The Bakken Magazine - March/April 2016 by BBI International

MARCH/APRIL 2016

Prepping For The Future Bakken U's role in keeping, expanding workforce Page 14

Plus

New Breakeven Prices Page 9

AND

Oil Analyst Offers Answers Page 20

Navigating Transport Trends Page 24

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CONTENTS

MARCH/APRIL 2016

VOLUME 4 ISSUE 2

Pg 20

EXPLORATION & PRODUCTION

Answer’s From The Bakken Analyst

Johnathan Garrett, Bakken expert from globally recognized Wood Mackenzie, shares insight on new fiscal strategies, prices and contract changes. BY PATRICK C. MILLER

DEPARTMENT

Pg 24

IN PLAY

Bakken Transport Trends: Newson Gale Feels Safe

Newson Gale shows why companies are watching transport trends, and how some firms are finding success regardless of the way oil is shipped out of the Williston Basin. BY THE BAKKEN MAGAZINE STAFF

Pg 14

WORKFORCE

Bakken U’s Purpose

As workforce challenges continue, North Dakota leaders have found a way to ensure oilfield workers are ready for a rebound, no matter the price. BY ANN BAILEY

4 Editor’s Note Bakken Falsities BY LUKE GEIVER

6 ND Petroleum Council

When Silver Linings Tarnish BY TESSA SANDSTROM

5 Events Calendar

ADVERTISER INDEX 28 AE2S

ON THE COVER: With the Bakken's drilling rig count hovering in the 40s and activities levels low, oilfield personnel are finding employment guidance from North Dakota's Bakken U. IMAGE: THE BAKKEN MAGAZINE

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17 Bluebeam Software, Inc.

10 New Prospect Company

19 CARBO 9 Convey-All USA 18 Golight Inc. 5 Hotsy Water Blast Manufacturing LP 25 iLevel Digital

2 NOV ISE 16 Protego USA, Inc. 12 UAS Energy In Sight Summit 27 URTEC 13 Williston Basin Petroleum Conference

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EDITOR'S NOTE

Bakken Falsities

Back when North Dakota’s drilling rig count was hovering around 200 rigs and exploration and production companies were rushing to hold acreage through production, there was a sentiment shared by experts that it was false to say the Bakken was booming. Even from

the early days of the Bakken, industry veterans, analysts and planners disliked the terminology and often worked to corLuke Geiver rect those who used the word to describe the Bakken. The Editor The Bakken magazine inherent nature of the word implied that the Bakken’s time lgeiver@bbiinternational.com of incredible activity was constantly running out, and that in essence, a bust was coming. Today, with oil prices as low as many linked to the Bakken have ever experienced, the amount and type of activity in the play is vastly different than during previous years. $30 oil simply does not support the drilling and completion of new wells. The harsh reality of the current Bakken also shows that workforce reductions and difficult-business decisions are being made. But, even in the midst of such a significant activity level change, those same people that were quick to discredit the Bakken as a boom would also be fast to squash any notion that the Bakken has bust. We have the evidence to prop up their perspective. In the feature piece, “Bakken U’s Purpose,” we covered those involved with a unique funding opportunity aimed at the Bakken’s workforce. Through a multi institution collaborative effort, several North Dakota entities have created a program specifically designed to keep the oilfield’s workforce committed to the Bakken region. As the story shows, the program will ensure the Bakken has highly skilled workers when needed and the state will have a positive path for workers to follow should they choose to pursue an alternative North Dakota career. North Dakota and the Bakken, the program’s organizers told us, has long-term potential. A Bakken analyst from globally recognized analysis firm Wood Mackenzie told us the same thing. When we caught up with Johnathan Garrett for perspective on energy service trends, oil prices and a multitude of other trends worth understanding, Garrett reminded us of the view shared by oil executives about the Bakken. According to Garrett, the Bakken is an incredible resource, the executives say, and one that should always be looked at long-term. Of course, speaking to oilfield workers who have been laid off or watching the state’s rig count continue to dip leaves us all feeling that the Bakken may have truly been a boom (and we know what that implies of the current state of the play). But, based on what industry veterans, experts, investor analysts and commodity price historians would tell us, we can’t let those thoughts gain any ground in our heads. There is a reason program’s like Bakken U exists. There is a reason oil executives are working hard to align their entities for the upswing in oil prices. The Bakken might be a rollercoaster (what market isn’t when its linked to commodity prices?), but at the end of the day, the resource of tight oil and associated gas present in the Basin is so great that it will continue to exist, not as a short-term economic anomaly, but rather as a long-term industry full of its own ups and downs.

www.THEBAKKEN.com VOLUME 4 ISSUE 2 EDITORIAL Editor Luke Geiver lgeiver@bbiinternational.com Staff Writer Patrick C. Miller pmiller@bbiinternational.com Staff Writer Ann Bailey abailey@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.

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EVENTS CALENDAR

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May 24-26, 2016 Bismarck, North Dakota Issue: May/June 2016

The Bakken magazine

North Dakota Petroleum Council Annual Meeting September 19-21, 2016 Minot, North Dakota

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NORTH DAKOTA PETROLEUM COUNCIL

THE MESSAGE

SERIOUS SCENE: With regulations continuing to pile up, any new operational requirements for producers will be tough to endure during a time of low oil prices. PHOTO: THE BAKKEN MAGAZINE

When silver linings tarnish Apart from the photos of kids or presidential posts about the Donald or Bernie Sanders, the most common social media posts I am seeing on my newsfeeds are those asking for oil prices to go back up. At one time, the lower prices were somewhat welcome, as communities caught up on infrastructure, businesses and motorists enjoyed lower gas prices and the bad eggs were weeded out and sent home. It seems, however, that those few silver linings are be6

ginning to tarnish as the impact of low oil prices begin to hit closer to home. If there was ever a reminder that all of these perceived big oil companies were made up of real people, this is it. Concerns within the industry are high as layoffs and bankruptcies seem imminent if there is not relief soon. Yet, there are those who scoff at those concerns, accusing the industry of fear-mongering or seeking pity. They say this industry should be

The BAKKEN MAGAZINE MARCH/APRIL 2016

By Tessa Sandstrom

â&#x20AC;&#x2DC;At between $20 and $30 per barrel, even a regulation that could cost $1 per barrel represents 10 percent or more of after-tax profits and that is not a sustainable expense.â&#x20AC;&#x2122; Tessa Sandstrom, Communications Manager, North Dakota Petroleum Council

NORTH DAKOTA PETROLEUM COUNCIL

taxed more, penalized more or bled more, despite the fact that oil and gas production taxes already account for at least half of all state tax collections. I say “at least” because those numbers do not even account the sales and use, income taxes or the fees and royalties paid by the industry and its employees and mineral owners. Some want to tax the industry more, even as the profit margins have shrunk to almost nothing and for some companies, into the red. If these artificially low prices continue, it means more lay-offs are ahead and some research analysts predict that at least one-third of existing companies will shutter their doors before the year is over. Meanwhile, the federal government seems poised and ready to deal the deathblow as regulation after regulation is being proposed. The U.S. Bureau of Land Management is already making rounds to push rules on flaring that would seek to grasp at pennies, but ultimately will mean a sacrifice in dollars as wells could very well be plugged and abandoned. That, after all, could be the aim of the federal government, but even within our state we’ve seen a movement toward more regulations, often as kneejerk reactions to those who are ill-informed on the issues in question or who believe that government interference and micromanagement is the only solution. This is not to discourage reasonable regulation. Such reg-

‘While 2016 is projected to be a down year, the future of the Bakken over the course of decades is bright. Many CEOS consider the Bakken to be among the top two best domestic resources in their play books.’ Tessa Sandstrom, Communications Manager, North Dakota Petroleum Council

ulations are important components of creating a level playing field and protecting people and resources. But the economic impacts must be taken into consideration because they affect much more than the profits of a business. They will impact people’s jobs, their livelihoods, other businesses, and even our own retirements and pensions since most are invested in oil and gas stock. It may seem as though I’m writing about a bust, but that is not the case. Many companies are still holding on to what they already have, showing that they want to be long-term members of our state and community. While 2016 is projected to be a down year, the future of the Bakken over the course of decades is bright. Many CEOS consider the Bakken to be among the top two best domestic resources in their play books. There is a large upside for improved oil recovery technology and the better production decline rates and the large oil ratio per barrel makes Bakken crude attractive at higher oil prices.

Companies are getting more efficient and able to increase oil recovery, making it possible to develop at lower prices, but everything has its limits. At between $20 and $30 per barrel, even a regulation that could cost $1 per barrel represents 10 percent or more of after-tax profits and that is not a sustainable expense. We have a tendency to hold the technology industry high as the golden child, and for good reason. Technology has made life easier, healthier, and more comfortable and connected than ever. The tech industry also makes a lot of profits and for good reason. As Andy Grove, Chairman of Intel and one of the founders of Silicon Valley said, “Profits are the lifeblood of enterprise. Don't let anyone tell you different.” Without profits, no industry can adhere to new regulations. They can’t improve and innovate. They can’t become more efficient. They surely can’t pay employees or taxes. Without profits, they simply can’t exist, but we’ve found ourselves

in an environment where that does not seem to matter. For a long time, North Dakota had policies that encouraged companies to come to our state to do business. We understood they meant jobs. Now, we have many companies that are fighting to stay, but many are trying to push them out. Instead of trying to weaken companies, we should be creating an environment where all businesses can become stronger and allowed to grow because the old adage is true: a rising tide does lift all boats, and we saw it happen in western N.D. as business after business popped up in the wake of a growing industry. But the overreach by federal government has begun to punch holes in many boats’ hulls. We need industry, its employees, its mineral owners, and our own local and state leaders to stand up and plug those leaks rather than delivering any further blows. Author: Tessa Sandstrom Communications Manager, North Dakota Petroleum Council tsandstrom@ndoil.org 701-557-7744

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BAKKEN NEWS

BAKKEN NEWS & TRENDS

READY FOR WORK: In 2015, Trican executives said most pressure pumping equipment not in use was kept from being pieced out for other crews and companies. PHOTO: TRICAN

Cimarron, Keane Group expand into Bakken through acquisition Cimarron Energy, the Oklahoma-based oilfield equipment provider, believes strongly in the oil and gas industry, said Jeff Wilson, director of business development. Following its acquisition of Diverse Energy Systems, Wilson also said it is clear his company will put its money where its mouth is. For an undisclosed amount, Cimarron has attained the Texas and North Dakota field and manufacturing assets of Diverse, the same company that expanded into the Bakken roughly four years ago. “For the Bakken producer, it brings a lot larger production and design experience to operators in North Dakota,” Wilson said of 8

Cimarron’s acquisition. Diverse has an oilfield tank manufacturing facility outside of the Bakken in Grafton, North Dakota. Diverse built a large manufacturing facility in the eastern North Dakota town while also refurbishing existing homes to house facility workforce. Cimarron will now be able to offer production, processing, measurement/custody/transfer, vapor handling, artificial lift and rental equipment to Bakken clients. Cimarron also serves the Marcellus, Utica, Permian, Eagle Ford and other plays in the Rockies. In the Bakken, Cimarron will expand its field services, Wilson said. “It’s one thing to

The BAKKEN MAGAZINE MARCH/APRIL 2016

SPECIFIC SERVICES: Through its purchase of Trican's U.S. assets, Keane Group will have added capability and scale to its overall U.S. operations. PHOTO: TRICAN

make the product,” he said, “and it’s another to have boots on the ground to help the user.” Keane Group, a U.S.-based completion company, has also made an acquisition that will expand its footprint in the Bakken. For $247 million, Keane has acquired all of the U.S. assets of Canada-based Trican Well Services. Through the acquisition, Keane has tripled its pressure pumping capacity and added the

ability to perform cementing and coiled-tubing services, two popular completion techniques used in the Bakken. Dale Dusterhoft, CEO for Trican, said Keane will now look to scale-up in the U.S., focusing mainly on the Permian, Bakken and Marcellus. “The intent going forward is that these will be the focus areas of the company,” he said.

BAKKEN NEWS

Montana, North Dakota Oil Directors Talk Prices, Expectations Eastern Montana, the birthplace of the Bakken shale oil play, remains an integral part of the Williston Basin with roughly 65,000 barrels of oil per day produced from wells targeting the Bakken or Three Forks formations. Starting this year, Alan Olson, oilfield veteran and former state legislator, will help lead Montana’s Bakken and statewide oil industry in his role as Executive Director for the Montana Petroleum Association. Olson has spent 38 years in the oil industry and said he’s seen wild upswings and steep downturns. “Every day is a new experience,” he told The Bakken magazine. “Some of the experiences, some of the projects you get to work on is what keeps you going,” he said. A former Halliburton and Sanjel employee, Olson also spent time working as a field inspector for the Montana Board of Oil and Gas Conservation.

Regarding the current oil industry environment, Olson said it will be a challenging year ahead. “We need to have discussion on what does it take to survive,” he said, adding that it has to be a broad discussion involving several oilfield entities. While those talks take place, Olson believes the future for Montana’s oil industry will get stronger as prices rebound. At current prices, he believes oil has bottomed out. “The cure for low prices is low prices,” he said. Lynn Helms, director of the North Dakota Department of Mineral Resources Oil and Gas Division, is also an industry veteran. Unlike Olson, Helms has one client to represent, the state of North Dakota. To do so, Helms’ frequently talks with oilfield personnel from North Dakota to Texas. During an annual industry event in Houston earlier this year, he learned that many in the industry expect low

THE MAGIC PRICE POINT EQUATION JULY 2015: If $65/b oil, then drilling and completion activity increases/ maintains

FEBRUARY 2016: If $40/b oil to $50/b oil, then drilling and completion activity increases/ maintains oil prices for longer than they originally expected last year. Operational plans are being made for the rest of the year and early 2017 based on current prices. Despite low prices, Helms has the same positive outward attitude towards the industry as Olson does. Part of the positivity is related to input from oil producers. “Operators and service companies still think

they have a lot of efficiencies to gain,” he said. Through various forms of technology upgrades, many producers believe they can economically retrieve oil and gas resources from the Bakken. The price point that would spur on additional drilling and well completion activity in North Dakota’s Bakken could now be $40 to $50/b Helms said.

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BAKKEN NEWS

Obama’s $10 oil fee could be DOA With the release of his proposed fiscal year 2017 budget, U.S. President Barack Obama drew a wide range of criticism from pro-oil developers for his idea related to every barrel of crude consumed in the country. Through his proposal, Obama’s administration would levy a $10 per barrel fee on imported oil to fund clean transportation projects and infrastructure. “By placing a fee on oil, the president’s plan creates a clear incentive for private sector innovation to reduce our reliance on oil and at the same time invests in clean energy technologies that will power our future,” the administration said. Under the proposed plan, the $10 tax would be applied to imported oil but not to U.S. produced oil set for export. The point along the production, refining and delivery chain where the fee would be applied has not been clarified to date. Comments from Congress show the idea for the $10 fee on each barrel of oil may never come to fruition.

‘When you look at this $10 tax, it’s almost as if they believe the American people aren’t paying enough for their gasoline. Why would you arbitrarily— at a time of challenging economics—go back and tell everybody in society that we’re going to raise your energy costs?’ Jack Gerard, President and CEO, American Petroleum Institute

‘From a national security perspective, that makes no sense…This proposal will never pass the Senate’ John Hoeven, Senator, R-N.D.

‘This is dead on arrival. Once again, the president expects hardworking consumers to pay for his out of touch climate agenda’

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BAKKEN NEWS

BP’s shale outlook shows misunderstanding BP is certain energy demand will increase in the next 20 years and uncertain of the role of shale energy in and outside the U.S. In it’s annual energy outlook, the global energy production major said that it has been repeatedly surprised by the strength of U.S. tight oil and shale gas. As an example of its surprise, BP pointed to the U.S. Energy Information Administration’s production outlook for U.S. tight oil in 2013. Production expectations issued by the EIA then showed tight oil production in the U.S. would reach 3.6 million barrels per day by 2030. In 2014, those production volumes were reached. “The continued growth of tight oil and shale gas in the U.S., and the spread of shale outside North America, are key uncertainties in our Outlook,” BP said.

THE OUTLOOK FOR US SHALE HAS BEEN REVISED UP REPEATEDLY

SOURCE: BP

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WORKFORCE

Bakken U's PURPOSE To ensure the Bakken’s workforce remains stable, state leaders have turned to innovative educational outlets to entice workers to stay no matter the oil price. By Ann Bailey

The BAKKEN MAGAZINE MARCH/APRIL 2016

Seasonal and temporary workers from across the globe have flocked to the Bakken oil patch of North Dakota for the past several years. Now, the state’s university system is promoting an initiative that aims to ensure they remain in the region for their entire careers. The North Dakota University System’s program Bakken U: Energizing through education, is designed to encourage energy workers to attend a North Dakota college or university.

WORKFORCE

THE BIG CHECK: Members from Dickinson State University and city of Dickinson, North Dakota pose with Warren Logan, the first recipient of the Bakken U funding opportunities. PHOTO: DICKINSON STATE UNIVERSITY

Bakken U Is Born

“It may surprise you that a North Dakota University System campus is likely within an hour’s drive of your well head or shop,” NDUS says through its marketing material to energy-related workers not tied to the region yet. According to NDUS, there is no issue with finding work in North Dakota at the current time. Roughly 35,000 jobs are available, and many are attainable through participation in continued education. Bismarck State College, Dakota College in Bottineau, Williston State College, Minot State University and Dickinson State University are

participating in Bakken U, offering a one-stop shop to explore energyrelated programs or other courses available on their campuses or online. North Dakota University System Chancellor Mark Hagerott says that conversations he had last summer with a couple of people who had visited the oil patch and witnessed the emptying out of Bakken oil man camps was the impetus for the Bakken U initiative. One of those men was Gaylon Baker, Stark County Development Corporation executive vice president. “Part of our job in economic development is to make sure we have

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WORKFORCE

an adequate work force. We pay attention to workforce changes,” Baker said. When Baker witnessed first-hand companies in the Bakken laying off workers in response to declining oil prices, he expressed concern to Hagerott that North Dakota would lose members of its workforce if something wasn’t done to stem the tide of out-migration. Many of the workers have families, homes and vehicle payments so unless they receive training that will give them skills to pursue other jobs, they likely will leave North Dakota after they are laid off, Baker says. “In order for them to preserve that lifestyle, to stay here, we need to offer them other support,” he says. Offering the energy industry workers educational opportunities will help them move forward with the next chapter of their lives, whether that is moving up the ladder in their oil industry job or working in another job sector in North Dakota. Listening to the concerns of Baker and a NDUS staff member who had witnessed the emptying out of man camps convinced Hagerott that the higher education system needed to do something to help the state’s oil field workers pursue post-secondary degrees. “I felt there was enough anecdotal evidence we needed to do something,” Hagerott says. The first thing the NDUS and the five western North Dakota colleges and universities did was to design Bakken U web sites so they could start getting the word out that there are higher education institutions within an hour’s drive of their job sites, Hagerott says The next step was to offer scholarships .The first two universities to announce scholarships were available were Dickinson State and Minot State. Williston State College and Bismarck State College soon will offer Bakken U scholarships, Hagerott says.

Education Pays In Multiple Ways

In January, Warren Logan, learned he landed a $5,000 scholarship from DSU. Logan, who works for National Oilwell Varco will use the money to pay for classes he is taking online from his home in Dickinson as he pursues a degree in business administration. Logan attended college for a short time 16

The BAKKEN MAGAZINE MARCH/APRIL 2016

EYEING ENERGY EDUCATION: Other winners of Bakken U funding will pursue jobs in petroleum engineering or non-oil work still within the state. PHOTO: MINOT STATE UNIVERSITY

after graduating from high school in Wyoming but was immature at the time and didn’t have much focus so he quit, he says. He moved to North Dakota from Wyoming several years ago after working in the construction industry. For the past six years, Logan has worked for National Oilwell Varco. Married and the parent of three young sons, Logan wants to earn a college degree that will help allow him and his family to remain in the community in which they put down roots. “I definitely love the things that Dickinson has to offer. They have a great recreation center here. They have a program for hockey. The church is great here.” Logan says Meanwhile, his oldest son also attends pre-school in Dickinson. “There’s a strong sense of community, it’s a faith-based, family based community. It’s just a great town,” he says. Logan hopes that his business administration degree will help give him job security with National Oilwell Varco. “I’d like to retire after 20 or 30 years with a company instead of just moving around and around. I certainly think it’s a company I’d like to grow old with,” Logan says. And, even if that doesn’t happen, Logan believes that earning a business administration degree is valuable because it will make him more marketable. “There are so many different industries you can take that into,” he says. Besides helping pay for his education, the $5,000 Bakken U scholarship he was awarded

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WORKFORCE

shows him the importance the state of North Dakota and the energy industry places on Bakken oilfield workers, Logan says. “Credit to the Petroleum Council and the university system for providing this,” he says. “Certainly they’re saying, ‘Stay here. There are good things here. They’re saying ‘We want you here.’” Jennifer Hutchins is another Bakken U scholarship winner. Hutchins was awarded one

of two $750 scholarship winners from Minot State University. Hutchins, whose husband is an oil industry worker, is a freshman at MSU earning a nursing degree. Her daughter also is attending college so money is tight, Hutchins says. A co-worker told her about the Bakken U scholarship. “I immediately went and applied,” Hutchins said. Earning a nursing degree will help give her family job security, she believes.

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Given low oil prices, her husband’s job future isn’t certain. “You never how long that will last,” Hutchins says. An administrative assistant at the MSU Student Health and Development Center, Hutchins wants to continue at her same workplace after she earns her LPN degree. “I love working at Minot State. It’s a big family,” she says. John Newcomb, a freshman at Minot State University also hopes to stay in North Dakota after he graduates from college. Newcomb, who also was awarded a $750 Bakken U scholarship, plans to take his general course requirements at MSU, and then transfer to the University of North Dakota and pursue a degree in petroleum engineering. “I really do like North Dakota,” Newcomb says. “I would like to live here a long time if I could.” Newcomb, who is working at Minot Aero Center while he is attending college, says the Bakken U scholarship will help him realize his goal of paying for college. “My parents said they would help me out, but I’ve always wanted to pay for it myself,” he says. The enthusiasm and gratefulness Logan, Hutchins and Newcomb expressed about the Bakken U scholarships is a benefit that transcends money. “It seems to be working as a communication device that you value them,” Hagerott says. “To find those people who are really interested in going back to school and continuing their education, we really want to be sure we’re there for them.” The final goal of Bakken U, Hagerott says, is for the energy industry in North Dakota to offer seamless educational opportunities or as he calls it, “soup to nuts,” for anyone who wants it. “Someone could eventually work their way up and eventually be a petroleum engineering major at UND. That’s the goal,” Hagerott says. Author: Ann Bailey Staff Writer, The Bakken magazine 701-738-4944 lgeiver@bbiinternational.com

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EXPLORATION & PRODUCTION

ANSWERS FROM

The Bakken Analyst Johnathan Garrett, an oil and gas expert from globally renowned analytics firm Wood Mackenzie, talks prices, contracts and new strategies. By Patrick C. Miller

Wood Mackenzie is known worldwide for its analysis of global markets in energy, metals and mining to provide businesses with the information they need to make strategic decisions. Forecasts based on the company’s proprietary data and modeling and global teams of experts are used internationally by governments and financial institutions. Wood Mackenzie’s Bakken expert is Johnathan Garrett, a principal analyst on the company’s U.S. lower 48 upstream research team. Located in the Houston office, Garrett studies the Bakken’s operator activity, production trends, crude export capacity and enhanced completions. In the low-oil-price environment, he says there are certain parts of the Bakken that remain attractive for producers. “North Dakota is great and the footprint is huge and it’s very oily, but there’s only a very few number of sub-plays that are even remotely close to being economically competitive right now at $30 oil,” Garrett says. “The southern portion of the Nesson anticline 20

is pretty good. The Fort Berthold Reservation area is pretty good, along with areas due west of the Nesson anticline. Other than that, there’s nothing that makes sense—even with the well costs below $7 million. Right now in North Dakota, it’s tough.”

Taking it on the road

Some oilfield services companies—large and small—are moving fleets and crews to the Permian and Eagle Ford shale plays in Texas. Some oilfield service companies have stacked fleets in the Bakken and moved personnel to other plays, such as the Eagle Ford or Permian in Texas. Some have moved an entire fleet to Texas. As one oilfield service company told The Bakken magazine, this is indicative of what companies must do to survive. “What you don’t want to have happen is that you get rid of people who have a lot of really good experience and you sell off the equipment at a fraction of what you paid for it,” Garrett said. “If you can keep those people working and that equipment well-

The BAKKEN MAGAZINE MARCH/APRIL 2016

maintained enough and working elsewhere outside of the Williston Basin, that’s a pretty smart move.” He noted that many smaller service companies have a have a presence in most of the major oil and gas producing basins around the United States. “Going where’s there’s activity, that’s the nature of the industry,” Garrett explained. “As of right now, if you’re looking at parts of plays that are the best returning throughout the country, most wouldn’t argue that the best parts of the Permian are probably more competitive than anywhere else in the country right now. That’s where you still see activity. And where you see activity, that’s where oil services will go.”

Hitting the floor on service prices

Garrett says there’s a limit to how far oilfield service companies can reduce their prices. When oil prices come up, it’s likely those costs will rise as well, but not to the levels previously seen. Optimization and improvements in efficiency will keep drilling costs lower overall.

“From 2014 to 2015, you generally saw at 30 to 35 percent decrease in oil costs, and most of that came on the back of deflation in the service sector, particularly in North Dakota because it’s so isolated relative to population centers,” Garrett explains. “What you saw over the last few years was a rapid buildup in equipment, services and people.” Just as North Dakota was beginning to get a handle on the situation, world oil prices plummeted. “In 2016 it’s a bit different in that you’re starting see the pressure to begin to mount with the service companies,” he adds. “It’s our view that you’ll continue to see some consolidations and you might even see some bankruptcies.” Garrett also says, “The well cost reductions that you’ll likely see in 2016 will be a function of the optimization of efficiencies—things done by the operators—and less so just rolling over on prices from the service companies. I think we’re getting close to the bottom.” Service costs will go up when oil prices rise

EXPLORATION & PRODUCTION

When oil prices eventually go back up, operators shouldn’t expect to see the same pricing structure from oilfield services companies that they had when crude was low. However, Garrett doesn’t see those prices rising back to the levels they were at will when drilling operations were at a frenzied pace. “When history is written, there’s going to be an anomaly we saw over a couple years back,” he says. “Those type of margins are likely over.” In oilfield services, drilling and pressure pumping are being stressed the most. Companies are looking at artificial lift, flow assurance and specialty production engineering to make up for those losses, according to Garrett. “If you have any extra money to spend, it might not make sense to put it into drilling or completing a well, but it would certainly make sense if you could slow the decline of the existing production,” he says. “That way, you might get more out of what you do as a result of drilling or completing a new well.” Well completion costs will be lower

DELIVERING ANSWERS: Johnathan Garrett, a Wood Mackenzie analyst in the company's Houston office, share's his expertise on North Dakota's oil and gas industry during the Bakken Conference and Expo last year in Grand Forks, North Dakota. PHOTO: THE BAKKEN MAGAZINE

Garrett says that even if oilfield services costs rise with oil prices, the overall cost to complete a well in the Bakken be far lower than it was before the crude price collapse. “There are two levers being pulled at the same time,” he explains. “You have the service sector in terms of deflation and then you also have this preference to enhance your completions. If you’re using a lot more of everything in your well—whether it’s water and sand—that’s costly. But the materials you’re using are becoming cheaper.”

When oil returns to $60 to $65 a barrel, Garrett expects to well completion costs to increase. Infrastructure improvements matter Lower oil prices have provided Bakken infrastructure to catch up to some degree, and Garrett sees that a positive long-term development for the play. “From an infrastructure build-out, I think the Bakken’s in pretty good shape right now,” he says. “It seems that there a bit of an over-build in crude-by-rail loading facilities. Some of these facilities on the East Coast are relatively

idle. There’s situation in Oregon where they switched from crude by rail to ethanol by rail. You’re not getting the expected volumes given the decline in the differential.” Garrett notes that the completion of crude pipelines such as the Enbridge Sandpiper and the Dakota Access will also help lower the price of Bakken oil, but not enough to make a significant difference. “It would make a good situation more favorable, but it won’t make a bad situation good,” he says. A time for more science?

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Production maintenance and flow assurance will continue to be the key services in the Bakken. â&#x20AC;&#x153;How can you arrest or slow your declines? Thatâ&#x20AC;&#x2122;s pretty important,â&#x20AC;? Garrett says. â&#x20AC;&#x153;Those are the parts of the business that donâ&#x20AC;&#x2122;t get talked about as much, but your dollar is probably better spent there than anything else right nowâ&#x20AC;&#x201D;unless you have the absolutely top-tier acreage.â&#x20AC;?

Wood Mackenzieâ&#x20AC;&#x2122;s global outlook

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Earlier this year, Wood Mackenzie released its report on what to look for in the oil and gas industry global upstream sector in 2016. The report says that it will be a challenge for the industry as companies struggle through the oil price cycle. According to the report, â&#x20AC;&#x153;Capital budgets will be further cut and only the more robust, or strategically important, new projects will get the green light. Exploration spending will be hit hard and will be less than half the 2014 peak.â&#x20AC;? Wood Mackenzie believes a lack of new investmentâ&#x20AC;&#x201D;combined with ageing, high-cost oil fieldsâ&#x20AC;&#x201D;creates a challenging situation for operators and governments, but that doesnâ&#x20AC;&#x2122;t necessarily translate into a lack of opportunities in countries such as Mexico and Iran. As Garrett predicted in the Bakken, merger and acquisition (M&A) activities are expected to increase globally â&#x20AC;&#x153;as the more financially sound players make counter-cyclical moves.â&#x20AC;?

The Americas

The inventory of drilled but uncompleted (DUC) wells

is at an all-time high across most major plays in the lower 48 states with an estimated 2,500 to 3,000 horizontal DUCs. This will be an important variable in 2016 as wells are brought online â&#x20AC;&#x153;The DUC count was closely watched last year but will be even more important in 2016 as the wells are brought online. It represents an important variable in Lower 48 production but is disconnected from the more scrutinized rig count,â&#x20AC;? says the companyâ&#x20AC;&#x2122;s report. â&#x20AC;&#x153;The growth in that backlog in 2015 signals that a disproportionate amount of capital was spent on drilling compared to completion, a trend we see reversing,â&#x20AC;? the report continues. â&#x20AC;&#x153;With independents striving for cash flow neutrality, it is unlikely that drilling competes with completion for capital. Most long term drilling contracts have expired and operators will drill primarily on spot contracts.â&#x20AC;? Wood Mackenzie forecasts that the draw-down on DUCs will remain relatively flat through the beginning of 2016, but is expected to accelerate significantly in the second half of the year as operators â&#x20AC;&#x153;look to mitigate production declines in the most financially attractive option possible.â&#x20AC;?

Canada

Across the border, Canada will forego any oil sands project, but will see a construction start-up with the PETRONAS LNG project in British Columbia. â&#x20AC;&#x153;The LNG project is now advantaged by the depreciated Canadian dollar and lower wage costs brought on by low oil prices. Buoyed by the partnerâ&#x20AC;&#x2122; continue drilling efforts in the Mon-

EXPLORATION & PRODUCTION

‘How can you arrest or slow your declines? That’s pretty important. Those are the parts of the business that don’t get talked about as much, but your dollar is probably better spent there than anything else right now—unless you have the absolutely top-tier acreage’ Johnathan Garrett, principal analyst, Wood Mackenzie

tey play, the liquefaction project is making steady progress on securing the remaining regulatory and environmental approvals,” Wood Mackenzie says.

China

The downturn in China’s economy has been responsible for a reduced world oil demand and a glut in supply. Wood Mackenzie sees significant changes ahead in how the country’s fiveyear plan impact its oil and gas sector when marketization becomes a key theme. “We’ve already seen significant policy changes in 2015; in natural gas pricing, licensing rounds and retail fuel pricing. We expect more moves to reduce NOC (national oil company) dominance, encourage new domestic players and diversify sources of investment,” the report says. Wood Mackenzie says that PetroChina started asset divestments and strategic reorganiza-

tion of its pipeline business in late-2015 and that big midstream asset sales are possible in 2016. “Depending on the scale, this could have a profound impact on the gas market and reshuffle the entire industry value chain,” according to the report. “We expect more domestic companies will emerge in the upstream sector with government support through licensing rounds and mixed ownership.” Author: Patrick C. Miller Staff Writer, The Bakken magazine 701-738-4923 pmiller@bbiinternational.com

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IN PLAY Transport Methods Are Changing

41%

December 2015

59%

December 2014

73%

December 2013

PIPELINE December 2012

20%

December 2013

39% December 2014

64% December 2012

RAIL

27%

52%

December 2015

Bakken Transport Trends: Newson Gale Feels Safe By The Bakken Magazine Staff

Mike O’Brien wants to of Bakken crude transported via take the shock out of the rail, truck or pipeline as his team Bakken. As the head of market- works to expand. ing for Newson Gale, O’Brien oversees the global operations of the U.K.-based static control service and product provider that works with a range of companies from small trucking firms to major oil refiners to ensure static electricity ignitions do not happen. The company continues to expand into the upstream, midstream and downstream sectors of the U.S. oil and gas industry, including the Bakken. O’Brien is in-tune with the many ways used to reduce the static sparking possibility present when fluids are moved or transferred from one vessel to another. He is also focused on the changing percentage 24

“In 2012, we had some loading rack builders that said we needed to be in the Bakken,” he says. “That spawned a new product development effort and launch for us. The expansion of the industry and the pace for which it took off was astounding.” In the past three years, the company has moved nearly 2,000 truck mounted grounding systems in North America through its work with a vertically integrated oil major. Its experience in working with trucking outfits could be a boon for O’Brien’s efforts in the Bakken, even though the company is well positioned to

The BAKKEN MAGAZINE MARCH/APRIL 2016

serve the crude by rail sector. Although O’Brien is certain the opportunity for helping to minimize static grounding-related incidents exists anywhere in the Bakken from the wellhead to the truck to the oil loading facility, he is focused most on rail and trucking. The amount of Bakken crude shipped out of the region via rail has changed over the past year, however. Historically, the lack of pipeline takeaway capacity has forged crude-by-rail as the number one transport method. But, as more pipeline capacity has been installed coupled with the tightening crude price differential between Brent and West Texas Intermediate, crude by rail shipments have now become the second transport method used today.

As of December, rail shipments from the Bakken accounted for 41 percent of all transport methods used, now trailing pipelines. This year, several midstream entities have updated their plans

‘We have a range of equipment that offers various levels of protection.’ Mike O'Brien, head of marketing, Newson Gale

IN PLAY

to build and bring online pipeline takeaway capacity or pipeline gathering capacity within the Bakken. Future pipeline infrastructure capacity shows that within the next three years, pipeline will be the dominant means to move Bakken crude. When the price differential between WTI and Brent remains small, producers are able to allow for the added time to move Bakken crude to market without the fear of losing out on a more favorable price that could have been achieved by sending oil via rail faster to a hub. Even with the changing dynamics of moving crude out of the Bakken starting to happen, O’Brien believes his company’s approach to reducing static electricity in the Bakken will prove successful as companies continue to update their safety efforts and compliance protocols. “We have a range of equipment that offers various levels of protection,” he says. Static grounding procedures, according to O’Brien, need to happen whenever a combustible

fluid is being transferred from one vessel to another. Such procedures should take place on the well site or at the transload facility where trucks pass tanker-stored oil into rail cars. To cancel out the possibility of a static-electricity-induced spark and a resulting explosion, the vessel from which the oil is being transferred needs to be grounded to the earth. “Even at the basic grounding level we add value. We use tungsten carbide teeth on the clamps to ensure the teeth are sharp and the tips will penetrate any paint or debris present on the clamping surface,” he says. Even with the changing trends in Bakken crude takeaway transport methods happening, O’Brien says the main hurdle for his transport-linked firm is still about appropriately serving the massive Bakken market. “Our opportunities are big, but organizationally we are struggling to keep up,” he said. The opportunity is directly linked to cancelling out static

TRUCK-MOUNTED STATIC REDUCTION: Newson Gale can provide truck-mounted units that allow static electricity to be canceled out during truck-related operations. At rail yards or midstream facilities, the company has other options. PHOTO: NEWSON GALE

electricity, an element of the oilfield O’Brien says is becoming a more serious concern of oilfield entities. “With our stuff you can

avoid a lot of bad press for something that is easy to take care of,” he says.

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