The Bakken Magazine - July/August 2016

Page 1

JULY/AUGUST 2016

Managing The Image Industry, State, EPA Work To Detect and Measure Gas Quantities, Fugitive Emissions Page 18

Plus

And

Page 12

Page 6

Water Use, Disposal Trends

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Event Review: WBPC 2016 Unlike Any Other


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CONTENTS

JULY/AUGUST 2016

VOLUME 4 ISSUE 4

Pacific Northwest Site Count = 190 Anacortes, WA

Kenai, AK Mandan, ND

Salt Lake City, UT Martinez, CA

Mid -Continent

Los Angeles, CA

Site Count = 700

California

Site Count = 1,550

NEWS

Pg 18

Pg 10

Bakken Water Management Trends

Pg 12

Summer Bakken DUC Possibilities

Pg 13

Tesoro Refining & Marketing Buys Bakken Refinery

EXPLORATION & PRODUCTION

Finding And Fixing Fugitive Bakken Gas Emissions

4 Editor’s Note

Revisiting The Bakken’s Long-Term Viability BY LUKE GEIVER

6 N.D. Petroleum Council: The Message

A Williston Basin Petroleum Conference Unlike Any Other SPECIAL FEATURE BY THE BAKKEN MAGAZINE STAFF

Working with the U.S. Environmental Protection Agency and the North Dakota Department of Health, Bakken operators are analyzing and alleviating fugitive methane emissions.

5 Events Calendar

BY PATRICK C. MILLER

ADVERTISER INDEX 2 AE2S ON THE COVER: A North Dakota Department of Health worker operates a thermal image camera on a Bakken well site. PHOTO: NDDOH

24 KLJ

28 Applied Air Systems

21 Matrix Service

23 Bartlett & West

22 New Prospect Company

25 Bluebeam Software, Inc.

20 Protego USA, Inc.

15 Convey-All USA 5 Hotsy Water Blast Manufacturing LP

17 Seaco Global Ltd 27 Trident NGL Services

13 ISCO Industries

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EDITOR'S NOTE www.THEBAKKEN.com

Revisiting The Bakken’s Long-Term Viability

Luke Geiver

Amidst the economic hurdles industry in the Bakken is currently jumping over, weaving past or avoiding altogether, there continues a push to improve the play— including things we can’t see with the naked eye. This summer, our team again

tackles the topics of flaring and gas production, to highlight an industry trend or change in operating procedures. Through his work on- and off-the-record with multiple sources, staff writer Patrick C. Miller writes about how industry, regulators and makers of thermal imagery cameras work to better understand and curb fugitive gas emissions from Bakken well sites and hydrocarbon storage facilities. The new methane reduction goals set by the U.S. EPA and the topic of fugitive methane emissions are coming into the spotlight this year. The industry, along with the EPA and the North Dakota Department of Health, is working to research, detect and measure fugitive emissions from storage tanks or gathering lines. In some cases, a thermal imagery camera can reveal when, where or if fugitive emissions are present and give all parties involved a starting place to proceed with any follow-up work. At the 2016 Williston Basin Petroleum Conference, there was a wide variety of topics we gained new information that will soon be appearing in print or online. The WBPC this year was like no other. Uncertainty over low oil prices was a huge element of the event, along with the looming U.S. presidential election and the impacts that may follow if particular candidates win this fall. We compiled information on oil prices, future activity levels, rig count changes, refracks and even the sentiment of Donald Trump on U.S. energy development. As I sat in the crowd during the event, I vividly remember making a note and highlighting a group of stats that say a lot about the Bakken today and how we should speak about the play’s long-term viability with those in and outside of the industry. The broad nature of the topic is something anyone familiar with the Bakken can gravitate toward and discuss, and it merits being written about again: More than 31,000 new Bakken wells have received a permit or are in the planning stages by operators. What more do we need to remember that this play is a long-term endeavor and that, as one prominent Bakken CEO said during the event, “we need to hang in there”? To put it into perspective, it will require roughly 65,000 wells to potentially exhaust the Bakken’s resources. To date, there are roughly 11,000. Despite how it might feel or sound at times of low oil prices, the Bakken isn’t just something people believe in, it’s something they are trying to constantly invest in.

Editor The Bakken magazine lgeiver@bbiinternational.com

VOLUME 4 ISSUE 4 EDITORIAL Editor Luke Geiver lgeiver@bbiinternational.com Staff Writer Patrick C. Miller pmiller@bbiinternational.com Copy Editor Jan Tellmann jtellmann@bbiinternational.com

PUBLISHING & SALES Chairman Mike Bryan mbryan@bbiinternational.com CEO Joe Bryan jbryan@bbiinternational.com President Tom Bryan tbryan@bbiinternational.com Vice President of Operations Matthew Spoor mspoor@bbiinternational.com Vice President of Content Tim Portz tportz@bbiinternational.com Marketing & Sales Director John Nelson jnelson@bbiinternational.com Business Development Manager Bob Brown bbrown@bbiinternational.com Circulation Manager Jessica Beaudry jbeaudry@bbiinternational.com Marketing & Advertising Manager Marla DeFoe mdefoe@bbiinternational.com

ART Art Director Jaci Satterlund jsatterlund@bbiinternational.com Graphic Designer Lindsey Noble lnoble@bbiinternational.com

Subscriptions Subscriptions to The Bakken magazine are free of charge to everyone with the exception of a shipping and handling charge of $49.95 for any country outside the United States. To subscribe, visit www.TheBakken.com or you can send your mailing address and payment (checks made out to BBI International) to: The Bakken magazine/ Subscriptions, 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. You can also fax a subscription form to 701-746-5367. Reprints and Back Issues Select back issues are available for $3.95 each, plus shipping. Article reprints are also available for a fee. For more information, contact us at 866-746-8385 or service@bbiinternational.com. Advertising The Bakken magazine provides a specific topic delivered to a highly targeted audience. We are committed to editorial excellence and high-quality print production. To find out more about The Bakken magazine advertising opportunities, please contact us at 866746-8385 or service@bbiinternational.com. Letters to the Editor We welcome letters to the editor. If you write us, please include your name, address and phone number. Letters may be edited for clarity and/ or space. Send to The Bakken magazine/Letters, 308 Second Ave. N., Suite 304, Grand Forks, ND 58203 or email to lgeiver@bbiinternational.com.

For the Latest Industry News:

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COPYRIGHT © 2016 by BBI International

The BAKKEN MAGAZINE JULY/AUGUST 2016

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EVENTS CALENDAR

The Bakken magazine

will be distributed at the following events: URTeC

August 1-3, 2016 San Antonio Texas Issue: July/August 2016 The Bakken magazine

North Dakota Petroleum Council Annual Meeting September 19-21, 2016 Minot, North Dakota Issue: September/October 2016 The Bakken magazine

OilComm

October 11, 2016 Houston, Texas Issue: September/October 2016 The Bakken magazine

NAPE Denver

October 12-13, 2016 Denver, Colorado Issue: September/October 2016 The Bakken magazine

Energy Generation Conference

January 24-27, 2017 Bismarck, North Dakota Issue: January/February 2017 The Bakken magazine


NORTH DAKOTA PETROLEUM COUNCIL

THE MESSAGE

8 to 10 wells per year per rig 2009

2016 20 to 24 wells per year per rig

A DIFFERENT DRILL SCENE: Changes in drilling rig efficiency was one of the major changes that has taken place in the Bakken, according to many presenters at the 2016 Williston Basin Petroleum Conference. PHOTO: OVERLAND AERIAL PHOTOGRAPHY

A Williston Basin Petroleum Conference Unlike Any Other By The Bakken Magazine Staff

The 2016 Williston Basin Petroleum Conference was unlike anything the Bakken’s vast group of companies and participants have ever experienced. This year’s

mainstay Bakken gathering was held in the midst of the longest oil price slump in the Bakken’s history. It also took place during the nation’s presidential primary election races. Despite the price of oil, the mood and general consensus on the exhibit floor, delivered on the mainstages and in the hallways weaving throughout the venue were similar, and in some ways, 6

unexpected. The 2016 WBPC had a positive sensibility. People were talking about projects currently happening and sharing their perspective on what they could have been, wanted to or were doing―instead of what they weren’t. From the presentations to the Donald Trump presser, The Bakken magazine team was immersed in the WBPC throughout the event. The following highlights the main storylines from the event, and what all can expect in the Bakken throughout 2016 and 2017 according to those at the WBPC.

The BAKKEN MAGAZINE JULY/AUGUST 2016

The 500-Mile Race

To explain the current state of the Bakken and how it will look in the years ahead, Lynn Helms, director of the North Dakota Department of Mineral Resources, told attendees to think of the Bakken like a race and a gear shifter. “We are at lap 100 of a 500 mile race,” Helms said, adding that, “if you take a five-speed shifter and replace it with oil prices, you get a sense of what is going to happen going forward.” In essence, the price of oil can move the hypothetical Bakken gear shifter forward or in re-

verse. At $35 per barrel oil, Bakken activity levels will be shifted in reverse. At $40/b, activity levels will stay neutral with previously shut-in wells being put back online. At $40, workover rigs will also be mobilized. The drilling of new wells—and the average of 120 employees that accompany the process—will not take place until oil steadies at $60/b. If $60/b is a cruising pace, $70/b will be much faster, he said. With only 11,000 wells currently drilled, the Bakken race still has to reach 65,000 wells to be near a finish. The DMR currently has 31,000 new wells already permitted and waiting for higher oil prices or other industry variables to change. In some ways, Helms believes the industry has already begun to work at stopping their continual chase of the oil price. With well costs down 30 percent across the play and the average well production up 20 percent, the cost to produce a barrel of Bakken crude is down roughly 60 percent, he said. “This will be a more efficient and better oil patch moving forward.” Next year, North Dakota will most likely have 50 drilling rigs operating and in 2018, the number should double.


NORTH DAKOTA PETROLEUM COUNCIL

FEATURE PREDICTIONS - 50 drilling rigs in 2017 - 100 drilling rigs in 2018 - $60/b the Bakken is cruising - $70/b the Bakken is racing

RIG COUNT NUMBERS: The rig count next year should be 50 before doubling in 2018, state regulators believe. PHOTO: THE BAKKEN MAGAZINE

The Real Rig Count

Bruce Hicks, assistant director to Helms, explained what the state’s rig count truly reflects. In 2009, a single drilling rig operating in the Bakken could drill 8 to 10 wells per year per rig. In 2016 however, a single rig can drill 20 to 24 wells in the Bakken per year per rig. Today’s rig count, Hicks said, can drill just as many wells per year as almost double the amount of rigs could in year’s past.

Entering The Bakken Is Still Ideal

Jim Arthuad, CEO of MBI Energy, spoke in tandem with Ernie Graham, a real estate developer that has worked in various oil plays. Both explained why the Bakken remains an attractive place to work and invest regardless of oil price. The Bakken has billions of barrels of oil and trillions of cubic feet of gas waiting to be mined, an undertaking that will take a lot of people, resources and time,

said Graham. “Don’t bail on the Bakken. Things will get better,” he said. According to Graham, the current activity slow-down is at least half-way through. The Bakken presents many opportunities to those that want to enter the play as well, including those looking to purchase land. Land that was selling for $15 per square foot a few years ago is now selling for $3/sq. ft. Arthuad is focused on adding skilled and talented workers to his team that may have been displaced from other organizations. The move is crucial to long-term success, he said, based on the probability of future activity pace. According to both Arthuad and Graham, a comeback will not be slow and gradual.

Finding The Right Storyline

North Dakota Gov. Jack Dalrymple said that outside media coming to find a bust in North Dakota are struggling to do so. “We see the industry going on for decades and decades to come,” he said, despite recent

statewide budgetary shortfalls linked to lower tax revenues from oil and gas activity. Part of the greater Bakken story, he added, is the impact it has had on the state’s other industry’s— both new and old. “This [the Bakken] has been an opportunity for the entire state of North Dakota and we have used these dollars wisely.” The wells drilled but uncompleted are the greatest economic hindrance to the state’s oil-based revenue.

$100 Oil Ever Again?

John Gerdes, managing director and head of research for the KLR Group, believes that by 2018 or 2019, the price of oil could be $100/b. The average price of oil should stabilize around $80/b based on energy demand in India and China. Eventually, by approximately 2030, world oil demand will be 110 to 115 million barrels per day, roughly 20 million barrels per day above today’s world daily demand. “Just the investment required to maintain that base to 2040 is phenomenal, probably in the neighborhood of a trillion dollars per year,” he said.

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NORTH DAKOTA PETROLEUM COUNCIL

Land that was selling for $15 per square foot a few years ago is now selling for $3/sq. ft.

THE WAY FORWARD: John Gerdes, managing director and head of research for the KLR Group, said it's a matter of time before world oil prices hit the $100 per barrel mark again. PHOTO: TOM STROMME, BISMARCK TRIBUNE

TRUMP YOU UP: Presumptive Republican presidential nominee Donald Trump was put over the top by North Dakota delegates to secure his party's nomination, news announced to the world at the Williston Basin Petroleum Conference. PHOTO: THE BAKKEN MAGAZINE

THIS IS CNN: John Acosta, senior White House correspondent with CNN, was among the national media in Bismarck to cover Donald Trump's press conference. PHOTO: THE BAKKEN

In the Bakken, Gerdes believes that by the summer of 2018, drilling activity will be comparable to what was happening entering 2015.

Leading The Bakken From The White House

Donald Trump, the presumptive Republican nominee 8

for the U.S. Presidency, created a new dynamic at this year’s event. By choosing to stop in North Dakota on his campaign trail, Trump was able to address the WBPC crowd—and others who paid specifically to see Trump—on a range of issues, including energy. During a news conference

The BAKKEN MAGAZINE JULY/AUGUST 2016

prior to his speech, national, regional and local media heard Trump speak on hydraulic fracturing, the Keystone XL pipeline, Hillary Clinton and the broader energy stance the U.S. should take. Standing near him during his press conference speech was Harold Hamm, CEO of Continental Resources, Rep. Kevin Cramer, R-N.D., and several unbound delegates who earlier in the day pledged their vote to Trump in a move that pushed him over the requirement to become the Republican nominee heading into the Republican convention. Trump does not want to limit hydraulic fracturing, unlike Hillary Clinton or Bernie Sanders, he said. “They want to ab-

solutely knock out fracking, and you do that, and you’re going to be back into the Middle East,” he said. “We’re going to be begging for oil again. It’s not going to happen; not with me.” Achieving energy independence is a key part of Trump’s energy vision for America, he said. “We also want to sell our energy to other places that don’t have the great natural resources that we have.” To do that, U.S. federal government needs to take a step back, he added. “I think the federal government should get out of the way; the federal government is in the way. We have so much potential energy that people wouldn’t even believe it.” Trump’s speech was open


NORTH DAKOTA PETROLEUM COUNCIL

IMAGE: HALLIBURTON

to the public and nearly 7,000 . people attended.

Refrack Potential

For roughly $1.5 million per well, Bakken operators can perform a refrack through Halliburton, said Kumar Ramurthy, technology manager for the Rockies. Ramurthy’s team performs refracks for three reasons: to target bypassed reserves in vintage completions, to target loss of fracture conductivity or to maintain a parent well’s production when infill drilling is occurring. Although

any refracked well’s proved developed reserves will not be altered, predicting additional production increases can be difficult. “The biggest obstacle in refracks is predictability and the second obstacle is the budget,” Ramurthy said. In most cases, the best performing wells are the best candidates for refracks. Most Bakken refracks performed to date have removed damage in a well bore or reconnected existing fracks. At $70/b, refracks can create an initial rate of return (IRR) of 62 percent

and at $54/b, IRR is roughly 33 percent by 60 months. Most operators want to think of refracks as a one-sizefits-all approach, but Ramurthy breaks them down into separate categories. In the future, he believes operators will consider and even factor in refracks as part of their infill drilling development plan. Parent wells— wells drilled first on a multi-well pad—benefit the most from refracking as their pressure drops when other wells are drilled and brought onto production. “With the lessons learned so far,

refracks can be economical and predictable,” he said. Before performing a refrack, Ramurthy’s team goes through well candidate selection and screening, and also does engineering of a refrack design based on client desire and budget. Following that, the refrack is performed (the cheapest portion of the process) and then refrack diagnostics are ran to determine the impact of the job.

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9


BAKKEN NEWS

BAKKEN NEWS & TRENDS

Bakken Water Management Trends 10000 Average Lateral Length, feet Average Fracturing Fluid Volume, bbI

90000

Slickwater, Longer Lateral Impacts to Water Supply

In 2007, most Bakkenfocused wells were hydraulically stimulated using 1 million gallons of freshwater or less, the report noted. But, as high-volume water fracks, or slickwater fracks, have become the preferred method for well completions in the Williston Basin, the average well requires 8 million gallons of water. In 2014, 237 wells had frac10

Average Fracturing Fluid Volume, bbI

9600

9100

80000

Like downhole technology and well-site operations, the role of water in the Bakken has changed through an improved understanding of what needs to change and what should stay the same. Following up on a previously started research effort to study the optimal strategies to produce the Bakken system, the University of North Dakota’s Energy and Environmental Research Center, has released a new report that includes an analysis of Bakken water supply volumes, usage trends, future needs and potential issues. While the revamped look at water in the Bakken has once again shown that freshwater supply is a non-issue, the EERC research team—led by Bethany Kurz—uncovered several new findings and the potential for future work on the always-evolving topic.

9500

10000 9700 89,700 9500

70000

9000

8300

60000 7500

50000 40000

8500

64,800

8000

57,200

7700

7500

47,900 38,800

6900

7000

30000 20000

10000 9,900 0

6500

6200

2006

13,900

16,700

21,200

Average Lateral Length, feet

Supply volumes, handling and disposal trends, usage changes and future scenarios

6000 5500

2007

2008

2009

2010

2011

2012

2013

2014

5000

IMAGE: ENERGY & ENVIRONMENTAL RESEARCH CENTER

ture fluid volumes with greater than 150,000 barrels used (with an average of 240,600 barrels per well). In 2013, there were only 94 wells that used more than 150,000 barrels of fluid (each with an average of 238,600 barrels of fluid). The increasing length of the horizontally drilled lateral along with the number of discrete fracture stages used in each well is also a factor in the amount of water used per well. According to experts, slickwater fracking creates a more complex fracture network near the wellbore, allowing more hydrocarbons to flow into the well. Even with an increase in

The BAKKEN MAGAZINE JULY/AUGUST 2016

slickwater and longer laterals, Kurz does not see an issue. “Freshwater supply isn’t an issue. It is available and inexpensive,” Kurz said.

The Future of Saltwater Disposal Practices

Between 2008 and 2014, saltwater disposal volumes have increased by 341 percent, according to the report, and between 2014 and 2035 volumes will increase by another 328 percent. Those projections indicate that in addition to the 500 SWD wells currently in operation throughout North Dakota, another 1,500 new disposal wells will be needed. And, those well projections do not

take into account the possibility that high-water-volume frack jobs will continue. “We are very fortunate with the Bakken in respect to water management and disposal,” Kurz said. “In the Bakken, we really don’t have any issues with saltwater disposal.” The Dakota formation is ideal for SWD purposes, according to Kurz, due to the sandstone nature of the formation located more than one mile below the surface. But, Kurz believes the industry needs to know more about the long-term potential of the Dakota formation and how feasible other options may become. “The reliance of indus-


BAKKEN NEWS

Projected Water Generation in the Bakken* Estimated Number of SWD Wells at an Average Annual Injection Rate of 793,000 bbl

Additional SWD Wells Needed Beyond Those Existing in 2014

Year

Estimated Number of Bakken Wells

Estimated Annual Bakken Produced Water Generation, million bbl

2020

21,183

624

787

300

2025

31,183

918

1158

671

2030

39,290

1157

1459

972

2035

40,000

1178

1485

998

*ASSUMES A WELL LIFETIME OF 20 YEARS

Typical Treatment Costs Associated with Produced Water Treatment (Grottenthaler and Kern, 2014) Simple Filtration

0.50-1.50 (per barrel)

Chemical Precipitation/Sedimentation

2.00-8.00 (per barrel)

EC

1.00-3.00 (per barrel)

EC/Ozonation

1.50-4.00 (per barrel)

SWD (other shale plays)

1.50-3.50 (per barrel)

Approximate Water Acquisition, Disposal, and Transportation Costs in the Bakken Cost, $/bbl Acquisition Costs Raw Water Transportation Disposal Costs Transportation Deep Well Injection Total Costs try on the Dakota aquifer as a disposal target warrants an assessment to determine the long-term impacts of produced water injection and to evaluate the capacity of alternative SWD targets,” Kurtz said.

Water Recycling, Reuse Trends

Three years ago, the EERC believed water reuse and recy-

0.60-1.05 0.65-5.00 0.65-9.00 0.50-1.75 2.40-16.80 cling practices were not economically feasible. “However, in the past three years, significant technological developments related to salt-tolerant fracturing fluid systems allow the use of minimally treated produced water and have created new opportunities for treatment and recycling,” the report said. The main issue today is produced water storage. “There

are concerns over spilling that water if you have to store it in large volumes,” Kurz said. EERC will perform some follow-up work to analyze various water storage options and other methods that would increase the feasibility of produced water storage in the Bakken.

Maintenance Needs to Raise Water Volumes

to 50 barrels of water per well per day. Each well in each different location requires different water requirements for flushing and maintenance, the report noted. Because of that, it is still unclear which chemical or physical parameters have the greatest impacts on scaling tendencies of Bakken produced water.

As production continues, the EERC and industry are still working to understand how much water is currently needed to maintain a well and how much will be needed in the future. Estimates by the North Dakota Department of Mineral Resources indicate a well usually needs 15 barrels of water per well per day for flushing and maintenance. The EERC believes each well requires up

THEBAKKEN.COM

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BAKKEN NEWS

INFRASTRUCTURE ONLY: When Halcon Resources begins drawing down its drilled but yet-to-be-completed inventory, the company will focus on DUC wells that already have infrastructure in place. North Dakota has roughly 900 DUC wells. PHOTO: THE BAKKEN MAGAZINE

Summer Bakken DUC Possibilities Operators in the Bakken are mixed on their commitment to focusing and investing into drilled but uncompleted wells (DUCs). With summer weather and a slow-to-stable oil price in their favor, many have commented on their plans—or hopes—to begin completing DUCs. Continental Resources has taken the clearest stance on Bakken DUCs. Earlier this year, the company indicated that when oil steadies (for an unspecified time period) at $50 per barrel, the company will add a Bakken frack crew to target its DUCs. Since that announcement, Continental has done just that and since June has been running a frack crew focused on DUCs in the Williston Basin. The company expects to exit the year with 195 DUCs. EOG Resources believes that at $50/b, the some of the company’s Bakken wells can earn 12

between 40 to 60 percent rates of return. This year, EOG is prioritizing drilling its premier locations and paying down debt before it focuses on DUC wells when oil is trading in the $50 to $60/b range. “We can respond quickly as supply and demand balance and oil prices firm,” said Bill Thomas, EOG CEO. Although Halcon Resources is extremely focused on working down debt payment requirements, CEO Floyd Wilson said earlier this year the company has plans to spend up to $150 million for drilling and completion. Outside of the Bakken, the company will not be performing any other work. If the company does complete any DUCs, it will be where infrastructure is already in place. WPX Energy is busy buying and selling assets in other basins. For the next few months, the exploration and production com-

The BAKKEN MAGAZINE JULY/AUGUST 2016

pany will defer well completions in the Bakken. Currently, WPX has 15 DUCs but by year’s end that number could grow by 14 DUCs if oil prices do not improve. Oasis Petroleum Corp. has its own internal frack crew. This summer the team will transition to its Wild Basin acreage. In Q1, the independent pure-play Bakken operator completed 15 wells. In May, the company had roughly 83 DUCs awaiting action. Like Oasis, SM Energy can earn attractive returns in the $40 to $50/b range, but $50 to $60/b is much more appealing to ramping up operations again, according to SM Energy. “We want to increase our activity once we are in our cash flows and we are still outspending our cash flows,” said Jay Ottoson, president of SM Energy, earlier this year. Whiting Petroleum expects to complete 44 wells this year. In

March, the company announced it was halting completion activity and that by year’s end, it could have 30 DUCs. Earlier this year, Whiting agreed to accept $30.7 million from a private party group in return for the party’s participation in certain wells and working interests in 44 wells. QEP Resources has roughly 17 wells yet to be completed after it completed 17 wells in the first quarter. The company recently purchased acreage in the Permian Basin for $600 million. Marathon Oil Corp. has spent $888 million for Oklahoma acres in the STACK play. The exploration and production company has not spoken about its Bakken DUC plans. But, the company has noted that this year’s production continues to benefit from enhanced completions it performed in late 2015.


Pacific Northwest

BAKKEN NEWS

Site Count = 190 Anacortes, WA

Tesoro Refining & Marketing Buys Bakken Refinery MDU Resources and Calumet Specialty Products have sold their collective portions of the Dakota Prairie Refinery to Tesoro Refining & Marketing. A breakdown of the sale, along with additional information regarding Tesoro’s investments into the Bakken reveal why the sale could have made all parties happy.

MDU Resources gets:

Tesoro gets:

Calumet Specialty Products gets:

-20,000 barrels per day of crude oil production. -The opportunity to apply its feedstock optimization processes along with distribution and transport strategies. -$20 million in annual operating income from the newly acquired refinery.

--Out of a refinery project that had a negative fiscal impact on the company. -The reduction of $66 million of debt related to the facility. -A buyer to continue the refinery’s existence and potentially keep 75 workers employed.

-Out of a refinery project that had a negative fiscal impact on the company. -$28.5 million from MDU and the release of all financial, commercial and environmental obligations.

Kenai, AK Mandan, ND

Salt Lake City, UT Martinez, CA

Mid -Continent

Los Angeles, CA

Site Count = 700

California

Site Count = 1,550

TESORO’S BAKKEN PORTFOLIO NOW INCLUDES: - Mandan Refinery - Dakota Plains Refinery - Vancouver Energy Project that supply’s Bakken crude to the West Coast (project creates initial rate of return to Tesoro of 40%) - Tesoro Logistics has also recently purchased an oil loading terminal near the DPR site.

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13


BAKKEN NEWS

What is the main way PE can add value to an oil and gas company? 6%

Global upstream spending (ex-MENA, $ billion) 700

4%

Announced capex cuts have gone below the levels required to stay flat

600

11%

16% 63%

$ billion

500 400 300 200 100

Growth capital Providing operational expertise

0

Providing access to networks

2010-2014 (Normalized average) Replacement capex

Geographic expansion Placing effective leadership/executives

2015 Actual

2016 Announced

Growth capex

2017 Estimates

Capex range

SOURCES: DELOITTE MARKET INSIGHTS, BARCLAYS, J.P. MORGAN

A significant amount of capital is required for the upstream industry to maintain production, replace reserves or to remain flat year over year, said John England, vice chairman of the Deloitte Center for Energy Solutions. Deloitte has released a study outlining a potential funding gap based from actual and announced capital expenditure cuts. The cuts “suggest that even remaining flat could be a challenge for the industry, let alone meeting any expected growth,” England said. According to the Deloitte study, oil and natural gas upstream companies have slashed capital spending below the minimum required levels to replace reserves. Typically, the replacement of proved reserves represents 80 percent of industry spending but in the past two years, the industry has cut capital spending by 50 percent. With the decrease in cash 14

1400

35%

1200

30%

1000 $ billion

Is A Funding Gap Looming?

Total debt and leverage (2008-2015)

25%

800 600

20%

400 15%

200 0

10% 2008

2009

Independent E&Ps debt

going to reserve replacement, is there a looming funding gap and connected production loss coming? Authors of an Ernst and Young Global Limited study on the interests of private equity investment in the oil and gas sector may help to provide an answer. Through a survey of 100 managing directors of partners from private equity firms that have made at least one investment in the

The BAKKEN MAGAZINE JULY/AUGUST 2016

2010 IOCs debt

2011

2012 NOCs debt

oil and gas sector within the past two years, results showed that private equity firms are readying to deploy up to $971.4 billion into the global oil and gas sector. Based on the survey’s results, the upstream and midstream sectors will present investors with the greatest opportunities. North America and Asia-Pacific will receive the most investment. Most private

2013

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Industry's debt/capital (right axis)

equity groups believe their strongest asset to oil and gas companies is growth capital.


BAKKEN NEWS

Year-to-date, Mergers, Sale Transactions Vary in Bakken Low oil prices have not impacted the type of transaction, merger, acquisition or outright sale of Bakken assets currently possible in the play. In the first half of 2016, non-operators have sold acreage while others have formed to buy acres. Major service firms have merged and major operators have sold assets. TechnipFMC, the name of the newly merged Technip and FMC Technologies Inc., will be based in Paris and hold an equity value of $13 billion. FMC currently has a Bakken presence based in Minot, North Dakota. According to Technip, the two companies will organize their new group of business activities into units covering surface, subsea services, products, subsea projects and onshore/offshore. Liberty Oilfield Services has finalized its deal to acquire the U.S. assets of Sanjel Corp. Liberty intends to expand its overall operations in the Bakken and in

other basins with the addition of 250,000 pressure pumping horsepower. Based out of New York, Crestview Partners is investing into the non-operator sector. With its $150 million investment, Crestview is backing newly formed W Energy Partners, a Dallas-based group founded by former Petro-Hunt LLC employees and the orginal founder of W Energy. The new entity will look to acquire or develop assets in the Bakken. Along with W Energy, Crestview has positions Synergy Energy, Silver Creek Oil & Gas, Select Energy Services, CP Energy, and Samson Resources. Samson Resources filed for bankruptcy in September 2015. Samson Oil and Gas, the Australian-based E&P, has decided to sell its North Stockyard field in North Dakota for $15 million to Angelus Private Equity Group located in Austin, Texas.

BAKKEN DEALS OF ALL KINDS: From the merger of global onshore and offshorefocused entity, Technip and FMC Technologies (which has offices in Minot, North Dakota), to non-ops selling or forming, the first half of 2016 has seen all types of transaction in the Bakken. PHOTO: TECHNIP

Angelus Private Equity Group has also invested in Bakken Resources, a nonoperator from Montana that focuses on the Williston Basin. Samson made the sale to help pay down debt and to gain cash liquidity for investment in another project located in North Dakota that will involve bringing shut-in wells online and restimulating other wells.

E-Spectrum Advisors is helping Condor Petroleum exit the Williston Basin. The nonoperator is looking to sell its Bakken and Three Forks properties that include 186 producing wells throughout North Dakota including eight EOG Resources drilled but yet to be completed wells.

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BAKKEN NEWS

Packers Plus CEO: Technical Innovation The Answer To Low Oil Prices Advances in technology will continue to play an important role in improving the economics of the Bakken, said Dan Themig, CEO of Calgary-based Packers Plus Energy Services Inc. For example, the company earlier this year announced the successful completion of multiple 50-stage wells in the Bakken formation using its advanced high-frack intensity system in combination with multilateral wells and zonal isolations. According to Themig—also a cofounder of Packers Plus and its chief technology officer—this development has the potential to significantly change the economics for Bakken producers. “Are we going to have 220 rigs running

in the Bakken any time in the foreseeable future? Probably not,” Themig said. But he believes the Packers Plus fracking technology used in conjunction with two- to threemile-long multilateral wells will support sustained drilling activity with oil prices in the $45 to $50 per barrel range. Packers Plus’ STACKFRAC system relies on sliding sleeves and a ball-activated system to allow for continuous frack jobs. “If we hit the $55 or $60 range, then it will be a different level of activity,” Themig said. “I think we’ll see a sustained level of drilling activity in the Bakken regardless of the price structure.” The 50-stage wells are the first step in the process. Themig said the second step will be wells with 60 to 70 stages—uninterrupted with no intervention. The third level will go to 100-stage jobs with two- to three-mile laterals. “One of the things you’re starting to see from our company is economic high-stage count and econom-

MULTILATERL WORK: While the Packers Plus team works on providing its sliding downhole ball-drop fracture system for operators with two-to-three-mile laterals, the company believes multilateral wells (multiple horizontal laterals from a single vertical well bore) will help the economics of the Bakken. IMAGE: PACKERS PLUS

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The BAKKEN MAGAZINE JULY/AUGUST 2016

ic high-frack intensity,” Themig said. “We don’t think it’s plug and perf. We believe the open hole has some distinct advantages in this play. We have the curves to prove it in almost every basin.” Although the price of oil will continue to play a role in PROVEN WORK: Packers Plus CEO and chief technology the level of oil and gas officer, Dan Themig, believes his team has the technology to make tier 2 and 3 areas of the Williston Basin economic to activity in the Willison fracture despite low oil prices. PHOTO: PACKERS PLUS Basin, technological innovation will have finished a multilateral project a significant impact. in Oklahoma—in addition to Themig said the Packers Plus the thousand wells we’ve done technology provides immediate that a lot of people don’t know benefits in the core of the Bakabout—using multilateral comken and could benefit wells in the play’s second-tier areas at $40 pletion techniques,” he noted. He believes Packers Plus to $45 a barrel. technology will result in a signifi“In the third-tier areas of cant drop in the breakeven point the Bakken, we think we can deliver economics at $60 or $65 oil, for Bakken producers. “Right now, we’re really which is a realistic target probably in the next 12 to 24 months,” the only company that’s worked on land-based, cost-effective Themig said. “But without the junction technology, and that’s technology, I don’t see a huge why we’ve done so many wells,” uptake in drilling activity using Themig said. “Multilateral drillthe methodologies people are ing is another place where you trying right now, which are both don’t have to recreate the surface slow and costly.” Packers Plus has done more location. The well construction can begin to add drilling laterals. multilateral drilling in the BakThe economics are very good ken than anyone else in the industry, accord- very quickly.” He’s excited about the direcing to Themig. “We tion the technology is headed. “It’s going to be one of the just key drivers,” he explains. “It’s a real step-change to the industry when they look at what we’re doing.”


BAKKEN NEWS

Timeline for Failed Baker Hughes, Halliburton Merger November 2014—Halliburton Co. and Baker Hughes Inc. announce that the two companies will merge. Halliburton plans to acquire all the outstanding shares of Baker Hughes in a stock and cash transaction valued at $34.6 billion.

December 2015—Halliburton and Baker

Hughes announce that they expect their timing agreement with the Antitrust Division of the U.S. Department of Justice to expire without reaching a settlement or the DOJ initiating litigation to block their pending transaction.

April 2016—DOJ says it plans to block the

merger because it posed an unprecedented level of antitrust problems throughout many markets.

May 1, 2016—Baker Hughes and Halliburton announce that they’ve terminated the merger agreement entered into in November 2014.

‘While both companies expected the proposed merger to result in compelling benefits to shareholders, customers and other stakeholders, challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action’ Dave Lesar, Halliburton chair and CEO.

FOLLOWING TERMINATION OF THE MERGER AGREEMENT, BAKER HUGHES TOOK ACTION TO: • Reduce costs for $500 million of annualized savings by the end of 2016. • Buy back $1.5 billion of shares and $1 billion of debt using the $3.5 billion merger breakup fee paid by Halliburton to the company. • Remove costs retained in compliance with the former merger agreement. • Evaluate broad structural changes for cost reductions aimed at improving efficiency and to better serve a rapidly shifting global market. • Retain a selective footprint in its U.S. onshore pressure pumping business, while also preserving the flexibility to expand. • Achieve cash-positive operations in a capital-intensive segment expected to remain challenging due to overcapacity, commoditized pricing and low barriers to entry.

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EXPLORATION & PRODUCTION

FINDING AND FIXING

Fugitive Bakken Gas Emissions Industry and researchers are working with state and federal regulators to understand, eliminate fugitive gas emissions By Patrick C. Miller

Even as North Dakota’s oil and gas industry gets up to speed on using thermal imaging cameras to spot and repair gas leaks, researchers are working on the next generation of technology that’s expected to be less expensive, more efficient and more precise.

Regulation Changes

There are two reasons why finding and fixing gas leaks have become an issue in the Bakken, both of which involve the U.S. Environmental Protection Agency (EPA). Last fall, the EPA notified several Bakken operators that it intended to start monitor-

ing their operations for fugitive gas leaks. That caused the North Dakota Petroleum Council to form the Bakken Upstream Air Task Force to work with EPA and the North Dakota Department of Health which regulates air quality in the state. According to Randy Neset, a petroleum engineer for Neset Consulting Services (NCS) who’s a member of the NDPC task force, the EPA’s action wasn’t a surprise. The agency used the same tactic with Colorado’s oil and gas industry before bringing its thermal camera to western North Dakota’s oil fields. “It wasn’t like the EPA warned everybody that they had the camera

MAKING THE INVISIBLE VISIBLE: Although methane can't be seen or smelled, the FLIR thermal imaging camera used by the North Dakota Department of Health can spot makes the gas visible by detecting the difference between the air temperature and the gas temperature. PHOTO: NORTH DAKOTA DEPARTMENT OF HEALTH

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EXPLORATION & PRODUCTION

THEBAKKEN.COM

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EXPLORATION & PRODUCTION

and told everyone to get a camera to do their own inspections,” he explains. Instead, Neset says the agency’s approach was to find violations and then tell industry what it was up to— threatening several producers with fines and punitive action. “It’s kind of how the EPA does business,” Neset says. “They like to collect the fines.” Under the Clean Air Act, the North Dakota’s health department has primacy in regulating air toxics, national emission standards for hazardous air pollutants, new source performance standards and Title V air quality permits. The EPA experience caused some Bakken operators and consulting firms such as NCS to purchase their own infrared (IR) camera and train personnel to operate them. According to Jim Semerad in the North Dakota Department of Health’s Division of Air Quality, the state soon followed suit, purchasing a $100,000 FLIR Systems thermal imaging camera and trained two people to operate it. Although methane, for example, is odorless and colorless, on the camera’s screen, escaping gas looks like colored smoke. The camera allows inspectors to examine and analyze if, when or where any kind of fugitive emissions are taking place. The health department says producers currently operating their own thermal cameras include Whit20

The BAKKEN MAGAZINE JULY/AUGUST 2016

THERE'S YOUR PROBLEM: Heath Consultants is part of a Department of Energy research project at Colorado State University studying new technologies to find and fix methane leaks. PHOTO: HEATH CONSULTANTS

ing Petroleum Corp., Hess Corp., Continental Resources Inc., EOG Resources Inc. and XTO Energy Inc. “The huge advantage of the FLIR camera is that you can see leaks from afar—200 feet away,” Semerad explains. “From the

entrance to the oil well site, you can see leaks that are substantial from a distance. With the other instruments we use, often times you have to be right up to the leaking area to smell it or hear it or measure it directly.” Through the Bakken


EXPLORATION & PRODUCTION

Upstream Task Force, which relies on industrywide participation, the health department and NDPC worked together to address the EPA’s concerns and establish procedures for detecting and fixing gas leaks. “The FLIR camera can be very effective as an additional tool to find leaks,� Semerad says. “We’re working with industry right now to implement an additional quality assurance and a quality control program where they’re searching for leaks and fixing them if and when they occur.� From NCS’s experience, using a thermal camera has helped the oil and gas industry better understand what it can do to detect and correct leaking gases. “There’s a lot of different tank battery designs out there that really need to be redesigned or have some maintenance done on them or a little of both,� Neset says. Sometimes the solution is as easy as remembering to properly close a tank hatch or a valve. Other times, it’s a stuck relief valve or a dried out seal that’s cracked and leaking. A line that’s not draining properly or a flare that’s not lit can lead to gas emissions. “Everybody’s aware of this now,� Neset says. “There’s a lot more thought going into these tank gas vapors and how to properly handle them. Tank batteries in the future will be much better designed. As for the older batteries out there, there’s going to be some maintenance to be done.� Through the NDPC task force—a model the organization has used to successfully solve other industry issues—a guid-

ance document was developed for all Williston Basin operators in North Dakota. As Neset notes, the document provides information on how to properly design facilities, as well as how to properly do leak detection and repair. “Part of the QA programs that the oil companies are going to be implementing this year is basically an education program for their workers on site looking for any sort of audible sound such as a hissing, any kind of an odor, any kind of sign that there’s a leak,� Semerad says. “In addition to that, they’ll be using FLIR cameras or other measurement devices. The beauty of the program is that even if you don’t have an instrument, you’re still paying attention and you’re approaching the problem from many different angles.� The second EPA event occurred in May when the agency issued three final rules to reduce emissions of methane, volatile organic compounds (VOCs) and air toxics under the strategy outlined in Pres. Barack Obama’s Climate Action Plan. The EPA issued final updates to the New Source Performance Standards (NSPS) that it says will curb emissions from new, modified and reconstructed sources in the oil and gas industry. The agency says the regulations provide greater certainty about Clean Air Act permitting requirements for the industry. The final rule was published in the Federal Register June 3, giving a 60-day comment period. Lynn Helms, director of North Dakota’s Department of Mineral Resources, said in June that his division was reviewing EPA’s rule and considering

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EXPLORATION & PRODUCTION

whether the state would take legal action. “It doesn’t fit with our rules at all,” he explained. “We’re going to have some jurisdiction problems.” In testimony in July before the U.S. House Energy and Power Subcommittee, Helms noted that the state was already involved in litigation with the EPA on three other agency actions. He said the EPA’s methane regulations directly interfered with the state’s ability to regulate the oil and gas industry. “Environmental regulators will be deciding when and where oil wells are drilled rather than the industry,” he said.

Technology Upgrades

Rather than using IR cameras that spot gas leaks based on

the difference between the air temperature and the gas temperature, laser sensors can accurately pinpoint small leaks by identifying gas molecules. And don’t be surprised if those sensors are far less expensive and mounted on unmanned aircraft systems (UAS) that can quickly cover a broad expanse and rapidly analyze the data they collect. Heath Consultants Inc. and Physical Sciences Inc., both headquartered in Andover, Maryland, are partners in developing UASbased and ground-based laser detection systems. They will be among at least eight companies participating in a three-year, $3.5 million U.S. Department of Energy research project set to begin at Colorado State University (CSU) that evaluates methanesensing technologies.

EXPERIENCE MAKES THE DIFFERENCE

“We’re putting laser sensors on unmanned aerial vehicles (UAVs) that can detect small leaks, precisely locate them, quantify the amount of gas escaping and automatically notify a repair crew,” says Paul Wehnert, Heath’s senior vice president of sales and marketing. “What we’re trying to get out of this is a proof of concept to show that we’ve taken existing technology, miniaturized it to fit on a UAV and then have the performance be similar with lower costs, more flexibility and more convenience to the operator,” he explains. Wehnert believes a laser detection system has a real advantage over a thermal imaging camera. “Once the gas temperature and the ambient air get close to

the same, you can’t see the leak; so you miss the leak,” he says. “With the laser, temperature doesn’t matter because it doesn’t operate off temperature differential. It actually sees the methane molecules. The difference is that you can see much smaller leaks—very, very small leaks— where a camera would never see them.” Dan Zimmerle is director of the Electric Power Systems Laboratory at CSU which will be running DOE’s project to test a variety of methane detection technologies. He notes that one of the primary goals of the 30-month research project is to cut costs for methane devices by one or two orders of magnitude. “You’re talking about a $20,000 instrument now being in the cost range of $2,000,” he says.

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The BAKKEN MAGAZINE JULY/AUGUST 2016


EXPLORATION & PRODUCTION

Zimmerle expects anywhere from eight to 11 companies to participate. In addition to Health Consultants, some will use UASmounted methane detection devices, bringing their technologies to CSU’s test center at Fort Collins. “We will be helping them to prove their technology in the run-up to the official testing,” he says. That testing will be conducted at various shale plays around the U.S., including the Bakken, according to Zimmerle. In addition to laser- and IR-based devices, he says there are variations on spectrometry and other better known technologies, but “several of the solutions are completely new takes on detection.” “There are things like carbon nanotubes that are sensitive to different types of gas prod-

ucts,” he explains. “Those are a lot farther out in terms of technology. They have the potential for having a sensor that’s down in the range of tens of dollars at very high sensitivity—electronic noses, if you will.” One aspect of methane detection not being tested in CSU’s project with DOE are the analytics programs which examine methane leak patterns over large areas. “Some of the monitor technologies are really focused on the analytics,” Zimmerle says. “You could put up several high-fidelity towers in a basin, pinpoint leaks efficiently, calculate where the leak is by looking at large amounts of data and wind direction to zero in on the specific leak. Some of the software that goes along with that is at least as challenging as the sensor itself.”

SNIFF FROM ABOVE: Heath Consultants and its partners are developing an unmanned aircraft system equipped with a laser sensor capable of detecting methane molecules. PHOTO: HEATH CONSULTANTS

THEBAKKEN.COM

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EXPLORATION & PRODUCTION

X MARKS THE SPOT: Other handheld sesors can be used to accurately pinpoint the exact location of a gas leak. PHOTO: NORTH DAKOTA DEPARTMENT OF HEALTH

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The BAKKEN MAGAZINE JULY/AUGUST 2016

What Zimmerle finds most exciting about the research project are technologies that lend themselves to the continuous monitoring of methane leaks. Combined with analytics programs, they can almost immediately inform an operator of a potential problem via an email or text message. “It’s really the best way to cut down emissions between the time of a problem and a fix,” he said. “I think it’s the thing that makes it very interesting. Sometimes the fix is as simple as going out there and closing a hatch or cycling a dump valve or switching which engine you’re running. Sometimes the immediate fix can be quite quick. It’s just alerting people that it’s happened.”

Industry’s Plan

Neset says he understands the importance of reducing oil and gas industry emissions.

“I live here and my family lives here. I want clean air to breathe,” he notes. “On the environmental side, I want this to be a good place to live.” He believes that by having industry work together with the North Dakota Department of Health and the EPA, the problem will be solved in the same manner that the industry has tackled other challenges. “There’s a little bit of work industry needs to do to come into compliance,” he says. “We plan on helping with the inspections and getting things fixed and making sure North Dakota has clean air. We have a few tweaks to do. We can handle this. We’ll get it figured out.” Author: Patrick C. Miller Staff Writer, The Bakken magazine 701-738-4923 pmiller@bbiinternational.com


THEBAKKEN.COM

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