TRR) in the North Dakota Bakken/Three Forks.

Note that Mr. Laherrere has forgotten more about geology than I know. He may have information that I don’t have access to or has read the USGS April 2013 Bakken/Three Forks assessment and found that the report was not credible.  I have assumed in my analysis that the USGS analysis is correct, if it is not then my analysis will also be flawed.  I would love to hear from Mr. Laherrere about the specific problems he sees with the USGS analysis, I no doubt would learn much.

In Figure 1 three scenarios are presented which represent the F95, F50, and F5 cases from the USGS analysis.  F95 means there is a 95% probability that the TRR will be higher than 6 Gb and likewise for F50=8.4 Gb and F5=11.3 Gb.  It is assumed in all three scenarios that 175 wells per month are added from Dec 2013 to Jan 2032, about 45,000 wells total.  All oil fields have sweet spots, which are limited in area. When these more productive areas run out of space for more wells, then less productive areas must be chosen for drilling and the estimated ultimate recovery(EUR) of the average new well will decrease.
The average new well EUR decrease can be thought of as a shift in the cumulative output curve. In the chart below, the average new well from Jan 2015 is compared against  an average new well from Jan 2018.  So far there is no evidence that such a decrease in new well EUR has begun, the average well through 2012 looks very much like the new wells from 2008, in my medium scenario I assume the average new well EUR remains at this 2008 to 2012 level until Jan 2015.  In the figure below I have guessed at how the cumulative output curve might shift from Jan 2015 to Jan 2018.

blog1402fig2/Figure 2
My medium(8.4 Gb) scenario assumes that the average new well EUR remains at its present level of about 350 kb over 30 years until Jan 2015 and then the EUR starts to decrease.  By Jan 2018 the cumulative output curve has shifted downward to the lower curve in Fig 2 (there are actually 35 of these curves between the two shown, one for each month, the chart would be a mess if they were all shown).   A point of confusion is the distinction between decline rate and the rate of EUR decrease.  In figure 2 the decline rate decrease for the Jan 2015 well is related to the slope of the upper curve and how it becomes less steep as one moves along the curve from left to right(steep near 0 months and flatter near 360 months).  The number of months it takes to shift from the higher curve to the lower curve determines the rate of decrease in new well EUR.  In a lower TRR scenario such a shift might take 6 months (a higher rate of decrease of new well EUR) and in a higher TRR scenario maybe 30 months (a lower rate of decrease).
So to create the three scenarios I arbitrarily assume the EUR decrease starts in December 2013 and goes from no decrease to its maximum rate of decrease over a 6 month period for the lowest scenario.  Then I vary the maximum rate of EUR decrease so that the TRR is 6 Gb, in this case a 20.5% annual rate of decrease in new well EUR is the result.  For the medium scenario the EUR decrease begins in Dec 2014 and reaches the maximum rate of new well EUR decrease of 14.5% per year in June 2016 and the high scenario the decrease in EUR begins in Dec 2016 and reaches the maximum rate of decrease of 9% per year in June 2018.

blog1402fig3/

Figure 3
Figure 3 shows how the new well EUR changes (blue curve) over time and the red curve shows how the annual rate of decrease in new well EUR (red curve right vertical axis) changes from Jan 2014 to Jan 2028.  This is for the medium (F50) scenario.
Using the scenarios developed for figure 1, I will now introduce economic assumptions to determine the economically recoverable resource(ERR) for each of the low, medium and high scenarios, the ERR will always be less than or equal to the TRR.  The figure below gives the real oil price in 2013$ per barrel on the right vertical axis and the real well cost, 30 year real net present value (NPV), and real profit in millions of 2013$, the oil price is based on the EIA’s 2013 AEO reference case. This chart is from the medium scenario.
blog1402fig4/
Figure 4
The other economic assumptions are an annual discount rate of 15%, royalties and taxes are 26.5 %, operating expenses(OPEX) are $4/barrel, and transportation costs are $12/barrel where all $ are 2013$ and all calculations are in real (2013$) terms.  See this post in the text after fig 3 for more information on how these figures are used.  Previously other costs of $3/ barrel were included, but based on information from Rune Likvern, sales from natural gas output probably covers these “other costs” so they have been eliminated.  Any of these economic assumptions will likely be incorrect and are impossible to predict over 5 years let alone 20 years, so these scenarios are very likely to be inaccurate over periods of more than 2 or three years.  If any of the many guesses underlying these scenarios should prove correct then the scenarios might be accurate, that is part of the reason for including a range of scenarios.  Prices, well costs, and transportation costs could all be lower or higher in the future than what I have chosen, lower transportation or well costs would tend to raise output and lower oil prices would tend to reduce output if all else remains equal.
Note the sharp bend in the profit and NPV curve in figure 4 in 2019, this is because the number of new wells added each month is reduced as profits approach zero, for the medium scenario for ERR we have:
blog1402fig5/
Figure 5
Note the kink in the # of wells curve where the wells added each month is reduced substantially.  This reduction in the number of wells added also reduces the rate of decrease in new well EUR as shown in the following chart for the medium scenario:
blog1402fig6/
Figure 6
The chart below gives the range of output for the USGS F95 to F5 estimates when the economic assumptions above are used.  The range of ERR estimates is 5.1 Gb to 10.7 Gb with a best estimate of 7.4 Gb.  The medium scenario peaks in 2016 to 2017 with peak output of about 1.2 MMb/d.
blog1402fig7/Figure 7
It would be great to get some feedback from industry pros on the well costs, oil prices, and other economic assumptions I have used and any obvious problems with the analysis.
Dennis Coyne


11 Comments on "North Dakota Bakken/Three Forks Scenarios"

  1. rollin on Sat, 8th Feb 2014 6:54 pm 

    Not quite as bad as the Titanic, but it’s going down sooner than later and no rescue ships in sight.
    Of course some new high tech method could be invented to suck out the rest of the oil in the shale at half the price and everything would change. But that is techno-dreaming.

  2. shortonoil on Sat, 8th Feb 2014 11:01 pm 

    The average Bakken well will produce approximately 195,000 barrels in its life time. Most calculations use the going market price of Bakken crude to determine economic viability for these wells. What is not taken into consideration is that because they are condensate wells, the API of the production stream gets lighter as the well gas pressure, temperature declines. As the output gets lighter (API is higher) the sale price of the crude declines. After 5 years the oil from these wells will be bringing less than $50/b as lighter crude is sold at a discount.

    Taking the declining product value into consideration, the full economic life cycle of these wells is likely to turn out negative. If the Bakken doesn’t run out of steam because of its extraordinary well decline rate, and capex costs, it will run out for lack of profitability. Once shale goes into terminal decline, crude prices will revert to their hundred year mean, which is presently about $114/b.

    http://www.thehillsgroup.org

  3. andya on Sun, 9th Feb 2014 12:21 am 

    Sounds about right. What is notable by it’s absence is a chart showing upside scenarios. What happens if oil prices double? It has a good history of doing so.

  4. Harquebus on Sun, 9th Feb 2014 12:48 am 

    If the oil price doubles, you can kiss the financial economy goodbye.

  5. Nony on Sun, 9th Feb 2014 12:52 am 

    It’s nice work and basically fits with a lot of other people’s estimates. Bakken is not going to be Saudi Arabia. Still it has been way more than a lot of people gave it credit for. Has already blown away the 150-225Kbpd and 600-700kbpd predictions of TOD, that were touted as “great work.

    Yeah, the wells have high decline. And yes, sweet spots are being drilled first. But I think the main thing that has been off with earlier pessimistic reports was drillers ability to find more sweet spots. I don’t think this is purely an outcome of “geology was different from what we thought” but of operators learning how to go develop the area as they went along. Completion technology is also arguably evolving (not radically, but still having an effect).

    I would use a lower future price and would make that the main axis of uncertainty.

    I wouldn’t get so apologetic about the geologist fellow. Actually he did have great feedback for you on that other site. But his linearization is really open to question (why choose the years, power law ease of fitting, limited data, etc.). I think your approach is actually better.

    Actually you can do a sensitivity analysis. I have a module that runs in Excel (slowly) and is used for corporate M&A of complicated businesses. Allows 10-50-90 on several different variables, plotting the outcome, learning which are key assumptions, even interactions. The situation here is actually a lot simpler than buying a materials business (e.g. ceramics) with a lot of different end markets, synergy assumptions for revenue, cost, etc.

  6. andya on Sun, 9th Feb 2014 4:07 am 

    If the oil price doubles, you can kiss the financial economy goodbye.

    So you say, yet it has happened before, and yet we still have a financial economy. This time is different?

  7. Northwest Resident on Sun, 9th Feb 2014 4:45 am 

    andya — “This time is different?” If you go back to the price of oil in 1861, it was about $1.34 per barrel. It stayed that way until about 1972, at which time it jumped up to about $3.29, effectively more than doubling in price. If you look at the graph of historical oil prices linked below, you’ll see many “doubling” of oil prices, given any starting point of time you’d like to choose. None of those “doublings” had a serious effect on the economy until recently. Our entire industrial civilization was built on cheap — really cheap — oil. All the doublings that occurred had inflicted little damage to the economy, because the price of oil was so cheap to begin with. Now, no more. We are paying extremely high prices for oil and any doubling from this point on will be too much for our economy to withstand. I personally believe that the current price of oil is too much for economy, but just “low” enough to inflict a long slow death, rather than an instant dagger to the heart that a doubling of today’s price would have.

    Historical crude oil prices:

    http://chartsbin.com/view/oau

    Oil prices to double by 2022:

    http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/9265272/Oil-prices-to-double-by-2022-IMF-paper-warns.html

  8. rollin on Sun, 9th Feb 2014 5:20 am 

    When I see spreads like that, I often think we run our whole society on the unknown. We could come up short or extend, a truly fuzzy insecure way to run a civilization.
    We also seem to depend upon new discoveries a lot, always depending upon the unknown.
    At least when we are back living off the sunlight, it’s fairly reliable, predictable and no discovery is necessary. No impending failure waiting two to five years or 10 ahead.

  9. andya on Sun, 9th Feb 2014 5:32 am 

    Great assessment rollin.

  10. Davy, Hermann, MO on Sun, 9th Feb 2014 1:30 pm 

    Ditto Rollin!

    We are starting to realize as a modern global society that maybe we don’t have a grip on our destiny, maybe we are not exceptional, maybe nature is in control.

    It is a start. When you have an illness the first step is accept you have an illness!

  11. rollin on Sun, 9th Feb 2014 5:18 pm 

    Yep, Davy, you got it. It’s a sickness. But worse it’s a kidnapping. Forcing the young into a self-destructive system and telling them it’s what they should support. Mental kidnapping.


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