The Bakken Magazine - December 2014

DECEMBER 2014

EMBRACING THE Challenges,DROP Opportunities in 2015

Plus Crude Prices Deconstructed Page 40

AND Circling The Export Debate Page 28

Notable 2014 Moments Page 8 www.THEBAKKEN.com Printed in USA

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Performance Under Pressure

Mechanical Products

CONTENTS

DECEMBER 2014

VOLUME 2 ISSUE 12

THE COMPLEXITIES OF CRUDE PRICES From IP rates to OPEC, deciphering the impact of low crude prices is complicated

By Luke Geiver

80 to 90 percent of new wells are drilled on existing pads

Drilling rigs could be sent to core areas The Bakken’s location creates a discount to WTI

Initial production rates drive future well location decisions Geologic formation impacts initial production (IP)

Well location can make capturing flare gas economically difficult

Core areas produce higher volumes of oil, gas

Flared gas is a wasted revenue source

Surface well location indicates geologic formation Completion methodologies effect IP rates

Pg 40

Wells connected to electrical grids reduce operating expenses

pg 40

EXPLORATION & PRODUCTION

The Complexities of Crude Prices How will falling crude prices impact the Bakken in 2015? The answer includes several constantly changing variables.

BY THE BAKKEN MAGAZINE STAFF

6 Editor’s Note

Following Crude Prices

pg 28

Pg 28

8 ND Petroleum Council

LOGISTICS

Debating The Export Ban

The U.S.-imposed crude oil export ban debate was a hot topic in 2014its fate could be decided in the new year.

BY LUKE GEIVER

BY LUKE GEIVER

Milestones to Mileposts: Signs of progress in western North Dakota

BY TESSA SANDSTROM

10 Events Calendar 14 Bakken News

Bakken News and Trends

ON THE COVER

EMBRACING THE DROP: 2015 will bring new challenges to the entire Bakken-based industry, but the opportunity to continue record-breaking production levels remains even as crude prices are at low levels.

Drilling rig operations are more efficient than ever. The total day count for spud to total depth continues to decrease.

Oil conditioning rules will ensure that Bakken crude is less volatile than most gasoline used in cars and lawnmowers.

Flaring regulations could decrease the percentage of wells still flaring produced gas, but infrastructure constraints may present a challenge for Bakken operators looking to meet state-imposed goals.

Crude by rail investments continue, from the rail operators to the transload facility managers.

Truck traffic will remain a crucial aspect of the play and road construction investment levels will continue breaking state investment records.

THEBAKKEN.COM

5

EDITOR'S NOTE

Following Crude Prices What happens in the Bakken does not stay in the Bakken. Unexpectedly low crude prices have highlighted the link between un-

Luke Geiver

Editor The Bakken magazine lgeiver@bbiinternational.com

For the Latest Industry News:

conventional oil and gas production in shale plays, such as the Bakken and Eagle Ford, and the global crude marketplace. No entity––be they exploration or production firms developing Divide County acreage or a family-owned trucking firm founded in the late 2000s––can now expect to perform and move their bottom line in a bubble that excludes world market forces.

When the Organization of Petroleum Exporting Countries meets in November during the Thanksgiving holiday to determine its future production plans, those connected to the Williston Basin now need to take notice. At this year’s OPEC meeting, the impact of U.S.-produced crude sourced from unconventional plays was a major topic––so large, in fact, that it influenced OPEC’s decision to shy away from cutting production. For OPEC, the threat of losing market share to U.S.-unconventional oil producers was, in part, too great to ignore the budgeting shortfalls that could affect the ability of OPEC members to maintain their fiscal well-being. The decision has thus kept the global crude supply greater than the demand. The Bakken play is now at an unprecedented juncture. Crude prices and the global supply and demand curve have many speculating what the impact of oil at $60 per barrel or lower will mean.

After exhaustive research, calls and talks with industry players and outside analysts, we believe the answer is simple: no one knows. What we do know is that low crude prices could have an impact on the Bakken play, but in a very complex way. Our team will continue tracking the evolving story of crude prices and the Bakken in the year ahead, and we worked to explain it in “The Complexities of Crude Prices” on page 40.

Before crude prices were ever an issue, many businesses and legislators were focused on lifting the U.S.-imposed crude oil export ban. Those favoring lifting the ban believe it will allow U.S. producers to continue the pace of production even as the U.S. light oil refining capacity approaches capacity. Opponents of lifting the ban—a group of refiners—believe it will increase the price of fuel for U.S. consumers. To put a face on a story engulfed by policy, we spoke with Dan Eberhart, CEO of Canary LLC, the largest U.S.based independent wellhead provider. Eberhart bet big on the Bakken in 2008 and has since reaped the rewards, transforming a Watford City, North Dakota-based oil services firm into a nationally recognized, multiplay firm with roughly 500 employees (Eberhart started with 12). Eberhart’s personal success story is outdone only by his efforts with the crude oil export ban. As you’ll see in, “Focused On Exports,” on page 26, Eberhart is in the midst of reshaping the story on the export ban.

The coming year will be defined, at least in part, by crude prices and the export ban.

Flaring, crude-by-rail and community funding will also continue to be dominant themes.

But, as Tessa Sandstrom reminded us, in her page-14 North Dakota Petroleum Council column, 2014 saw some incredible successes. And if the year ahead can mimic the one we are leaving behind, we will all want what happens in the Bakken to be known everywhere outside the Bakken.

www.TheBakken.com Follow us: twitter.com/thebakkenmag facebook.com/TheBakkenMag 6

The BAKKEN MAGAZINE DECEMBER 2014

www.THEBAKKEN.com

ADVERTISER INDEX

VOLUME 2 ISSUE 12 EDITORIAL Editor Luke Geiver lgeiver@bbiinternational.com Staff Writer Emily Aasand eaasand@bbiinternational.com Staff Writer Patrick C. Miller pmiller@bbiinternational.com Copy Editor Jan Tellmann jtellmann@bbiinternational.com

20

AE2S

31

Alpha Capital LLC

46

Bakken Directory

36

Bartlett & West

27

Bountiful Tanks

38

Capital Lodge

12-13

Centek Group

30

Eide Ford Diesel Services

PUBLISHING & SALES

37

Golight Inc.

Chairman Mike Bryan mbryan@bbiinternational.com

44

iLevelDigital

3

MBI Energy Services

CEO Joe Bryan jbryan@bbiinternational.com

34

Miller Insulation

President Tom Bryan tbryan@bbiinternational.com

47

NCS Energy Services, Inc.

Vice President of Operations Matthew Spoor mspoor@bbiinternational.com

25

Profire Energy, Inc.

Vice President of Content Tim Portz tportz@bbiinternational.com Business Development Manager Bob Brown bbrown@bbiinternational.com Account Manager Ben Lester blester@bbiinternational.com Marketing & Sales Director John Nelson jnelson@bbiinternational.com Circulation Manager Jessica Beaudry jbeaudry@bbiinternational.com

11

Quality Mat Company

2

Rossco Crane

21

SBG Energy Services LLC

26

Steptoe & Johnson

48

Summit Casing

23

Taylor Power Systems

39

Tempus Aircraft Sales & Service

Traffic & Marketing Coordinator Marla DeFoe mdefoe@bbiinternational.com

10

2015 The Bakken Conference & Expo

ART

22

Valley Industries LLC

Art Director Jaci Satterlund jsatterlund@bbiinternational.com

45

Wacker Neuson Sales

24

Wells Concrete

35

Wood Group PSN

4

Graphic Designer Lindsey Noble lnoble@bbiinternational.com

Tyco Fire Protection Products

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 866-746-8385 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.

COPYRIGHT Š 2014

by BBI International

TM

Please recycle this magazine and remove inserts or samples before recycling

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7

NORTH DAKOTA PETROLEUM COUNCIL

THE MESSAGE

INFRASTRUCTURE STRONG: Oil and gas processing and storage facilities like the one pictured here have helped streamline activities in the Bakken in the past five years.

PHOTO: OVERLAND AERIAL PHOTOGRAPHY

Milestones to Mileposts: Signs of progress in western North Dakota

By Tessa Sandstrom

This year has been a momentous one for North Dakota. As has been the case

in the past few years, North Dakota has again found itself producing record levels of oil and gas while contributing significantly to the nation’s drive toward energy security. Earlier

8

this year, we celebrated reaching 1 million barrels of daily production, joining only Texas and 19 other countries in the world that currently produce at this level.

North Dakota achieved another significant milestone for both the state and the na-

The BAKKEN MAGAZINE DECEMBER 2014

tion in December when the Dakota Prairie Refinery near South Heart, North Dakota, accepted its first shipment of Bakken crude. The refinery is the first to be built within the United States in over three decades. “I think you can’t underscore enough the significance

of somebody getting this done in America,” said Ron Ness, president of the North Dakota Petroleum Council. “The fact that it ends up being a North Dakota company, built by a North Dakota contractor like Westcon—it’s just a fantastic achievement."

NORTH DAKOTA PETROLEUM COUNCIL

The industry celebrated other ribbon cuttings this year as new or expanded gas plants sprang up, accepting more natural gas and helping our state and industry meet aggressive gas capture goals set at the beginning of the year. Capturing gas has been one of the many challenges faced by the state, but in an effort largely unprecedented for our industry, we worked together to come up with a set of recommendations that have since been adopted and more importantly, opened up lines of communication among the upstream, midstream and service contractors, which has allowed us to be better partners.

In another collaborative effort, the NDPC and its members elicited a comprehensive study of Bakken crude characteristics. The study is the most comprehensive of its kind for a shale play to date.

This information will not only be incredibly useful to shippers in ensuring the proper handling and transport of Bakken crude, but it is has also created a standard for Bakken crude that may pave the way for a Bakken benchmark.

Community Progress

Over the past decade, technology and innovation have allowed us to recover more resources, pushing production, tax revenues, salaries, population and the number of jobs ever higher. For the communities, this rapid growth has brought with it many growing pains, from housing shortages to congested roads. This year,

however, we’ve begun to gain on those impacts.

I came to that realization in November as I walked casually across Elk Street in Alexander, North Dakota. It didn’t dawn on me until I got to the other side of the street that this was not ususally such an easy task. Instead of traffic streaming steadily past on the street—Elk Street is also U.S. Highway 85—it now hums along a new four-lane bypass outside of the small town.

Here, instead of being marked by data-based benchmarks or milestones, progress was literally being marked by mileposts.

New Town and Watford City celebrated the same achievements when bypasses circumventing their downtowns opened this year, bringing some relief to the main streets of both communities.

For New Town, it presents new opportunities for progress. According to Mayor Dan Uran, a renovation of New Town’s downtown will begin in the spring, and new businesses will begin growing along the Highway 23 bypass.

Renovation and revitalization have also been the themes for many western North Dakota schools. Alexander, Powers Lake, Watford City and Williston, among others, have either passed new or expanded school projects or already broken ground on them. These schools will help accommodate the growing number of families moving into the state. This is important for the state and it’s important for the industry because we are starting to get

PROSPEROUS VIEW: The Bakken Rocks Cookfests hosted by the North Dakota Petroleum Council have helped highlight the growth in small North Dakota communities that were struggling pre-Bakken activity.

the amenities we need to attract good, dependable workers and their families, which will help fill some of the service jobs open in many of the new retail establishments that are flourishing in these busy, vibrant communities.

With our Bakken Rocks CookFests, we get the privilege each summer of celebrating two of these growing communities and see the progress being made. In Kenmare this year, we surrounded its beautiful square that had just been updated with new lighting, sidewalks, and curbs and lined with several new businesses.

Dunn Center welcomed us to its park and even rolled out the horses for wagon rides.

The events are always a highlight of the year. That’s why I’m excited to announce

that this year, we are going to bring the traffic back to Alexander—at least for one day—to host the Bakken Rocks CookFest in the community park just off Elk Street. As a tremendous host for the industry for so many years, we are honored they are welcoming us to their community on July 14 to allow us to throw them a little party. No stranger to lots of activity, South Heart will welcome us July 16, and we look forward to celebrating progress as well.

Author: Tessa Sandstrom Communications Manager, North Dakota Petroleum Council tsandstrom@ndoil.org 701-557-7744

THEBAKKEN.COM

9

EVENTS CALENDAR

The Bakken magazine

will be distributed at the following events: Energy Generation Conference

January 27-29, 2015 Bismarck, North Dakota Issue: January 2015 The Bakken magazine

DUG Bakken and Niobrara March 31-April 2, 2015 Denver, Colorado Issue: March 2015 The Bakken magazine

Williston Basin Petroleum Conference April 28-30, 2015 Regina, Saskatchewan Issue: April 2015 The Bakken magazine

Unconventional Resources Technology Conference (URTeC) July 20-22, 2015 San Antonio, Texas Issue: July 2015 The Bakken magazine

The Bakken Conference & Expo

July 27-29, 2015 Grand Forks, North Dakota Issue: July 2015 The Bakken magazine

10

The BAKKEN MAGAZINE DECEMBER 2014

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BAKKEN NEWS

BAKKEN NEWS & TRENDS

LAYING OUT A PLAN: The collaboration between Phillips 66 and Energy Transfer Partners will help ensure the completion of the proposed 450,000 barrel of oil per day Dakota Access Pipeline. Phillips 66 owns and operates multiple refineries, including the one pictured here.

PHOTO: PHILLIPS 66.

Phillips 66, Energy Transfer Partners collaborate on pipelines Phillips 66 and Energy Transfer Partners have formed a joint venture to ensure the completion of two pipelines designed to move Bakken crude from North Dakota to various refineries on the West coast. The partnership will aid in developing the Dakota Access Pipeline

14

(DAPL), a proposed 450,000 barrel of oil per day system that will move Bakken crude from western North Dakota to Patoka, Illinois. It will also help build the Energy Transfer Crude Oil Pipeline from Illinois to Texas.

The pipelines, which could be online by the end of 2016, will

The BAKKEN MAGAZINE DECEMBER 2014

be constructed by Energy Transfer. Energy Transfer will own 75 percent of each pipeline, while Phillips 66 will own 25 percent and help pay off its proportionate costs of construction of each pipeline. “We look forward to working with Phillips 66 to build this

much-needed pipeline infrastructure to link rapidly growing supplies of domestically produced light crude oil in the Bakken and Three Forks play to refineries throughout the country,� said Kelcy Warren, CEO of ETP. Greg Garland, chairman and CEO of Phillips 66, said

BAKKEN NEWS

238,000 CAPACITY

bopd

285,000 CAPACITY

bopd

145,000

gasoline bopd

CAPACITY

the joint-venture will help the company “increase its access to advantaged North American crude oil and add the momentum we are building in our midstream business.”

“ETCOP will have an interconnection with our recently acquired Beaumont Terminal, which provides water access and creates additional optionality for supplying refineries on the East Coast, including Bayway,” a spokesperson for Phillips 66 told The Bakken magazine.

The ETCOP project will provide crude transport from Illinois to Sunoco Logistics Partners and Phillips 66 storage terminals near Nederland, Texas. The DAPL project will allow shippers to load Bakken crude onto unit trains bound for the East Coast.

Dakota Access Pipeline cost:

$3.8 BILLION Dakota Access Pipeline capacity:

450,000 BOPD

Dakota Access Pipeline length:

1,000 MILES

PIPELINE REACH: The Dakota Access Pipeline could span more than 1,000 miles and cost roughly $3.8 billion.

PHOTO: ENERGY TRANSFER PARTNERS

THEBAKKEN.COM

15

BAKKEN NEWS

Dust impact studies in progress for western North Dakota

16

TOTAL NUMBER OF VEHICLES AT EACH SITE 30000

27000

24000

21000

Number of Vehicles

University of North Dakota civil engineering professor, Daba Gedafa, recently completed a simple dust study to measure its impact on crops and livestock. The study measured and compared dust from unpaved roads in Mountrail, McKenzie and Williams counties in western North Dakota taking into consideration traffic, material type and weather conditions.

Canning jars mounted on a metal post, along with a traffic counter, were set up at each of the test sites to collect dust in the air. Three separate data collections captured during 27- to 36-day periods during JulyAugust, August-September, and SeptemberOctober were taken.

The study found the effects of the dust on crops includes reduction in photosynthesis, stomatal interference, increased incidence of plant pests and disease and reduced effectiveness of crop spraying.

The effect of dust from unpaved roads on livestock included dust pneumonia, pinkeye, change in grazing patterns and excessive teeth wear.

Researchers at North Dakota State University are taking the dust research a step further. Five research proposals have been selected to receive seed funding to research the impact of road dust issues in areas of energy development across western North Dakota. NDSU announced receipt of five awards totaling $224,516 to conduct research over the next two years.

“Measuring the amount of road dust from traffic and developing scientific data on its impact provides information as the challenge of road dust emissions continues,” said Kelly Rusch, vice president for Research and Creative Activity at NDSU. “The proposals selected for funding combine research approaches from different fields of study to provide an opportunity for wide-angle views of a significant challenge.”

Research areas include “Quantification of Road Dust and Its Effect on Soil Quality,” “Road Dusts: Their Abatement and

18000

15000

12000

9000

6000

3000

0

N

S

Mountrail

N

S

McKenzie

N

S Williams

Driving Direction in Each County August

September

Impacts on Human Health,” “Fugitive Dust Impacts on Plant and Landowner/Citizen Perceptions of Bakken Development,” “Development of Best Practices Approach to Unpaved Road Dust Control in Western ND,” “Full Spectrum Dust Control Techniques and Economy-Based Criteria.”

“Not only does it [the research] allow

The BAKKEN MAGAZINE DECEMBER 2014

October

students to learn scientific methods, it also engages them in fast-track research to help provide information that can benefit communities,” Rusch said.

BAKKEN NEWS

ACTUAL VS COUNTERFACTUAL PRODUCTION AND PRICE IMPACTS 91

$120

90

$100

88

$80

87 86

$60

85 $40

84 83

(2014$/bbl)

Production (MMbpd)

89

$20

82 81 2008

2009

2010

2011

2012

2013

$0

Actual World Production (MMbpd)

Counterfactual Global Production (MMbpd)

Actual Brent Price (2014$/bbl)

Counterfactual Brent Price (2014$/bbl)

Sources: 2008-2013 actual world production and Brent prices: EIA; 2008-2013 counterfactual assessments: ICF

Sources: 2008-2013 actual world production and Brent prices: EIA; 2008-2013 counterfactual assessments: ICF

API: Oil production from US fracking stabilizes world prices A study on the effects of fracking operations in the U.S. show that not only has the economic impact been positive, but also that domestic oil and gas production has been a stabilizing influence on world oil prices.

The report, conducted by ICF International for the American Petroleum Institution, estimates what prices and production would be without horizontal drilling and hydraulic fracturing and how these advanced drilling technologies have impacted gasoline prices. New plays such as the Bakken were responsible for about 48 percent of U.S. oil production and shaved up to 94 cents per gallon from fuel prices in 2013.

“Citigroup analysts have described it as a $1.1 trillion global stimulus—at no cost to taxpayers,” said Kyle Isakower, API’s vice president for regulatory and economic policy. “Lower crude prices are also providing a check on the influence of foreign sup-

pliers like OPEC, and Russia, which relies on oil and natural gas revenues for over half its federal budget.”

While there’s still debate about how markets will trend, Isakower said the report shows there’s no question that increased oil and gas production in the U.S. has saved money for American consumers, savings that translate into more disposable income that benefits retailers and businesses.

He referred to a report from AAA that says a majority of U.S. gas stations were posting prices below $3 per gallon.

“This would normally seem impossible given the turmoil we’ve experienced overseas,” Isakower noted. “In the last few months, motorists have watched with growing optimism as U.S. gasoline prices fell to levels not seen in nearly four years.”

According to ICF’s analysis, without horizontal drilling and hydraulic fracturing, international crude oil prices would have

averaged $122 to $150 per barrel in 2013, an increase of $12 to $40 per barrel.

Isakower said the corresponding discount on gasoline and other refined products was estimated to be 29 to 94 cents per gallon. The price decline saved U.S. consumers as much as $248 billion in 2013 and up to $624 billion from 2008 to 2013.

The ICF’s analysis showed that U.S. oil production from wells using horizontal drilling and hydraulic fracturing totaled 4.78 million barrels per day in 2013, accounting for 48 percent of all U.S. production—up from 11 percent in 2008.

“For the first time in generations, surging domestic production is driving our energy security and providing a crucial buffer against disruptions in Europe, Africa, and the Middle East,” Isakower said.

THEBAKKEN.COM

17

BAKKEN NEWS

Nuverra, XTO Energy connect on water pipeline Nuverra Environmental Solutions may be known for moving liquids by truck, but a new contract with XTO Energy Inc. will shed light on its ability to build and operate pipeline infrastructure.

XTO Energy, a subsidiary of Exxon Mobil, has contracted Nuverra to build a 150-mile dual pipeline system to move produced water from its well sites and bring fresh water to them. The system, expected to cost between $120 million and $150 million, will be located in McKenzie County, North Dakota. Construction could start in May and end in the fourth quarter.

PROVEN SUCCESS: Power Fuels, a division of Nuverra Environmental Solutions, has established itself as one of the largest, transportation services in the Williston Basin.

PHOTO: NUVERRA ENVIRONMENTAL SOLUTIONS

been disclosed, but Nuverra said the contract is a long-term, fee-based agreement.

Mark Johnsrud, Nuverra CEO, said the pipeline represents a transformational step for the company, “to become a fully-integrated environmental solutions provider in North Dakota.” The pipeline makes sense for the company, he added, due to the well density increase and growing water volumes present in the area.

XTO Energy represents the operator working in ExxSTRONG VISION: CEO Mark Johnsrud onMobil’s most active unconhas transformed Nuverra from a ventional play. The Bakken is trucking firm serving the Bakken to a major oil and energy services provider the liquids growth engine of in multiple plays. the U.S. for the company, Jeff PHOTO: NUVERRA ENVIRONMENTAL SOLUTIONS Woodbury, vice president of The pipeline will serve investor relations, said recently.

XTO and other operators in The company is running 13 the area looking to move or drilling rigs in the play, and receive water. Lines will be fixed and buried in the ground. since it entered the Bakken, in Terms of the contract have not 2008, has increased new wells 18

The BAKKEN MAGAZINE DECEMBER 2014

FLOWBACK RECYCLING: In addition to trucking, solids handling and now pipeline operation, Nuverra has also worked with industry to reuse produced water in future fracking operations.

PHOTO: NUVERRA ENVIRONMENTAL SOLUTIONS

brought online year-over-year by 25 percent. Since 2011, XTO Energy has reduced drilling and completion costs by 25 percent. The company has been deploying a proprietary frack technique that reduces costs

by eliminating the need for multiple plugs in the well bore, Woodbury said, and is working on pad development.

BAKKEN NEWS

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North Dakota refinery outlook MDU Resources is currently evaluating the potential of building and operating its second diesel refinery.

David Goodin, president and CEO of MDU said, “There continues to be high demand for diesel in North Dakota.” During the company’s third-quarter conference call, Goodin noted that the state consumes 59,000 barrels of diesel per day (bopd) but only refines 22,000 bopd.

“Given this substantially under-supplied North Dakota market, we are excited to announce that we are seriously evaluating the

building of a second refinery,” said Goodin.

The company has identified a site and is currently working on permitting. The refinery would be nearly identical to the current 20,000 bopd production facility located near Dickinson, North Dakota. If MDU decides to go forward with the project, construction could begin early in the year. Calumet Resources, MDU’s partner on the Dakota Prairie Refinery, may or may not be involved with the second refinery, Goodin said.

Along with the MDU poten-

tial refinery, Eagles Ledge Energy Ltd., based in Vancouver, B.C., is proposing a refinery to be built in Devils Lake, North Dakota.

Similar to the refinery in Dickinson, the proposed $200 million, 20,000 bopd refinery could be up and operating within three years. In order to develop this refinery, Eagles Ledge has secured a 354-acre parcel northwest of Devils Lake.

“This location features multiple benefits, most notably its proximity to road and rail access, North Dakota’s existing oil pipeline, and ancillary services

necessary for the optimization of the refinery’s development capabilities,” said Eagles Ledge Energy.

Eagles Ledge is completing its civic- and state-level due diligence on regulatory and licensing matters. “Eagle Ledge understands strong community and government support is crucial to the success of any projects that arise as a result of mutually beneficial partnerships,” the company said in the summary it provided.

If approved, the refinery could be operating as early as 2017.

THEBAKKEN.COM

19

BAKKEN NEWS

Williston Basin groundwater unaffected by oil development A first-ever scientific study conducted by the U.S. Geological Survey concludes that oil and gas development in the Williston Basin has not impacted groundwater quality.

The study is based on water samples collected by USGS scientists from 30 randomly distributed, non-federal domestic wells screened in the upper Fort Union Formation.

The results were published in the scientific journal “Groundwater.”

“It’s great news that we found nothing of concern, but it doesn’t answer all the questions,” said Joel Galloway, chief of hydrologic studies in the USGS Bismarck office.

For example, he noted that the study examined the Fort Union aquifer in North Dakota and Montana only, the most used groundwater source in the region.

“There are some more

20

shallow glacial aquifers,” he said. “The flow in those may be more rapid than in the Fort Union formation and those may be more vulnerable, but they weren’t part of the study.”

The study—a collaborative effort between the USGS North Dakota, Montana and Colorado offices—included the Bakken and Three Forks formations. It compared concentrations of several chemicals to health-based drinking water standards, analyzed correlations between concentrations and evaluated methane for indications of deep production-zone gases.

“This is the first time a region-wide study looking at groundwater has been done in this area,” Galloway noted.

“These are domestic wells, wells on peoples’ farms that they use.”

Peter McMahon, a USGS hydrologist and lead author of

The BAKKEN MAGAZINE DECEMBER 2014

FIRST-TIME RESULTS: The U.S. Geological Survey worked at 30 different random well sites throughout the Williston Basin for its groudwater study.

PHOTO: U.S. GEOLOGICAL SURVEY

the study, said, “These results are good news for water users, and the data provide a valuable baseline against which future water-quality data can be compared. However, it is important to consider these results in the context of groundwater age.”

Based on carbon-14 dating, most of the sampled water was more than 1,000 years old.

Galloway said the measurements revealed that all water was older than the 1950s when oil drilling began while the oldest went back more than 30,000 years. If contaminants were present in the groundwater, they wouldn’t have moved far from their source.

“What that tells us is that it’s very old water, very slowmoving water,” he explained.

“We may not pick up the signal of all the activity going on right now.”

Galloway noted that the USGS is conducting another study focused on glacial aquifers, although the results won't be released for some time. He said other state and federal agencies, such as the North Dakota Department of Health, are also involved in monitoring groundwater quality.

BAKKEN NEWS

Keystone XL pipeline issue likely to reemerge in 2015 The Keystone XL pipeline issue could come to the forefront again in early 2015 when Republicans take control of the U.S. Senate.

Although President Obama may veto a stand-alone Keystone XL bill, Sen. John Hoeven, R-N.D., intends to introduce Keystone approval legislation within a broader energy package that he believes the president will not want to veto.

“I believe we will have the votes to pass the bill in January when a number of new senators who support my legislation take office and the new Congress begins,” Hoeven said.

A bill to approve the pipeline, sponsored in part by Hoeven, was defeated in the Senate last month by a single vote. Following the defeat, Hoeven said, “Even had it

passed, President Obama has indicated that he intends to veto the bill.”

Sen. Heidi Heitkamp, D-N.D., who voted in favor of the pipeline, said she is committed to completing the project and indicated that she would again support it in the 2015 Congress.

Last April, Heitkamp recruited 10 other Democrats to voice their support for the pipeline and to pressure the president to make a decision on the pipeline project that has been in limbo for six-plus years.

According to TransCanada, the company responsible for the build-out and operation of the pipeline that stretches from Canada to the Gulf, the U.S. Department of State’s Final Supplemental Environmental Impact Statement concluded that Keystone

SERIOUS TONE: Sen. John Hoeven, R-N.D., at podium, has been a vocal advocate for the Keystone XL pipeline.

PHOTO: U.S. SENATOR JOHN HOEVEN PRESS OFFICE

XL would create 42,000 direct and indirect jobs and $3.4 billion in U.S. gross domestic product and that 17 of the 29 counties Keystone XL would move through would see their property taxes increase by more than 10 percent.

“We put 9,000 Americans to work building the first two phases of the pipeline back in 2009/2010. We hired another 5,000 to build the southern leg

of the project two years ago, and we want to put 9,000 more Americans to work to finish what we started,” TransCanada said.

The Keystone XL would run through Baker, Montana, a receiving point for Bakken crude that would be transported to refiners, including Valero, along the Gulf Coast.

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BAKKEN NEWS

MDU announces potential sale of its E&P firm, Fidelity MDU Resources announced plans to begin marketing its exploration and production firm Fidelity, in a move that could make a sale of the firm possible by early 2015.

David Goodin, president and CEO of MDU, said that although MDU continues to see attractive investment opportunities for Fidelity, the capital required to effectively grow the business would compromise MDU’s ability to fund substantial opportunities in other sectors. “We expect to grow our utility, pipeline and construction business units in a more meaningful way and pursue that growth with a lower overall business-risk profile,” he said.

MDU is working to set

22

The BAKKEN MAGAZINE DECEMBER 2014

Areas of significant acerage ownership States of operations Montana

North Dakota

Wyoming

Utah

Texas Louisiana

IMAGE: FIDELITY EXPLORATION AND PRODUCTION

BAKKEN NEWS

up a data room for potential investors to see Fidelity’s assets values, and taxed, initial production rates and other pertinent information. Fidelity will continue drilling and completing the majority of its programs in various plays until the sale concludes.

Fidelity has acreage ownership in North Dakota, Montana, Wyoming, Utah, Texas and Louisiana. As of Dec. 31, 2013, its total proved reserves were 80.7 million barrels of oil equivalent. The company currently produces 10.3 million barrels of oil equivalent per year and is running two rigs in North Dakota.

Current oil prices did not play a large role in MDU’s de-

QUICK FACTS:

-80.7 million barrels of oil equivalent available -1.4 million net barrels produced in North Dakota through first half of 2014 (52 percent of company oil production) -108,500 net Bakken acres -Two drilling rigs operating in North Dakota -Operating in Paradox, Powder River, Williston Basins cision to sell Fidelity, according to Goodin. An internal review completed by board members and outside advisors concluded that other business segments of MDU would benefit more from money going into Fidelity.

Kent Wells, president and CEO of Fidelity, said that for the right investor, the explo-

ration and production firm could offer a unique opportunity. “Put aside the oil price, it could be a unique opportunity for someone to move into the U.S. shales,” Wells said.

Proceeds from the sale of Fidelity have not yet been allocated to a specific business segment or purpose.

Overall activity in regards

Bakken oil production and other industries serving the oil producing region is still brisk, according to Goodin and Wells. Although lower than normal crude prices could slow down investment, Wells expects development to continue as costs typically come down when investments do to level out the price differential.

THEBAKKEN.COM

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BAKKEN NEWS

POST-MERGER, BY THE NUMBERS: Halliburton expands Bakken In 2014, Halliburton would add 21,000 people to its current holdings with Baker Hughes merger total of 80,000 If a $34.6 billion merger between Halliburton and Baker Hughes occurs, it would make Halliburton Co. one of the largest players in the Bakken oil services and fracking industry.

Through the potential deal, Halliburton would acquire all outstanding shares of Baker Hughes in a stock and cash transaction.

Expected to be completed in the second half of next year, the transaction would give Baker Hughes stockholders approximately 36 percent of the combined company.

Halliburton and Baker Hughes each have several field offices located throughout North Dakota, including facilities in Williston, Minot and Dickinson. “The transaction will combine the companies’ product and service capabilities to deliver an unsurpassed depth and breadth of solutions to our

customers, creating a Houstonbased global oilfield services champion, manufacturing and exporting technologies, and creating jobs and servicing customers around the globe,� said Dave Lesar, chairman and CEO of Halliburton.

Under the terms of the agreement, Baker Hughes stockholders will receive a fixed exchange ratio of 1.12 Halliburton shares for each Baker Hughes share plus $19 in cash. Halliburton intends to finance the cash portion of the acquisition through a combination of cash on hand and fully committed debt financing, the company said. “I’m most excited about bringing together some of the best talent in the industry and I am confident that uniting our great people will be a competitive advantage for our combined organization,� Lesar said.

In 2014, Halliburton would increase its North Dakota employee base by 350, pushing the company’s state total over 2,000 Halliburton’s board of directors would total 15, three of which would come from Baker Hughes Baker Hughes shareholders would hold roughly 36 percent of Halliburton Baker Hughes operates in 80 countries and employs 60,000 Combined company revenues would surpass $51 billion “Between growth and attrition, Halliburton alone is looking to add 21,000 people in 2014.�

The combined company will maintain the Halliburton name and will be headquartered in Houston. Lesar will continue as chairman and CEO of the combined company. The combined company’s board of directors is expected to expand to 15 members, three of whom will come from the board of Baker Hughes.

“The stockholders of Baker Hughes will immediately receive a substantial premium and have the opportunity to participate in the significant upside potential of the combined company,� said Lesar. “Our stockholders know our management team and how we live up to our commitments, we know how to create value, how to execute, and how to integrate in order to make this combination successful.�

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LOGISTICS

28

The BAKKEN MAGAZINE DECEMBER 2014

LOGISTICS

DEBATING THE EXPORT BAN Consensus favors lifting the ban but there's little talk or congressional action yet

By Luke Geiver

Lifting the export ban on U.S.-produced crude could be a major benefit to the U.S., or a huge mistake, depending on who you ask. Those in favor of eliminating the

ban believe the option to access new markets and foreign refiners will deliver an unprecedented level of certainty to shale oil producers concerned with the likelihood that U.S. light sweet crude refiners will soon be at capacity. Proponents of lifting the ban believe that without its removal, oil produced in the U.S. will have limited refining endpoints, and investments in fieldlevel expansion could stall. Opponents of lifting the ban believe the policy enacted during the ‘70s Arab oil embargo, still has merit. If the ban is lifted, opponents believe, U.S. consumers will pay more for refined products such as gasoline and diesel. And, U.S.-based refiners—who benefit from domestically produced crude that trades at a discount to the global benchmark—may be forced to slow production to cope with higher crude-acquisition costs.

THE FACE OF THE FIGHT: Dan Eberhart, CEO of Canary LLC, the largest independent wellhead provider in the U.S. got his start in the Bakken. He hopes to continue growing his brand and adding employees by helping to lift the export ban.

PHOTO: PHOTO: CANARY LLC

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In September, the U.S. Government Accountability Office released a 45-page report aimed at providing insight into the crude export ban debate following numerous studies published or paid for by both non-partisan groups and industry-specific entities, congressional hearings featuring expert testimony and requests from policymakers looking for guidance. Although the report’s conclusion that lifting the export ban would be a boon to the U.S. was clear, debate on its merit still exists and little talk or congressional action has been taken.

Concerned Parties

Dan Eberhart has never been afraid to take action on his beliefs. In the mid-2000s, Eberhart was the vice president of a Houston-based oilfield services firm looking to expand into one of two places: North Da-

kota or Pennsylvania. “We had performed a high degree of focus work on where to expand. My boss chose Pennsylvania and I thought it was the wrong move,� he says. “I felt so strongly about it that I quit the company to focus on North Dakota. At the time, people were really focused on natural gas, but I thought the dynamics of shale oil were amazing.�

In 2008, Eberhart moved to North Dakota with what he calls, “a focus on the story of the Bakken.� For Eberhart, stories of difficult living conditions and high rental fees were true. His dreams of owning a home in Watford City were quickly dismissed, he says, and after living out of a hotel room he moved into a high-cost apartment with roommates. That same year, Eberhart started Frontier Energy Group LLC, and he and his team acted on their desire

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The BAKKEN MAGAZINE DECEMBER 2014

for acquisitions and purchased a well head service firm based in Watford City. Frontier Energy Group went on to acquire two other Bakken-related firms over the next three years. In 2013, the company made its largest acquisition to date, purchasing Canary Wellhead. Following that acquisition, Eberhart and team rebranded under the name Canary LLC. Since Eberhartâ&#x20AC;&#x2122;s move into the Bakken, the company has performed nine total acquisitions and now has service locations in 55 different places throughout the U.S. Eberhart started with 12 employees, and now oversees more than 400. Because his team has been outbid on its previous three attempts for Bakken-based acquisitions, the team has shifted its Bakken-specific focus. â&#x20AC;&#x153;We have switched our Bakken model to investing in and buying more equipment to grow our existing businesses there,â&#x20AC;? he says. Since acquiring the Watford City well head location in 2008, Canary has invested an additional $500,000 for facility upgrades and millions more to purchase frack heating equipment for its Williston location last winter. â&#x20AC;&#x153;We are very bullish on the Williston Basin and the Bakken play,â&#x20AC;? he says.

Eberhart is quick to point out his history and bias for the Bakken when talking about his professional careerâ&#x20AC;&#x2122;s fast ascent the past six years. Because of his commitment to the Bakken, he says, Canary LLC is now the largest independently held wellhead company in the U.S. A visit to Canaryâ&#x20AC;&#x2122;s website doesnâ&#x20AC;&#x2122;t offer any upfront proof, however. Instead, the main brand message in large text on the website is linked to an issue Eberhart and the team are now pushing. Eberhart has become a major voice in the crude oil export ban debate. The website features several posts, original stories and lists regarding the issue. If a visitor to the site were unsure of Canaryâ&#x20AC;&#x2122;s true prominence in the unconventional shale industryâ&#x20AC;&#x201D;Inc. Magazine named the company one of the fastest growth firms in 2014â&#x20AC;&#x201D;the messages on exports would indicate that Canary is actually a lobbying firm with a clear agenda supporting the removal of the ban. â&#x20AC;&#x153;We can export

LOGISTICS

straw, chairs, wood and watermelons. Why can’t we export oil?” Eberhart says.

The reason for Canary’s focus on the crude oil export ban, according to Eberhart, is this: policymakers need to understand that failure to lift the ban creates a negative trickledown effect to firms like Canary. “If our story is to continue, the industry has to grow. If we are able to get to 600 to 700 jobs, the industry needs to keep pace,” he says. “If oil companies stall, we stall.”

Fueled by his quest to grow Canary’s presence in the Bakken and other shale plays within the U.S., Eberhart has become a crude export ban lift supporter and activist. He has traveled to Washington, D.C., met with many members of Congress in official and unofficial meetings and tweaked his website to reflect his views on the issue.

Canary has also displayed banners in major

metropolitan areas promoting the removal of the ban.

But, although he believes his work to explain the issue to anyone willing to listen gives those in favor of lifting the ban a more well-rounded foundation for argument, he also realizes the CEO of one independent wellhead service provider is only so big. “This has to be a collaborative effort amongst many parties,” he says.

George Baker, an energy expert for the past 30 years, agrees. In October, Baker was tasked to lead a new group called PACE, Producers for American Crude Oil Exports.

“We are domestic producers and independent producers who are in favor of American crude oil exports,” Baker says.

“We would like Congress to eliminate a relic of the ‘70s and allow the export of oil so that we can really rationalize the markets

as opposed to having a segregated market from the rest of the world.”

Baker and Eberhart believe they represent an answer to one of the main problems with lifting the export ban. “It is a new topic for a lot of people, including policymakers.

Most people aren’t even aware of the new abundance of U.S.-produced oil we have,” Baker says. “You can’t blame America for not yet understanding this new age of abundance. For 30 years, it has been drilled into our collective consciousness that we are a country that is on the downslope of energy production and that we have to import a lot of our oil.”

Baker says, the PACE team will be working to educate the general public and members of Congress on what they believe to be the facts of the issue. “We will be telling people what the reality is and members

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THEBAKKEN.COM

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LOGISTICS

Weekly West Texas Intermediate and Brent Crude Oil Prices, 2009-June 2014 Dollars (per barrel) 140 120 100 80 60 40 20 0 2009

2011

2010

2012

2013

2014

West Texas Intermediate Brent SOURCE: GAO ANALYSIS OF BLOOMBERG DATA

Crude Oil Prices Implications of Removing Crude Oil Export Restrictions from Four Studies U.S. crude oil price

Resources for the Future Midwest refiner acquisition costs increase $6.68 per barrela

ICF International WTI prices $2.35 to $4.19 per barrel higher on average from 20152035

IHS $7.89 per barrel higher on average from 20162030

NERA Prices increase $1.74 per barrel in the reference case and $5.95 per barrel in the high case on average from 2015-2035.b

SOURCE: GAO ANALYSIS OF RESOURCES FOR THE FUTURE, ICF INTERNATIONAL, IHS, AND NERA STUDIES. Note: Estimates are in 2014 year dollars. a Refiner acquisition costs are the costs of crude oil including transportation and other fees paid by the refiner. Such costs may be closely related to the prices of crude oil discussed in this report. b Implications refer to the difference between the reference case and its baseline with export restrictions in place, and the difference between the high oil and gas recovery case and its corresponding baseline. NERA also found that removing crude oil export restrictions would have no measurable effect in the low world oil price case.

of Congress need to be on the information curve.”

Baker will be pointing out several benefits of removing the ban. “We want to be able to send a signal to our domestic producers that they can produce as much as they can sell. We want to say to them that they can find buyers wherever they can,” he says. The group will also work to highlight 32

the jobs—not just in the oilpatch—that could be linked to lifting the ban. Earlier this year, HIS Inc. released a crude oil export ban study that indicated up to 1 million jobs would be created post-ban.

But, while Baker and Eberhart work to eliminate the export ban, others are doing the opposite. Some refiners who have revised their U.S. operations due to their ability

The BAKKEN MAGAZINE DECEMBER 2014

to utilize cheaper U.S. domestic crude, have formed their own group. The Consumers and Refiners United for Domestic Energy are opposed to lifting the export ban.

The same month the Government Accountability Office issued its findings on lifting the crude oil export ban, a CRUDEcommissioned study was released by Baker & O’Brien, an energy consulting firm. The

LOGISTICS

Consumer Fuel Price Implications of Removing Crude Oil Export Restrictions from Four Studies U.S. Consumer Fuel Prices

Resources for the Future Gasoline prices decline by 1.8 to 4.6 cents per gallon on average

ICF International Petroleum product prices decline by 1.5 to 2.4 cents per gallon on average from 20152035

IHS Gasoline prices decline by 9 to 13 cents per gallon on average from 2016-2030

NERAa Petroleum product prices decline by 3 cents per gallon on average from 20152035 in the reference case and 11 cents per gallon in the high case.

Gasoline prices decline by 3 cents per gallon in the reference case and 10 cents per gallon in the high case.

SOURCE: GAO ANALYSIS OF RESOURCES FOR THE FUTURE, ICF INTERNATIONAL, IHS, AND NERA STUDIES. Note: Dollar estimates are in 2014 year dollars. b Implications refer to the difference between the reference case and its baseline with export restrictions in place, and the difference between the high oil and gas recovery case and its corresponding baseline. NERA also found that removing crude oil export restrictions would have no measurable effect in the low world oil price case.

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study, â&#x20AC;&#x153;An Analysis of U.S. Light Tight Oil Absorption Capacity,â&#x20AC;? found that the U.S. refining system will have the capacity to process all of the light tight oil (LTO) produced in plays such as the Bakken or Eagle Ford for the remainder of the decade if LTO production continues to fall in the trajectory path estimated by the U.S. Energy Information Administration in its 2014 Energy

2016

2017

2018

2019

2020

Start-up Year Outlook. The study also found that the U.S. refining industry will have the capacity to absorb an additional 3.1million to 4.3 million barrels per day of LTO by 2020.

U.S. refiners will absorb that capacity in three ways: displacement of crude oil imports, increased utilization of existing refinery capacity, and capital expansions, the report says. The study also points out that

these options will be possible under certain circumstances. Political, strategic and other factors will not limit displacement of crude oil imports with additional light oil, transportation of light oil to U.S. refineries will not be constrained, and additional heavy crude oil supply is limited to that expected to be produced In Canada. The report also notes that assumptions made regarding re-

THEBAKKEN.COM

33

LOGISTICS

FUTURE WORK: Although every business that Dan Eberhart and his team at Canary LLC have entered into is growing, Eberhart believes future success hinges on the ability of U.S. oil producers to find additional markets for their U.S. products. Additional markets will help grow the industry, especially the energy services firms that work with producers, Eberhart says.

PHOTO: CANARY LLC

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fining capacity for light oil were based on technical feasibility. â&#x20AC;&#x153;No attempt has been made to assess refinery economics, which are dependent on numerous factors that are specific to each refinery,â&#x20AC;? the study says.

Baker & Oâ&#x20AC;&#x2122;Brien reported that roughly 1.8 million to 2.3 million barrels per day of additional light oil can be absorbed by displacing all LTO imports along with a portion of medium and heavy crude imports.

Because LTO imports are close in grade to U.S.-produced LTO, displacing imports would be relatively straightforward. Medium crude oil imports would be more difficult to replace due to the naptha and light material content. Medium crude imports could be replaced by refiners that have excess naptha and lighter handling capacity; investment in additional light oil refining capacity in place of medium crude refining capacity investments, and mixing heavy oil with light oil.

An oil blend of 41 percent LTO with 59 percent heavy oil contains the same naptha and lighter material values as imported medium crude. Displacing heavy crude would prove to be the most challenging, according to the study.

In the future, refiners can also utilize excess refining capacity not used due to pre-

LOGISTICS

‘It is a new topic for a lot of people, including policymakers.

Most people aren’t even aware of the new abundance of U.S.produced oil we have. You can’t blame America for not yet understanding this new age of abundance. For 30 years it has been drilled into our collective consciousness that we are a country that is on the downslope of energy production and that we have to import a lot of our oil.’

George Baker, executive director for Producers for American Crude Exports

viously formed contracts for medium and heavy crude. And, according to the report, roughly 1.1 million barrels per day of crude oil and condensate projects have been announced.

“It is likely that U.S. refiners will implement additional projects to process LTO, beyond those announced at this time,” the study says. “Not all companies announce their intentions to increase capability to process LTO, particularly when relatively modest investment is required.” With that relatively moderate investment, the report says, refiners could add 10 to 20 percent more naptha and lighter material capacity, a move that would help them process more LTO. Assuming costs are spread over five years, refiners would add roughly 108,000 to 503,000 barrels per day at a cost of $50 million to $240 million. CRUDE consists of four refiners, Philadelphia Energy Solutions, Alon USA Energy Inc., PBF Energy Inc. and Monroe Energy.

Potential Conclusion

Bakken production projections show that the record-breaking pace will continue.

And, as of December, all signs show that lower-than-expected crude oil prices will

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EXPLORATION & PRODUCTION

SPREADING THE MESSAGE: Canary LLC purchased billboard space in major metropolitan areas to show signs denouncing the export ban.

PHOTO: CANARY LLC

36

The BAKKEN MAGAZINE DECEMBER 2014

EXPLORATION & PRODUCTION

HARDWORK PAYING OFF: After starting with 12 employees, Canary LLC has grown its workforce to 500-plus.

Canary added a hot-oil service based in Williston, N.D.

prices and sellers access to world markets.

That philosophy is what could provide policymakers with the information needed to pull the plug on the ban.

The GAO report said the studies it reviewed, and most of the stakeholders interviewed for the report, suggested that consumer fuel prices, such as gasoline, diesel, and jet fuel, could decrease as a result of removing crude oil. And, the GAO also reported that lifting the export ban could increase the price of domestic crude sold on the world market. â&#x20AC;&#x153;By removing the export restrictions, these domestic crude oils could be sold at prices closer to international prices, reducing the price differential and aligning the price of domestic crude oil with international benchmarks.â&#x20AC;?

Citing the findings of several reports, the GAO report also noted that lifting the ban would not only allow domestically-

produced crude to trade on par with global benchmark prices, it would also spur on an increase in production. Growth in exploration and production could, however, trigger a decrease in domestic refinery growth and investments into additional capacity due to a higher price of domestic crude currently being used at U.S.-refineries.

What we are really seeing with all of the studies and the general path of the crude oil export debate, Baker says of his work explaining the benefits of lifting the ban, â&#x20AC;&#x153;is an intellectual consensus by professional economists who donâ&#x20AC;&#x2122;t have a financial dog in the fight coming to the very same conclusion that Americaâ&#x20AC;&#x2122;s consumer stand to benefit.â&#x20AC;?

Author: Luke Geiver Editor, The Bakken magazine 701-738-4944 lgeiver@bbiinternational.com

PHOTO: CANARY LLC

not slow production. Eberhart and his team have performed their own internal research and believe that the U.S. is at or quickly nearing refining capacity for light sweet crude in the U.S. Other organizations, including the EIA, have reached the same conclusion.

Exploration and production firms may not be willing to wait until 100 percent capacity is reached before they decide to cut capital spending plans. â&#x20AC;&#x153;Having worked with oil companies for several years, we know this.

Oil companies are working on budgets 12 to 18 months in advance so I think they start easing on budgets when we hit 90 percent,â&#x20AC;?

Eberhart says.

Based on the conclusions of multiple reports, U.S. producers may not have to worry about 90 percent or even about the export ban at all. Earlier this year, in support of lifting the crude export ban, Larry Summers, president emeritus of Harvard University and former U.S. Treasury Secretary, said, â&#x20AC;&#x153;The merits [in support of lifting the crude export ban] are as clear as the merits, with respect to any significant public policy issue as I have ever encountered.â&#x20AC;?

The Brookings Institute says allowing goods to flow into the international marketplace gives buyers access to competitive

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EXPLORATION & PRODUCTION

THE COMPLEXITIES 80 to 90 percent of new wells are drilled on existing pads

The Bakkenâ&#x20AC;&#x2122;s location creates a discount to WTI

Initial production rates drive future well location decisions Geologic formation impacts initial production (IP)

Surface well location indicates geologic formation Completion methodologies effect IP rates

EXPLORATION & PRODUCTION

OF CRUDE PRICES From IP rates to OPEC, deciphering the impact of low crude prices is complicated

By Luke Geiver

Drilling rigs could be sent to core areas

Well location can make capturing flare gas economically difficult

Core areas produce higher volumes of oil, gas

Flared gas is a wasted revenue source

Wells connected to electrical grids reduce operating expenses MANY VARIABLES: The information snippets here are only a small portion of several variables that will impact future production in a low crude price environment.

EXPLORATION & PRODUCTION

The evolving Bakken story has just added a new, utterly complex twist.

Crude prices—economically advantageous for the shale oil industry in the past five years—have fallen. Few,

if any, can predict when the price bottom will be reached or what falling crude prices will mean to the Bakken shale play. And, although many have tried, few, if any, can offer an acceptable prediction on what falling crude prices will mean to the Bakken shale play.

In mid-October, when falling crude prices had officially caught the eye of analysts and before mainstream media picked up on crude prices as a major-implication story, the North Dakota Department of Mineral Resources team held its monthly update on the state of the Bakken. Unlike previous updates, this session was largely focused on crude prices. At the time, Lynn Helms, director of the DMR, offered his perspective on the complexity of the issue.

“There are too many facets that need to be considered,” he said, regarding what the prices mean.

Since then, many others have offered the same assessment. In Pioneer Energy Services’ third-quarter update, Stacy Locke, president and CEO, said, “I would tell you that as we look out into the future, one has to be cautious with oil prices where they are today.” Client activity in the Bakken has stayed level and will stay level, he added, but “it’s just too early to tell.”

Lee Boothby, president and CEO of Newfield Exploration, provided a similar perspective. In the company’s third-quarter call, Boothby said at the time that the past eight weeks for the industry had been brutal.

“We were all reminded that oil is still a commodity,” he said.

Price Considerations

Ann-Louise Hittle, head of Marco Oils research and John Dunn, lead analyst for Wood Mackenzie’s North America upstream unit, believe the main factor behind the recent decline in price is weakening global oil demand growth. Oil demand growth this year in Europe, Japan, Russia and China has slowed and we now expect only a 0.8 million

42

barrel per day increase from 2013 to 2014, Hittle and Dunn say. “Combined with very strong gains in U.S. oil production, this had led to a global oversupply of oil since this summer. Then OPEC decided not to cut its production to ease the oversupply. Saudi Arabia’s decision not to cut output allows it to protect its market share in Asia,” Dunn says.

There is no magic per-barrel price of West Texas Intermediate—the globally traded crude most closely linked to Bakken crude—that will indicate when exploration and production companies will drastically alter their respective Williston Basin operations. The decision for change is, however, dependent on the following factors.

Geology and Surface Location for New Wells

Because the oil and gas industry typically operates using two- to three-year contracts for drilling rigs and other oilfield services, wells currently in production or awaiting completion will become operational due to the contractual obligations. But, the drilling and completion of existing pads and future wells could be impacted by the location of the new wells. To date, oil prices trading in the $90/barrel and higher range have allowed operators to drill throughout the Williston Basin as long as it included portions of the Bakken or Three Forks shale. Not all areas of the Bakken or Three Forks formations offer the same access to hydrocarbon availability or the type of geology well-suited for hydraulic-fracturingbased oil retrieval. The Bakken and Three Forks plays fit into the motto used in real estate, it’s all about location.

With wells still awaiting completion and other infrastructure in the works necessary to service existing wells, many, including Helms, believe the potential location for new wells will indicate oilfield activity in the future. Exploration and production firms will use their understanding of location geology to guide their work. The core of the Bakken will receive more focus and the fringe areas of the Bakken and Three Forks could see less future activity until prices increase.

Currently, 85 to 90 percent of all new

The BAKKEN MAGAZINE DECEMBER 2014

wells are drilled on multi-well pads. Wildcatting is not a prevalent part of the play for the vast majority of operators. Wells that are drilled today are done so in proven fields yielding nearly 100 percent success rates.

Initial Production Rates

Even though most new Bakken and Three Forks wells will produce, there is a wide range of production potential for wells in various parts of the play. The reason potential well geology will drive future activity decisions relates to the initial production rates a new well may offer an operator. Certain fields are more naturally pressurized or contain higher quantities of recoverable oil.

Those areas therefore produce higher IP rates. At a time when oil producers are in need of receiving the highest rate of return for the large sum of investment required to bring a well online, higher IP wells—as proven by previously completed wells—offer those operators the best case scenario for a quicker return and payback ability on their investments. Wells that offer higher-thanaverage IP rates allow operators to continue oil extraction during times with lower-thanaverage crude oil prices.

Well Completion Costs and Methods

One cannot solely use location and potential IP rates to understand which areas of the play will see an increase or decrease in activity, however. IP rates can be altered by completion methodology, and for those in less-productive zones, lower overall well costs can offset the cost of bringing a well online. In the Bakken, well completion methodologies are constantly improving. In the past year, many operators have added slickwater, increased frack sand injections, additional discrete frack stages and other tweaks to completion designs, all of which have allowed operators to report well production increases up to 100 percent for wells using the new methodologies in the same fields as wells using previous methods.

And, as well completion designs continue to improve a well’s overall production from start to finish, the cost to bring a well online has dropped for the majority of firms.

EXPLORATION & PRODUCTION

Reported increased well costs are typically related to that firm’s addition of sand or water injection for new wells. Due to evolving completion designs that increase IP rates and potentially dropping overall well costs, operators can opt to tweak well designs to increase overall production.

Operating Costs

Following the well’s location, potential IP rate and completion methodology, operating costs can also be tweaked. Cutting operating costs is a major option for producers looking to revamp profit margins decreased by low crude prices. Currently, wells that present unique challenges or above-average maintenance costs will be looked at. Wells or fields that feature high-water cuts could be economically challenging to pursue. Well sites planned or in need of onsite power linked to diesel may also put operators at an economic disadvantage insurmountable to justifying further investment in the area at current low oil prices. Wells planned for established fields on existing pads will continue to receive volume service discounts, however.

The Spread

The spread between Bakken crude and WTI is expected to continue, according to the U.S. Energy Information Administration. With the continuation of the spread, the price of WTI will remain a false indicator for what exploration and production firms looking to sell crude sourced from the Williston Basin are actually receiving. It also places continued importance for operators to access multiple oil markets on the east, west and Gulf coasts.

The Curve

The EIA has also shown that global oil supply is outstripping demand. The scenario, if linked to the EIA’s projected prices for crude in 2015 that are lower than their 2014 projections, should continue for the foreseeable future. The Organization of the Petroleum Exporting Countries did not choose to cut its supply of crude into the world market at the end of November. The decision

by OPEC has many analysts believing that the global supply of oil will continue on its current pace of growth. But, although some chose to take no action with their oil production strategy, many members of OPEC will not be able to meet their respective budgets at current oil prices, which could in turn cause a cut in OPEC’s production in an effort to curb supply to increase crude prices.

According to LDV Oil and Gas Consultants Inc., a Texas-based firm that specializes in oil marketing and hedging, supply or demand for oil, however tough to predict, could be impacted in 2015 by the following factors: a major oil producing country curtails production due to political crisis; Iranian political tension with the U.S. could reduce Iranian exports causing an increase in prices; lower oil prices could spur economic recovery which in turn would increase demand and raise prices.

POTENTIAL OUTCOMES FOR 2015

Oil prices may continue to decline. But, even as they do, it is clear that certain members of the industry are not in fear. Continental Resources has already bet big on recovering oil prices. The Bakken exploration and production giant sold off its oil futures hedges in late 2014, netting Continental $433 million. The move could allow the company to partake in the current market price for oil it is selling as the price recovers, according to Harold Hamm, CEO. Helms believes only 10 percent of the industry could stall, or at least those operators with drilling rigs running in the North Dakota counties of Bowman, Slope and Divide. Whiting Petroleum did not shy away from its decision to acquire Kodiak Oil and Gas, an exploration and production firm with many assets outside of the core of the Williston Basin.

Many operators have already stated that although they will continue current pace, plans to accelerate work in 2015 will be put on hold until prices increase. Hittle and Dunn are following global oil demand growth. “Does oil demand recover in the U.S., the world’s largest consumer, due to

low prices?” they ask. “If the growth rate of oil demand picks up, that will help absorb the oversupply.”

For the upstream spending and activity portions of the oil and gas industry, Dunn is focusing on potential cutbacks in drilling programs that would indicate low prices are having an effect on oil production. “Eventually this would cause supply growth to slow.

This would again help balance the market.”

Other factors that could also rebalance the market include supply outages in the Middle East due to geopolitical risk or a decision later by OPEC to cut its output, Hittle says.

“We will see companies focus on the core of the plays that matter and there will be an increased focus on reducing costs and increasing efficiencies. We also expect companies to innovate through an increased push for technological improvements,” Dunn says.

And, for the companies with the financial firepower, there could be merger and acquisition opportunities to fill gaps in their portfolios at a lower than previously expected cost, according to Hittle.

Even if it is difficult to quantify when a major decrease in acvitity will occur, if at all, there may be no better indication of how crude prices impact the entire shale industry than the commentary related to a recently released survey of 100 oil and gas chief financial officers.

“The past six months have seen the oil markets return to the volatility that has historically characterized the industry,” Charles Dewhurst, partner and leader of the natural resources practice at BDO USA LLP, a consulting firm, said following the release of a survey completed by BDO that took the pulse of 100 oil and gas industry CFOs. “However, while headlines may be saying these price declines herald the end of the shale boom, U.S. companies have been preparing for a return to fluctuations and are well-equipped to navigate through this transitional period.”

Author: The Bakken Magazine staff 701-738-4944 lgeiver@bbiinternational.com

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