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North Dakota Output Up, Shows Signs of Easing

Mixed with solid reviews about all-time record highs for monthly natural gas and oil production in North Dakota's Bakken Shale and Williston Basin region, the director of the state's Department of Mineral Resources (DMR) sounded words of caution last week that the drilling boom is showing some signs of easing.

DMR Director Lynn Helms' comments appeared to contrast the state's latest production report, which indicated that the number of producing wells at the end of July reached an all-time high (7,467) as did the number of new drilling permits issued (266, plus one seismic). However, even with "great weather for drilling and hydraulic fracturing [fracking]," Helms said the production increase from June to July was 1.4%, the lowest month-over-month increase since April 2011. A declining rig count -- now in the 190-195 range -- is one major reason for the slowdown.

"The combined effect of several factors [including the rig count decline] has led to a noticeable slowing of activity and production growth," said Helms. Operators are transitioning to higher efficiency rigs and implementing cost-cutting programs. "The idle well count increased significantly," with an estimated 394 wells waiting on fracking services.

New permits in North Dakota surged in August, hitting a monthly high for the year at 260, and the number of spudded wells jumped to 275, topped only by the May total of 285. All of this has happened while the average rig count has gone from 200 in January to 198 in August, with a peak of 213 in July.

Rapidly rising drilling costs that have "consumed" most operators' capital budgets for the year. This has happened faster than companies anticipated and further hurts future plans given the uncertainty surrounding future federal policies on fracking, Helms said.

Daily natural gas production is increasing at a "slightly faster" pace than oil production, something that has already been identified as putting more pressure on the industry to step up the development of takeaway pipeline capacity and processing facilities, as well as the statewide efforts to cut the percentage of associated natural gas that is being flared.

DMR's latest statistics indicated that the rig count is falling throughout the multi-state Williston Basin, although the rig count in neighboring Montana has been "steady" while the numbers in North Dakota have dropped 11% after reaching a high in May. The utilization rate for rigs capable of 20,000-foot well depths has fallen to 90%, but for shallow-well rigs drilling to only 7,000 feet the utilization has increase to 60%, according to DMR. Even the steady increase in drilling permits is explained by Helms as tied to the fact that more multi-well pads are being drilled and locations need to be built before the upcoming winter weather sets in.

Production-wise, the state's all-time record numbers for gas and oil continued to flow: 22.2 Bcf of gas (718.7 MMcf/d) in July, compared to 20.9 Bcf (699.9 MMcf/d) in June. Crude oil production reached 20.8 million bbl (674,000 b/d) in July, versus 19.9 million bbl (664,618 b/d) in June. Sweet crude prices were down slightly in July month-to-month ($71.13/bbl versus $72.58/bbl in June), but have ramped back up to $85.75/bbl, Helms said.

Gas delivered to Northern Border Pipeline at Watford City rose in July to $2.50/Mcf, Helms said. "This indicates the gas-oil ratios may be increasing and more gathering and processing capacity will be needed. Processing plant and pipeline gathering system construction is "in full swing. U.S. natural gas storage has dropped to 9% above the five-year average, but this still indicates low prices for the foreseeable future."

Nearly all of the permits issued were for new development and wildcat drilling; only two went for extensions of existing permits. For August, 253 new development permits were issued, along with seven wildcat permits, making the vast majority of the permits for more drilling in proven and heavily explored areas.

Overall, for the first eight months this year, 1,455 permits have been issued by the North Dakota Oil and Gas Division in the Department of Mineral Resources. Of that total, 1,390 were developmental permits and another 63 for wildcatting in unproven areas. Two were extensions. Compared to 2011, the overall permit totals and developmental permits at the end of August were substantially higher, but there has been far less wildcat activity. Last year after eight months, permits issued totaled 1,203 with 1,054 of those being developmental. At the end of August that included 142 wildcat permits, more than double this year's wildcat total so far.

The number of spuds so far this year (1,958) nearly equals the total for all of 2011 (2,017). And the slower permitting and spudding last year relative to 2012 so far was accompanied by a rapid increase in average rig count: 163 in January 2011 to 200 at the end of last year. Going back five years to 2008, North Dakota statistic pale in comparison to the present. At the end of 2008, the statistics showed 946 permits issued; 720 well spuds; and the average rig count at 75. More than 20% of the drilling permits were for wildcat wells in 2011.

Industry investment in infrastructure and more emphasis on infill developmental wells are helping to contain the state's wellhead gas flaring in the oil/liquids-rich Bakken Shale formation, said Justin Kringstad, director of the North Dakota Pipeline Authority.

"One of the big assumptions [in any of these types of analysis] is what is our future investment in new gas infrastructure going to be, and obviously I think the industry is going to continue to step up with more investments in additional gas plants," Kringstad told NGI.

Regarding takeaway infrastructure, Kringstad said he is confident the industry will continue to respond "if we see the volumes continue to increase and production continues to develop at the pace we are now. I don't see any slowdown in efforts to capture and process that gas." He said he is seeing "very positive trends as far as how quickly we are getting new wells; the numbers of wells connected each month has continued to increase over the past several years so our pace of connecting wells is increasing.

"As these systems get built out, every new well and all these in-fill wells that need to be connected are that much closer, or essentially right next to existing gas gathering pipelines," he said, adding that the critical current need is for more small-diameter gathering pipelines. "The infrastructure is being built out and we're making positive headway in getting these wells connected."

Before the end of the year Kringstad hopes to get analyses from the state Department of Mineral Resources that show how much of the flaring has been lessened this year.

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