Some analysts see Bakken production peaking sometime soon, then slowly trailing off after most of the Middle Bakken benches are tapped into. This analysis completely disregards the immense level of technological innovation coming out of the oil and gas industry. Innovations like pad drilling, downspacing, and better well completion designs have all helped rapidly reduce well completion costs and drilling times, all while production rates and EURs (estimated ultimate recovery) increase.
Better techniques are being used and refined in shale plays across America, including the Bakken. Don't listen to the doomsayers; focus instead on the companies that are actually developing the Bakken and pay attention to where they think hydrocarbon production is headed over the next few years.
Listening to Ryan Lance
On April 10, ConocoPhillips' (NYSE:COP) CEO Ryan Lance updated shareholders during its latest analyst meeting. There are several import things to take away from its presentation, including how ConocoPhillips plans to spend $1 billion a year to develop the prolific Bakken.
ConocoPhillips plans on running an average of ten rigs in the Bakken to complete the 800+ potential drilling locations on its acreage. By obtaining 620,000 net acres in the Bakken, ConocoPhillips was able to add 600 million barrels of oil equivalent to its reserve base. Most likely this will continue to increase as ConocoPhillips tests out better well spacing and placement.
Downspacing is key
Currently ConocoPhillips is using 320-acre spacing between wells so it can complete four wells in the Bakken, two in the Middle Bakken, and two in the upper part of the Three-Forks per unit. This has yielded decent results, but management thinks it can do better. ConocoPhillips is testing out 160-acre spacing, which would allow it to complete four wells in the Middle Bakken and four wells in the upper part of the Three-Forks per unit.
By drilling wells closer together, ConocoPhillips could double the amount of its potential drilling locations without having to acquire any new acreage. Being able to access each bench of the Bakken and Three-Forks boosts the amount of recoverable hydrocarbons, which will send ConocoPhillips' reserve estimates upwards while giving the Bakken boom longer legs.
Sometime in the future, ConocoPhillips hopes to be able to complete four wells per bench in the Middle Bakken, upper part of the Three-Forks, and the middle part of the Three-Forks. That right there would be a four-fold increase in the number of wells currently being completed per unit and would be a major boon to reserve estimates and drilling inventories.
As downspacing boosts the amount of potential drilling locations, reserve estimates will rise in tandem because oil and gas producers will be to able to access every bench in the Williston Basin, from the Middle Bakken all the way down to the lower part of the Three-Forks. Most of the wells that have been drilled in the Williston Basin only tapped into the Middle Bakken, so now it's time to see what the Three-Forks can produce. This is why the Bakken/Three-Forks boom story is still in its early stages.
There are plenty of numbers out there that shale bears love to point out, like high decline rates that follow high initial levels of production. They conveniently leave out how deeper laterals and downspacing is allowing oil and gas producers to boost the amount of recoverable hydrocarbons per well while sending initial production rates much higher, however.
With roughly 45,000 locations yet to be drilled, the Bakken growth story is still far from over. By investing a billion dollars in the region a year through 2017, ConocoPhillips thinks it can boost its output from the region by 20%, compounded annually, through that time frame. Shareholders should take note, as this is several times larger than ConocoPhillips' guidance to grow output by 3%-5% over that same time frame.
The average well in the Bakken produces mostly crude (83% oil, 6% NGL, and 11% gas), and crude fetches the highest margins, which is why the Bakken will also help ConocoPhillips achieve its margin growth target of 3%-5% a year.
3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free.
Callum Turcan owns Aug 14 ConocoPhillips calls. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.