The Bakken Magazine - October 2014

OCTOBER 2014

Watford City’s Main Story Past, Present, Future Page 24

Plus

5-Year Outlook Page 40

AND

An Economist's Perspective On Jobs Page 48

www.THEBAKKEN.com Printed in USA

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CONTENTS

OCTOBER 2014

VOLUME 2 ISSUE 10

Pg 40 EXPLORATION & PRODUCTION

The 5-Year Bakken Outlook

KLJ’s oil and gas impact study reveals the elements that will effect economic growth and hydrocarbon production in the next half-decade.

BY EMILY AASAND

DEPARTMENTS

IN PLAY

48 Economist Examines API Survey Of Bakken

David Flynn, a noted North Dakota economist, weighs in on a recently completed American Petroleum Institute assessment of the Bakken shale play.

BY PATRICK C. MILLER

Pg 24

INFRASTRUCTION & CONSTRUCTION

The Heart Of The Bakken The growth and success of Watford City, North Dakota, hinges on collaboration, leadership, and execution of its long-term development plan.

BY LUKE GEIVER

6 Editor’s Note

The Making Of The Watford City Story

BY LUKE GEIVER

8 ND Petroleum Council My History With Oil

BY TESSA SANDSTROM

10 Events Calendar 14 Bakken News

Bakken News and Trends

ON THE COVER: Watford City Leaders from left: Gene Veeder, Brent Sanford, Ron Anderson, Darick Franzen.

PHOTO: JESSIE SCOFIELD

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5

EDITOR'S NOTE

The Making Of The Watford City Story This month’s cover photo shows the leadership team from Watford City, North Dakota, standing in the middle of the town’s busiest street. These men are the basis of the feature story, Luke Geiver

Editor The Bakken magazine lgeiver@bbiinternational.com

For the Latest Industry News:

www.TheBakken.com

“The Heart Of The Bakken,” and represent the reason I asked myself: At what point during or after a conversation do we realize that it is one we will never forget? On a beautiful late-summer morning much like the one pictured on the cover, I sat down with these men at Outlaws Bar & Grill to discuss a story that until now, has not been told. We ordered food, I tried to take notes and ask questions pertinent to the oil and gas industry, legislators and those with a stake in the Bakken. But mostly, I just listened, turning my head from speaker to speaker every few minutes.

Shortly after we started talking, I knew this conversation would stay with me forever.

Watford City is at the center of the Williston Basin development. One-third of the state’s oil production and drilling rig operation occurs within 80 miles of where the men on the cover are standing. What happens in Watford City impacts the entire trajectory of the Bakken development and the state of North Dakota. These men know this more than anyone, as their daily duties the past five years have evolved from ranching, running a car dealership, organizing chamber meetings or working on community enhancement projects. They speak candidly with energy service firms and exploration and production firms nearly every day. They run budgets based on money they don’t have for projects that needed to be finished last year. They provide tours, insight and information to anyone lucky enough to earn their time. Their story is one you’ve never heard and one we should all remember.

Put aside the reports of drugs, despair and struggle. Amidst the nearly impossible situation of unprecedented growth that includes infrastructure bottlenecks, supply pricing bordering on insanity and a way-of-life transformation that turned a 2-mile-square small town into a sprawling community that seems to have no outer limits, these four men have channeled their passion for the city into innovative, collaborative solutions that have kept the town from becoming Oil Town, USA. It may appear that there is little glamour to a story that details the formation of a nonprofit daycare, late-night discussions on road maintenance or water tower construction, but look a little deeper. There is value to anyone looking to understand how Watford City—the city at the heart of the Bakken—will help or hinder oil production and the state’s economic vitality based on the direction of four men who made time for this writer on a late-summer morning that unveiled a story about homesteading, failed attempts at economic development pre-Bakken and the reality that once people move to Watford City, they never want to leave. The problem is, with no place to stay and nothing to do, they might not have a choice.

Thankfully, that concern may not become a reality. Watford City leadership has a well-constructed plan for the future based on industry intel, proven financial modeling and an uncanny grasp of the island empire they are building. They are adamant about many things, but three elements of their story represent the backbone of what they are all about. First, they don’t want handouts, they are willing to borrow (they just don’t have the city income to borrow against).

Second, they have a plan based on why money should be spent, not just where. And third, they are magnetized by the power of place and the pull of a hometown that compels them to stay and see the city succeed, because they have come to realize that as the simple saying goes: home is where the heart is.

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EDITORIAL

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Editor Luke Geiver lgeiver@bbiinternational.com Staff Writer Emily Aasand eaasand@bbiinternational.com Staff Writer Patrick C. Miller pmiller@bbiinternational.com

PUBLISHING & SALES Chairman Mike Bryan mbryan@bbiinternational.com CEO Joe Bryan jbryan@bbiinternational.com President Tom Bryan tbryan@bbiinternational.com

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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.

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7

NORTH DAKOTA PETROLEUM COUNCIL

THE MESSAGE

My History With Oil

By Tessa Sandstrom

The intensive care unit is not a place to spend a weekend. Unfortunately, I recently spent time there to visit my four-week-old niece. I distinctly remember

the plastic tubes hooked into her nose during that visit. The tubes were in place to provide her with vital antibiotics

8

needed to treat a serious infection. As I left the hospital after visiting her, I remember thinking about those tubes and how they correlated to a book I had been reading detailing innovative technologies or inventions that at one time were deemed remarkable, but today, seem commonplace. It was clear to

The BAKKEN MAGAZINE OCTOBER 2014

me that those plastic tubes, however commonplace to an ICU unit they might be, were a remarkable invention. The tubes are derived from oil.

“Our lives are surrounded and supported by a whole class of objects that are enchanted with the ideas and creativity of thousands of people who

came before us: inventors and hobbyists and reformers who steadily hacked away at the problem of making artificial light or clean drinking water so that we can enjoy those luxuries today without a second thought, without even thinking of them as luxuries in the first place,” says the book, “How

NORTH DAKOTA PETROLEUM COUNCIL

We Got To Now: Six Innovations That Made The Modern World.” That passage of the book sticks out to me today after my visit to the ICU, and it is the basis behind a point all of us need to remember, but often forget: oil is a remarkable product that we need to be thankful for even if it has become commonplace.

Oil, of course, has been in use for centuries before it made North Dakota the eco-

A bottle of Bakken light sweet crude.

nomic powerhouse it is today.

Oil that seeped naturally to the surface was used for fueling lamps, making paint and mortar, and waterproofing boats, among other uses. Refining of crude oil began as early as the mid-1700s, and scientists, inventors and innovators were continually learning new ways to use this valuable resource.

Among them was the refining of kerosene from crude oil.

Up to the mid-19th century, lamps were fueled by oil derived from whale fat. This oil burned with less odor and smoke than most fuels and also served as a great lubricant for machine parts in trains. The high demand for this product took a huge toll on whale populations until 1857 when the kerosene lamp first appeared on the market. Kerosene was a cleaner burning and more affordable fuel than whale oil, which was abandoned almost overnight. Oil has, of course, been utilized and tweaked for thousands of other uses outside of the kersone lamp. Most notably for me, oil is used in plastics. From the disposable gloves that help protect the spread of disease to the smallest tubing used to deliver IVs and antibiotics for people such as my little niece in that ICU in Fargo, North Dakota.

Plastics, for me, show the truly

Williston Basin core samples, including the Middle Bakken and surrounding layers.

innovative transformations of a product that has gone from remarkable to commonplace.

It is truly amazing to consider the ingenuity that has gone into turning a black, dense rock two miles below Earth’s surface into a product that can be molded into any shape and used to save lives.

It’s a material so diverse that it impacts every waking moment of our lives. It is used to create synthetic materials we wear, it warms our homes, is used in toothpaste and medicine to keep us clean and healthy, and offers the main ingredient to fuel, the same fuel used in the helicopter that got my niece to Sanford’s ICU in minutes rather than hours for those plastic tubes to be inserted. It is fascinating what that chunk of rock can do even if it is taken for granted. It is difficult to weave

a complete story about all of the positive impacts oil has had on our lives and society, but for me, the story is about my niece and those plastic tubes. Hopefully your oil story doesn’t involve the ICU. And, if you aren’t quite sure what your oil story might be, consider this. If you wanted to live without fossil fuels, you would have to go back to the early 1800s, if not earlier. For my niece, that would mean pre1800s medicine, and no plastic tubes. I can’t help but feel thankful for modern medicine and be proud to work in an industry that plays such a crucial role in delivering it.

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

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EVENTS CALENDAR

The Bakken magazine

will be distributed at the following events: Produced Water Reuse Initiative: Rocky Mountains Tight Oil & Shale Gas Plays October 29-30, 2014 Denver, Colorado Issue: October 2014 The Bakken magazine

Crude By Rail 2014 October 29-30, 2014 Houston, Texas Issue: October 2014 The Bakken magazine

Energy Generation Conference

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

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

The Bakken Oil Conference & Expo

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

10

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13

BAKKEN NEWS Crude Characteristics Up For Debate

BAKKEN NEWS & TRENDS

The U.S. House Subcommittee on Energy and Oversight met in September to get a better understanding of the scientific analysis of the characteristics and behavior of Bakken petroleum, to see if it is different from other types of light, sweet crude.

Subcommittee Chairman Cynthia Lummis, R-Wyo., said, “This [Bakken crude] is an important resource for the United States and it deserves due attention. The assertion that volatility necessarily correlates to increased ignitability and flammability has generated significant controversy."

Witness testimony from the U.S. Pipeline and Hazardous Materials Safety Administration and the U.S. DOE clarified the context of volatility, explaining that petroleum from the Bakken region is properly classified as a “light, sweet crude oil” and not outside the norms for light crude oils. Further, the DOE witness stated that more scientific analysis is needed to better define the relationship between volatility and ignitability/flammability.”

The hearing included representatives from the PHMSA, the DOE, the North Dakota Petroleum Council, Turner, Mason & Co., and the Syracuse Fire Department.

14

Kari Cutting, NDPC vice Table 1: Comparison of Crude Properties president, in a joint hearing Domestic Crudes API Gravity Sulfur (wt. %) TAN (mg KOH) with two PHMSA representaLight Sweet tives, testified on a recent DeBakken (1) (2) 40 to 43* 0.1 <0.1 partment of Transportation WTI (4) (5) 37-42 0.42 0.28 announcement that claimed LLS (2) (4) 36-40 0.39 0.4 Bakken light sweet crude oil is more volatile than other Eagle Ford (2) 47.7 0.1 0.03 sweet light crudes.

Eagle Ford Light (2) 58.8 0.04 0.02 The committee asked the PHMSA and DOE repreInternational Crudes API Gravity Sulfur (wt. %) TAN (mg KOH) sentatives on the panel how Light Sweet PHSMA knows Bakken crude Brent (2) (6) 37-39 0.4 <0.05 is more volatile than other Medium light sweet crudes. Neither representative could answer Arabian Light (2) 33 1.98 <0.1 directly how PHMSA knows Arabian Heavy (2) 27.7 2.99 <0.1 this.

Heavy As the hearing continWestern Canadian Select 21.3 3.46 0.93 ued, the lack of information (Heavy Sour) (3) and the unacceptable anDalia (High TAN) (2) (7) 23.1 0.51 1.6 swering abilities of PHMSA and DOE seemed to cause tension and uncertainty about the PHMSA’s Bakken claim.

Catalytic Resources Bakken In Cutting’s testimony, she discussed the steps taken Crude Treatment Numbers by the industry to properly Bakken Crude Refined Bakken Test Feedstock Product classify and ship Bakken crude oils, as well as the API (D1298) 43 37.2 industry’s safety record and Flash point (D93) 20ºC (68ºF) 30ºC (86ºF) goals.

Vapor Pressure (D6377) 58.5 kPa (8.5 psi) 8.3 kPa (1.2 psi) “Three independent D86 IBP 38ºC (100ºF) 92ºC (198ºF) studies have now shown that D86 T50 241ºC (466ºF) 274.5ºC (526ºF) Bakken crude is similar to D86 T90 <300ºC (65%) <300ºC (60%) other North American light BS&W (D4007) 0 0 sweet crude oils in gravity, Corrosion (TM-0172 E A vapor pressure, flash point Sulfur ppm (D4294) 632 733 and initial boil point,” said Third party independent laboratory test results Cutting. “According to these studies, Bakken crude oil chemical properties attest to

The BAKKEN MAGAZINE OCTOBER 2014

BAKKEN NEWS

its proper classification as a Class 3 flammable liquid. This category contains most of the valuable fuels and fuel feedstocks offered for transportation in the United States.”

Cutting further testified that hazardous materials transported by rail arrive safely at their destination 99.997 percent of the time, but that all stakeholders recognize the importance of implementing additional safety measures to reduce the probability of the remaining 0.003 percent.

"Routing analysis, infrastructure inspection and maintenance, railcar design, and additional training and information for emergency management personnel are all efforts being addressed," she said.

The various testimonies led to an inconclusive understanding of whether Bakken light sweet crude has different characteristics than other U.S. light sweet crudes or is more volatile.

According to the Subcommittee, “…witnesses today including from the Department of Energy, agreed that such a claim requires further evaluation.”

The North Dakota Department of Mineral Resources Oil and Gas Division held a similar meeting a month later to address the transportation safety and marketing of crude

PHMSA Data Table E

NDPC Data

March - May (11 Samples) Dates: 3/17/14 - 5/2/14

Flash Point (ºF) D86 IBP (ºF) VPCR 4 @ 100 ºF (psi) Ethane (% Vol) Propane (% Vol) Butane* (% Vol) C2-C4

Rail Only (49 Samples) Dates: 3/25/14 - 4/18/14

Average

Min

Max

Average

Min

Max

<50 87.0 12.28 0.20

79.1 10.22 0.06

94.4 14.28 0.29

<73 100.3 11.52

96.7 9.57

104.1 12.85

0.23

0.13

0.33

1.38 3.49 4.65

0.85 3.01 0.00

1.95 4.44 6.68

1.39 3.32 4.95

1.02 2.63 3.91

1.95 4.24 6.44

PHMSA Data Table E

NDPC Data

Total (88 Samples) Dates: 2/24/14 - 5/2/14

Flash Point (ºF) D86 IBP (ºF) VPCR 4 @ 100 ºF (psi) Ethane (Liq Vol %) Propane (Liq Vol %) Butane* (Liq Vol %) C2-C4s

Total (152 Samples) Dates: 3/25/14 - 4/24/14

Average

Min

Max

Average

Min

Max

<50 88.1 12.42 0.23 1.45 3.55 5.17

79.1 10.10 0.06 0.85 2.74 0.00

97.5 15.10 0.40 2.08 4.48 6.88

<73 99.5 11.69 0.24 1.55 3.66 5.45

91.9 8.93 0.08 0.84 2.35 3.33

106.8 14.37 0.67 3.13 5.50 9.30

produced in the Bakken. The DMR staff took testimony from 19 witnesses in front of a standing-room only crowd, and following each testimony, the governor and commission staff were given the opportunity to ask questions.

The DMR hearing included commentary from companies that work with alternative technology to condition Bakken crude, as well as other perspectives on transportation, infrastructure and well site conditioning.

Catalytic Resources, a

research and development company that specializes in commercializing new ways of refining light crude oils, testified on the conditioning of Bakken crude. The company has created a plug-in module to refine Bakken crude to reduce its volatility.

“With this module, we’ve raised the flashpoint significantly, decreased the vapor pressure significantly, increased the initial boiling point, and improve the API gravity,” testified Jon Ramer, vice president of Catalytic Resources.

The alternate technology is used at the well site and, according to the company, can be up and running in about six months.

“This shows there’s a safer way to convert light end crudes into a more marketable crude,” said Ramer.

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BAKKEN NEWS

Water Facility Easing Limits Allotted To Operators The North Dakota Industrial Commission has approved plans for a water storage facility to help the Western Area Water Supply Authority provide additional drinking water capacity in McKenzie County and reduce restrictions or temporary halts of water sales to Bakken producers in the area.

The commission approved engineering and bids for a 2 million gallon water storage facility in McKenzie County near WAWSA’s Indian Hills reservoir south of the Missouri River. The construction bid opening was set for Oct. 21. The expected completion date is August 2015 if the NDIC approves the bids.

“This will help us to satisfy our customers’ needs and keep our industrial customers happy with the water they’re receiving in the volumes they’re requesting,” says Jaret Wirtz, WAWSA executive director.

The Western Area Water Supply Project was created by the North Dakota Legislature in 2011 primarily to provide Missouri River water for municipal and rural needs in Burke, Divide, McKenzie, Mountrail and Williams counties. Communities served include Williston, Watford City, Ray, Tioga, Stanley, Wildrose, Crosby, Fortuna, Noonan and Columbus.

The project is expected

16

Western Area Water Supply Project

to cost approximately Rural Water District Map $460 million to complete. It is mostly funded by loans from the Bank of North Dakota, which are being repaid through sales of water to the oil and gas industry in the Bakken. Wirtz says WAWSA earns up to $2.5 million a month in revenue from industrial water sales depending on capacity availability, weather, rig location, etc. The new facility will increase the system’s storage capacity from 22 million gallons to 24 million gallons.

“The growth that we’ve experienced in McKenzie County is a lot larger than we ever anticipated, not only on the domestic side, but also on the industrial,” Wirtz says. “Because of the unprecedented growth that we’re experiencing—especially in the Watford City area—a lot of that storage is taken up.”

The lack of storage capacity on the south number of slowdowns and side of WAWSA’s system shutoffs we could potentially has caused some shortages for industrial users in McKen- incur. Consistent sales helps keep WAWSA on track to zie County. paying back our state debt.”

“The limited amount of Water is treated at the storage has affected numerWilliston Regional Water ous slowdowns in sales,” Treatment Plant and then Wirtz explained. “The adtransported to towns and ditional storage will limit the

The BAKKEN MAGAZINE OCTOBER 2014

rural areas in the project's service area. Based on population estimates, the project is expected to provide drinking water to an estimated 160,000 people by 2035.

BAKKEN NEWS

Vitesse Energy Acquires 19,000 Net Acres In Williston Basin Vitesse Energy LLC has acquired non-operated oil and gas assets in the Williston Basin from EnerVest Operating LLC for a preliminary purchase price of $186.5 million.

The assets include a working interest in approximately 600 wells and more than 19,000 net acres primarily in Williams, McKenzie and Mountrail counties. Vitesse Energy, a subsidiary of Leucadia National Corp., was founded last April and is located in Centennial, Colorado.

EnerVest is one of the 25 largest oil and gas companies in the U.S., with more than 28,000 wells across 15 states, 4.8 million acres under lease and more than $9 billion in assets under management.

Brian Cree, president and CFO of Vitesse, said that on average, the firm has a 4.5 percent working interest in the wells acquired from EnerVest.

INVESTMENT PROFILE: A drilling rig operates on a well site that Vitesse Energy has chosen for its Bakken investments.

PHOTO: VITESSE ENERGY LLC

“Those assets are operated by premier operators in the Williston Basin,” he noted. “We differentiate ourselves by focusing on what we consider the core of the Bakken and Three Forks play rather than paying less for leases, acreage and assets on the outer edges of the play.”

Cree described the Vitesse corporate strategy as acquiring assets in areas of the Bakken that offer the best economics, have the greatest amount of future drilling and provide the most upside from technological enhancements.

“Our niche is to utilize our sizeable balance sheet to acquire core non-operated working interest ownership from both larger companies like EnerVest

and from smaller entities or individuals that need to raise capital or reduce their exposure to increased drilling,” he explained.

Cree said the nature of the Bakken shale play minimizes the risk in acquiring oil and gas assets, but Vitesse takes that a step further by working with the top operators in the Bakken.

“When you can buy in the core of the field and participate with the best operators, we believe that strategy will yield the best rates of return for Vitesse,” he said.

Bob Gerrity, Vitesse Energy CEO, said, “This acquisition represents a synergistic addition to our existing high-quality acreage in the core area of the Bakken and Three Forks play, and

also provides new growth opportunities in developing areas of the field where technology continues to enhance returns,” Cree and Gerrity also manage Vitesse Oil LLC. Founded in August 2013, it is a Jefferies Capital-backed portfolio company. Both Vitesse firms are privately held companies that acquire non-operated working interest ownership in the Bakken to partner with operators.

“We’ve been funded to the tune of $350 million, and it doesn’t necessarily have to stop there,” Cree said. “We’re going to try to find additional acquisitions that meet our investment parameters.”

California Refiner Will Expand With Bakken Crude Alon USA Energy Inc. is basing its crude flexibility project on Bakken crude. The Dallasbased independent refiner has been formulating a refinery expansion plan since October 2013 for its Bakersfield, California, refinery that would allow the facility to import Bakken crude. The facility was recently

approved for a rail and refinery upgrade project that will expand the facility’s railcar unloading and oil storage capacity along with other equipment upgrade modifications. Construction of the upgrades could be complete by the end of 2015, and will include the construction of a double-loop track capable of

handling two unit trains per day.

The project will allow the facility to bring in 150,000 barrels of oil per day. The Bakken crude will be blended with other heavier crudes prior to refining.

The facilities expansion marks the continued success of a refinery that went bankrupt in 2008 under previous ownership.

In 2011, the refinery was restarted and currently has a 70,000 bopd production capacity.

“We are very pleased to receive the permit for our Bakersfield crude flexibility project and grateful for the community’s support of this initiative,” said Paul Eisman, CEO and president of Alon.

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BAKKEN NEWS

NRP, Macoma Investors Ramp Up Bakken Exposure

Natural Resource Partners LP, a Houston-based firm with operational headquarters in West Virginia, can’t get enough of the Bakken. In June 2013, NRP acquired roughly 13,500 net acres in the Bakken and Three Forks play from Abraxas Petroleum for $38.3 million. The purchase included 120 producing wells and interests to 22 wells that at the time of the purchase were in various stages of development. In October of the same year, the company acquired acreage in the North Dakota counties of McKenzie, Mountrail and Dunn from Sundance Energy for approximately $33.7 million that included interest in 100 producing wells and the ability to participate in future development locations.

This year, NRP has upped its investment commitment in the Williston Basin by nearly ten-fold. The company, which owns

18

interests in oil and gas, coal, aggregates and industrial materials, has purchased 5,700 net acres from Kaiser-Francis Oil Co. for $340 million. The acreage price can be attributed to the operator responsible for developing the acreage: Whiting Petroleum Corp.

“These assets give NRP extensive exposure to one of the premier oil plays in the U.S.,” Wyatt Hogan, president for NRP, said. According to NRP, production from the recently purchased acres is roughly 3,100 barrels of oil equivalent per day for 186 producing wells and 10 wells in the different stages of development.

Following its most recent Bakken purchase, the company said it would hedge nearly 80 percent of the acquired production volumes through 2016, a practice used in the oil and gas industry that will allow NRP to sell its portion of the oil produced through the transactions at current crude oil prices.

Macoma Capital Group, a New Yorkbased investment firm, sees the same value in the Bakken as NRP does. The company recently announced it has made its largest

The BAKKEN MAGAZINE OCTOBER 2014

NPR’s Bakken Investment History

October 2014: 186 producing wells

$340 Million

June 2013: 120 producing wells

$38.3 Million

October 2013: 100 producing wells

$33.7 Million

investment ever through a partnership it has formed with an undisclosed exploration and production company focused on the Bakken. Andrew Cohan, managing partner at Macoma said his firm is excited about the unique investment opportunity “at the heart of the Bakken shale play.”

Earlier this year, Macoma formed a illiquid special opportunity fund for its investors. The fund focuses on assets that are difficult to sell, but high in value.

Ag Could Thrive With Bakken Feedstock North American agriculture producers are taking advantage of the infrastructure and the natural gas produced in the Bakken to help ship ag-related products and create chemical products needed by farmers.

The Port of Vancouver, in Washington is supplying the Bakken oil and gas play with energy-related materials ranging from tubular goods to frack sand. Most of the railcars shipped from the port to the Bakken are returned without cargo, according to the POV. To alleviate delays in shipping agricultural products via rail from the Mid-Continent Region, the port signed a memorandum of understanding with the North Dakota Department of Agriculture that will allow the POV to provide dedicated rail services to the state. Agricultural products in the region will be shipped via empty railcars returning to the port.

“Once the eastbound cargoes have been delivered, the port and its logistics part-

THE NEW BOOM: The Jamestown, fertilizer plant will be the biggest investment in CHS history.

PHOTO: CHS

ners will fill cars with agricultural products for the return trip to Vancouver,” POV said.

“This unique service would not be possible without the support of our partners in North Dakota,” said Todd Coleman, CEO of the POV. Coleman and his team are working with BNSF to provide the railcar service. The port could eventually provide trains for agricultural products based on demand from the region.

Coleman and Curtis Shuck, POV director of economic development and facilities, have both been active in the Bakken oil play for several years, working to connect the Williston Basin to West Coast refineries and the rail lines.

CHS, a cooperative owned by farmers, ranchers and other co-ops across the U.S., announced its plan to build a $3 billion fertilizer manufacturing plant northeast of Jamestown, North Dakota, on a 640-acre site near Spiritwood Energy Park.

“With this decision, CHS is taking an important, strategic step on behalf of its member-owners by ensuring them a reliable domestic supply of nitrogen fertilizers essential to help farmers raise healthy, profitable crops to feed a growling global population, said Carl Casale, CHS president and CEO. The plant will produce more than 2,400 tons of ammonia daily which will be further converted to urea, urea ammonium nitrate, and Diesel Exhaust Fuel. According to the company, the majority of the nitrogen products from the plant will serve farmerowned cooperatives and independent farm supply retailers within a 200-mile radius of the plant in North Dakota, South Dakota, parts of Minnesota, and Montana.

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BAKKEN NEWS

Canadian Crude Imports

Heavy

2007-May 2014

Light (Non.-U.S.)

1000

Light (U.S.)

900 800

In December 2010, the U.S. was export700 ing 32,000 barrels of oil per day to Canada.

This June, the U.S. average monthly crude 600 export volumes to Canada reached 350,000 500 mbpd. The export increase has happened in large part due to production of light sweet 400 crude, according to a report by Turner, 300 Mason & Co., a Dallas-based petroleum consulting firm. “This growth has been 200 an important relief valve for U.S. produc100 ers as the ability of domestic refiners to absorb light barrels approaches its limits and 0 exports to other countries are restricted,” the 2007 2008 2009 2010 report said.

The report also noted that the U.S. has the principal feedstock supplier to Canada’s passed Ecuador, a member of the OrganiAtlantic Coast refineries. zation of Petroleum Exporting Countries, But, changes to U.S. refinery infrain total crude exports while also becoming structure, export policy and the supply of

20

The BAKKEN MAGAZINE OCTOBER 2014

2011

2012

June 2014: 350 MBPD U.S. Crude Imports

←

Canada’s Imports of Light Sweet Crude Could Change

2013

2014

light sweet crude could alter the amount of light sweet crude produced in the U.S. that is exported to Canada. Changes and factors include:

BAKKEN NEWS

Changing U.S. Refinery Crude Slates 1985-2014

Middle Eastern

Latin American & Canadian Heavies

Domestic Lights

1.6

32.0

1.4

31.5

1.2

31.0

1.0

30.5

0.8

30.0

1985

1990

1995

2000

2005

2010

Sulfur, wt. %

32.5

Cravity, API

• The reversal of Enbridge’s Line 9, which transports imported crude west from Montreal to Sarnia in southwestern Ontario. This flow is being reversed to give the eastern Canadian refineries access to western Canadian crudes, potentially cutting into U.S. crude exports.

• Increasing Canadian production combined with the U.S. lack of approval for TransCanada’s Keystone XL pipeline and Enbridge’s Alberta Clipper expansion has made producers more desperate to find a market for their crude.

• Price disparities caused by increased U.S. crude production and restricted exports could enable Canada to use Montreal as a hub for the exchange of heavy crude for light. Using cheaper, foreignflagged transport vessels, Canada could ship heavy oil sand crude to the U.S. Gulf Coast and have them return with light, sweet crudes.

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The BAKKEN MAGAZINE OCTOBER 2014

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INFRASTRUCTURE & CONSTRUCTION

THE HEART OF

THE BAKKEN Watford City leadership is succeeding in an impossible situation

By Luke Geiver Photos By: Jessie Scofield

A white top tent set up in the parking lot of Whiting Petroleum Corp.â&#x20AC;&#x2122;s Watford City headquarters is ready for a busload of visitors coming from every part of North Dakota. For many on that bus, this will be their

first time in the heart of the Bakken shale play.

Beneath the tent are round tables with place cards and information packets. A refreshment bar is situated near the edge of the lot in a way

24

The BAKKEN MAGAZINE OCTOBER 2014

INFRASTRUCTURE & CONSTRUCTION

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INFRASTRUCTURE & CONSTRUCTION

FINANCIAL VISIONARY: Brent Sanford's background in finance has helped him find innovative ways to pay for projects. Under his leadership and vision, the city has annexed more than 2,000 acres and has a plan to build necessary infrastructure for future growth. His message to legislators is simple. "If you reinvest the gross production tax with us to the tune of 60 percent, we will make you look good."

that forces any patron of the bar to view the landscape below surrounding the city to the south.

The view is unforgettable.

Past the existing smalltown buildings, the under-construction apartments and past the busy highway, are sprawling wheat fields and oil wells situated atop the rolling hills that make up the countryside surrounding

Watford City. In the far-off distance, the view shows trucks of all sizes coming in and going out of the town. The movement of the city can be felt; the idea of change can literally be heard in the air. It is clear why the tent was put in Whiting’s lot.

On that August night, the sky is clear and the wind calm.

The vibrating noise of truck

traffic can be heard from that lot like a soft song repeating again and again in the distance.

A group of men mill around the parking lot by the tent, checking on the mics and speakers, chatting with the caterers and realigning the place cards. They are visibly anxious for the visitors. It is as if they know something important is about to happen.

The event was organized in part by Brent Sanford, mayor of Watford City, Ron Anderson, McKenzie County Commission chairman, Darick Franzen, Watford City’s Chamber president, and Gene Veeder, executive director of the city’s economic development office. The group's anxiousness prior to the arrival of the visitors—state legislators invited to see the impact and opportunities created by oil and gas development surrounding the city—is all linked to the sense of hope and urgency each has for the evening’s presentations to be delivered by local business leaders, national developers, energy service companies, states attorneys, school superintendents and from the four main men themselves. Their goal for the evening is unified, but daunting: tell the true story of Watford City. By the numbers, what happens in Watford City with housing, infrastructure and community development impacts oil production in the county that is at the geological core of some of the Williston Basin’s most prime areas. More than one-third of the state’s oil production occurs in McKenzie County, and the same can be

said for the percentage of drilling rigs operating in the state.

That story is non-fiction.

As the sun lowers in the west, and the visitors take seats at a table, a strong stream of light shoots below the tent, spotlighting the faces of the presenters. They squint through the sun or raise a hand to block it and then clearly and defini-

THE FULL PICTURE: With roughly one-third of the state's oil production happening within an 80-mile radius around Watford City, the community has embraced the new landscape.

26

The BAKKEN MAGAZINE OCTOBER 2014

INFRASTRUCTURE & CONSTRUCTION

tively run through facts, figures and personal tales of what Watford City is all about and why what happens there affects what happens everywhere—not just North Dakota. Their stories are also nonfiction.

The event lasts more than two hours, and offers all in attendance a chance to talk with young professionals who call

Watford City their preferred place of employment. Anderson speaks on the impact of oil production on roads and infrastructure that invigorates the crowd and is talked about for the rest of the evening. Sanford’s talk is a mix of financial review, persuasion and personal experience. The next morning, all four men gathered in the city’s

main restaurant with The Bakken magazine to rehash what went right or wrong at the event. That morning, the full truth and story of Watford City comes out.

Before Bakken

Locals call it the island empire. Oil and gas folk have recognized it as the heart of Bakken oil country. Media reps

in town writing for national publications often describe it in terms of what has happened to the town, rarely ever what will, always writing about topics such as meth, crime or a 21st century Wild West. The state of North Dakota has declared it an oilimpacted city, but not a hub, even as McKenzie County accounts for more than one-third

THEBAKKEN.COM

27

INFRASTRUCTURE & CONSTRUCTION

EXPERIENCE MATTERS: Ron Anderson, McKenzie County Commission chairman served as a state legislator during the state's previous oil era in the '80s. He has earned the trust of the county to make multi-million dollar decisions in days not weeks due to his understanding of the oil industry and how development impacts everything from gravel supply to dust control budgets.

28

The BAKKEN MAGAZINE OCTOBER 2014

of the state’s oil production and just over one third of all drilling rigs operating in the state. Brent Sanford, the mayor of Watford city and the man who left after graduating in 1990 at the bequest of the city’s then Mayor—Brent’s dad—due to a lack of economic opportunity, calls Watford City home.

What Sanford, Veeder, Anderson and even Franzen—a former Illinois resident who moved to Watford City for the chance at economic prosperity and the ability to make things happen—call Watford City is important and part of the answer that could be the key to the city’s, and surrounding oil industry’s, future. “The story of Watford City is as much about what this community was like before all of this hit, and what it has taken to sustain all of this,” says Veeder.

“This is about what happened before the Bakken.”

For Veeder, Anderson and Sanford the past is all similar. Anderson, a thirdgeneration McKenzie County resident, says his grandparents homesteaded the family ranch. Anderson’s grandmother and grandfather, not acquainted at the time, immigrated from Norway, boarded a ferry at Ray, North Dakota to cross the Missouri River to homestead their own respective claims.

After meeting and marrying, the two estab-

INFRASTRUCTURE & CONSTRUCTION

lished what is the Anderson family ranch is today. Veederâ&#x20AC;&#x2122;s family history is similar. â&#x20AC;&#x153;My grandpa rode his bike across the Missouri in winter at Ray to get to his homestead,â&#x20AC;? he says. Sanford has four sets of great grandparents who all homesteaded in the area. â&#x20AC;&#x153;This is home. This is deep,â&#x20AC;? Sanford says. â&#x20AC;&#x153;I have lived in Grand Forks, Fargo, Phoenix and Denver. I never felt at home during my time away from here. There was always something missing." Before becoming mayor, Sanford worked as a CPA and as a chief financial officer in Fargo, Phoenix and Denver. His grandfather was Watford's mayor for 19 years and his father served on City Council for eight years. All three of them owned and operated S&S Motors on Main Street in Watford City. The Sanfords and the business have been a fixture there since 1946.

Veeder, Sanford and Anderson were all entrenched in the city before the mid-2000s when Bakken oil activity exploded. Each was adamant about continuing the cityâ&#x20AC;&#x2122;s progress and maintaining its viability. In the mid'90s Veeder worked to bring computer programmers into the city from the West Coast.

He helped turn an old John Deere building into a programming center. When the dot. com boom hit, many of the programmers

THE PERFECT ADDITION: Darick Franzen, president of the Watford City Chamber of Commerce, has become the goto example for the city's other leaders. He frequently works to organize events crucial to development, from business meetings to legislative debates. His ability to connect business with community interests has made him a respected man, and, a successful one.

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MULTI WELL, MULTI YEAR: Because the leadership team stays connected to oil and gas industry decision makers, the city not only understands, but is preparing for development for several decades.

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left. The story, to Veeder and Sanford, offers a glimpse into what could happen to oil development and the stateâ&#x20AC;&#x2122;s economic prosperity if people donâ&#x20AC;&#x2122;t understand what homesteading grandparents mean to a cityâ&#x20AC;&#x2122;s potential, or how strong the pull of home can truly be. According to Veeder, the programmers left Watford City for one reason. â&#x20AC;&#x153;This wasnâ&#x20AC;&#x2122;t home to them,â&#x20AC;? he says.

Although accounts of Watford Cityâ&#x20AC;&#x2122;s ensuing demise or reports of dreadful everyday life seem to dominate headlines or discussions of the city, all four men have a drastically different view of the city. â&#x20AC;&#x153;If you want to find something bad, you can go to any city anywhere,â&#x20AC;? Veeder says. â&#x20AC;&#x153;When people come here, we donâ&#x20AC;&#x2122;t have to convince them that we are doing good things and welcoming everyone that is here for the right reasons.â&#x20AC;? Sanford and Veeder want the city to grow. They want people like Franzen to join the community, and making that happen, starts as the saying goes, at home. â&#x20AC;&#x153;Until people believe this is their home, they will be transient. They need housing,â&#x20AC;?

INFRASTRUCTURE & CONSTRUCTION

The Merits of Making Watford City Home

The leadership group of Sanford, Veeder, Franzen and Anderson is adamant about many things regarding the city.

Housing is one of the most important issues for each. “Urgency comes from our understanding of how long it takes to get things done here,” Veeder says. According to Veeder, there are several housing projects two years away from completion that started a long time ago. “The decision making that you will see at the county or city level is compressed because of the world we live in,” he says. “We don’t pay a lot of money for consulting; we just have to say let’s do it or let’s not. If we try and run

things through federal agencies, four years later we might have something done. That is not acceptable.”

The topic of housing is an easy way to bring out the passion of Sanford. “This is incredibly urgent,” he says. Sanford knows firsthand. Although his day job is running S&S Motors, he spends time every week talking with oil company representatives about future plans for development. Housing is always a topic of concern for oil companies, and recently, it has become a main talking point. “The oil companies are three years into mancamp life. Many came from a house and are now living in a mobile home at best. Many truck drivers have purchased

Road Maintainence Cost Gravel Road Costs:

McKenzie County maintains 1,130 total miles of roads: 407 miles of organized townships, 130 miles paved, 593 gravel roads.

ON THE PULSE: As the city's economic development director, Gene Veeder has become in-tune with the elements of the community that can stall or increase the city's economy. When Sanford or Anderson need to know which projects matter most to overall economic stability, they turn to Veeder, who they say, "has the pulse of the community."

Current cost to gravel 1 mile of road in McKenzie County is $125,000 per mile.

Dust Control: Veeder says. “You can’t build a community on man camps.”

Sanford, Veeder and Anderson don’t want anyone to confuse their collective pasts with their hope for the future.

“Yes, we want to have the type of community we’ve had before,” Sanford says, “but we want to make it bigger.” Sanford points to Franzen as an example for the future. “We want to

welcome people and call them one of us. That is how it has always been. It’s been 100 years of homesteaders coming in and they weren’t all from the same village in Norway. Today they are coming from Texas, Oklahoma and Wyoming. We are used to this.”

McKenzie County applies magnesium chloride (salt) on gravel roads to control dust.

Year 2009

Volume Road Distance (gallons) (Miles) 387,000 55

Cost $471,465

2010

872,000

124

$1,062,494

2011

1,614,300

230

$1,921,759

2012

2,876,000

408

$2,426,676

2013

1,980,000

355

$2,208,111

2014 Budget 2,500,000

355

$2,500,000

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31

INFRASTRUCTURE & CONSTRUCTION

THE ROAD TO SOMEWHERE: Although Anderson is constantly struggling to keep the county's road system in working condition, he has been able to correctly chosen which roads need the most attention at which times of the year.

a vacation home with money made here because there are no homes here,” he says. “Their eyes begin to stray back home because there is nothing here.”

The lack of homes means the lack of job possibilities, Anderson points out. “These people have to live here. They can’t live far away because of emergency issues with the wells. They can’t live in Williston. It has to be within proximity to where they work,” he says.

32

Conoco Phillips in particular, has spoken to Sanford recently about the need to buildout Watford City. “They called me one day and said we have a problem. They said we have a pumper position available in Keene for $100,000 and we can’t get anyone there to apply.”

According to Sanford, the answer to the problem was simple: the job was hard to fill because there is nowhere to live. “The industry is getting

The BAKKEN MAGAZINE OCTOBER 2014

itchy about this situation. They are talking about redeploying resources elsewhere where it is easier to do business,” Sanford says. “That is why we want to do this responsibly.”

If housing doesn’t happen soon enough, Watford City, McKenzie County and the state will feel an incredible economic downturn. For fiscal year 2011, tax revenues collected from oil and gas production by the state equaled $181 million. In fiscal

year 2013, the state collected $640 million. As of May, McKenzie County was producing roughly 10 million barrels of oil per month, or 32 percent of the state’s total production.

The Realization of Watford City

To help Watford City become the true island empire and unofficial shining light of all Bakken communities, the city’s leadership team has an impor-

INFRASTRUCTURE & CONSTRUCTION

tant message for legislators, citizens and industry members: the city isn’t looking for handouts because the city has a plan and the experience needed to execute.

During the white tent event earlier this summer, Sanford and Anderson voiced that message, focusing on what the city can be, not what has negatively happened to it. Maintaining the city’s success to date, however, has not been easy, nor will it be,

no matter how much effort the leadership team puts in.

Wayne Stenehjem, CEO of First International Bank, headquartered in Watford City, spoke during the event on his work to help develop the city that has been home to his family for more than a century. Stenehjem has roughly 800 acres within a mile of Watford City. Over the past few years, he has sold some of that acreage to investors, but for the remaining acres, Stene-

hjem has tried to develop the land himself. There are several challenges, he says, including a short construction season and the lack of existing infrastructure. “Watford City can be a class A town, three times as big as we are now if we have the infrastructure,” he says.

The main issue for infrastructure development, however, is linked to the city’s size and bonding capacity, a topic Stenehjem and Sanford are well-

versed on. Using his lending experience, Stenehjem compares the difference between Fargo and Watford City to illuminate the hardships of developing infrastructure and housing in western North Dakota.

Fargo has money, he says.

When a developer approaches the city with a plan for 50 lots, the city signs off, the developer puts up a bond that he is good for the infrastructure and then the city puts in all of the curbs

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INFRASTRUCTURE & CONSTRUCTION

and gutters. Over time, the city charges interest on the bond and the developer gets back his bond as the lots sell. Watford City has no money, however, â&#x20AC;&#x153;the city has no bonding capacity.â&#x20AC;?

Watford Cityâ&#x20AC;&#x2122;s taxable valuation will increase from $7 million to $12 million in one year, according to Sanford. Taxable valuation is often considered to be one-twentieth of a cityâ&#x20AC;&#x2122;s actual value. The cityâ&#x20AC;&#x2122;s building permit value in 2013 totaled $66 million and

through August this year, the city has already created $117 million worth of building permits. â&#x20AC;&#x153;The growth is not slowing down either,â&#x20AC;? Sanford says. The challenge for the city is related to gross production tax issues.

Major industries in the city or county cannot be taxed by either of the latter, and for fiscal year 2013 and 2014 the city only received roughly $11 million and $27 million back from the state, respectively.

For 2014, McKenzie Countyâ&#x20AC;&#x2122;s budget

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34

The BAKKEN MAGAZINE OCTOBER 2014

TWO MORE: To maintain the city's development, two water towers were pushed through. But, according to third-party studies, the city needs two more to maintain growth.

INFRASTRUCTURE & CONSTRUCTION

will be $97,841,385 for total expenditures.

Through gross production taxes allotted by the state along with other county revenue and North Dakota DOT funding, the city will receive $98,598,625 for a net difference of plus $757,240. In 2015, if a new gross production bill that includes a formula that would give oil-impacted counties 60 percent of GPT doesn’t pass, the county will be short on its budget that includes road department work, equipment, payroll, paving,

a northern bypass, gravel roads, necessary county expenses and a necessary capital improvement project by $137 million.

“I tell people we are willing to borrow the money to do it [develop the city], but we can’t even borrow it. Give us the means to borrow the money and we’ll do it,” Sanford says. “It is an impossible financing situation here. As small as our tax base is here, we can’t go out and borrow against that.”

Part of the tax base problem has to do

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INFRASTRUCTURE & CONSTRUCTION

with the lack of housing. The majority of people living in the county reside in RVs or campers. Housing is difficult to provide due to the high cost of materials and the lack of existing infrastructure like water. Watford City currently has a lagoon built for 1,500 people. There are now 6,500 people using the lagoon. The lagoons are obviously out of compliance with the state so the city recently broke ground on a state of the art $20 million wastewater treatment facility.

The financing required an extraordinary combination of cooperation and creativity from engineers, state officials and city officials. The city recently spent a major funding award on the build-out of two water towers, and, it already needs two more.

In 2008, the city’s kindergarten through 12th grade school had 525 students. This August the total was 1,330 with more than 700 in the K through fifth-grade levels.

There is currently a $50 million high school project underway, nearly half of which was not funded. The most telling statistic is that 40 percent of the Watford City school children are classified as homeless. Because living in a camper or sharing a home with another family constitutes homelessness, Sanford feels this fact alone drives home the reason for the urgency to build the necessary permanent housing units. "Their parents are here to work and provide a better life for their families. We owe it to them and their employers to figure this out and get the permanent housing infrastructure in the ground."

The white tent event put on in part by the city’s leadership wasn’t about a plea for money for new schools or lagoons, however. It was about something much different, something that over the next few years, could combine with the power of the city’s pull on its leaders to be a defining element of the Watford City story. For Sanford, Veeder, Anderson and Franzen, the white tent event was about sharing the plan and explaining the city’s past successes in a an RIG READY: Roughly one-third of all rigs operating in the state are in McKenzie County.

36

The BAKKEN MAGAZINE OCTOBER 2014

INFRASTRUCTURE & CONSTRUCTION

THE NORMAL SCENE: Contrary to reports, the city has maintained its small-town, community-minded vibe.

According to Sanford, the city is no different than other communities. "If you want to find something bad anywhere, all you have to do is look," he says.

effort to prove that given a greater financial flexibility, future successes will happen.

The plan constitutes $285 million in infrastructure for roads, water, sewer and expansion into annexed areas. The money, provided through a loan or from the state, would allow the innovative strategies already deployed by the city’s leadership to continue. When it became clear that daycare was a huge issue for recruitment, the team got together to form a nonprofit called Wolfrun Village that was planned, built and now constitutes the third largest daycare center in the state. It opened in August with 78 kids and less than two months later is approaching 160. The 190-child capacity will most likely be attained by Christmas. According to Anderson, a new hospital in the city has given the USDA a new model for special loan programs based on the work of Hospital Administrator Dan Kelly and USDA

Administrator Jasper Schnieder on the loan submittal and creation process The city has also created some innovative hiring practices that have helped it grow its employee base considerably in a town where employers are as competitive as anywhere in the country.

“We need people to understand that we are solution oriented, that we as a city and county are collaborative,” Sanford says.

“Whiting wouldn’t have built their building here, Hess wouldn’t be coming here, and you wouldn’t have MBI and Nuverra here if they didn’t want to work with us and they didn’t believe in us.

It may be hard to really believe what Sanford, Veeder, Anderson and the Illinoisoutsider-turned-community leader Franzen, have accomplished to date but the story is entirely non-fiction. For an oil and gas industry looking to plant firmer roots and a state unsure about funding for oil-impacted

regions, all the team cares about is that you consider the real story of Watford City. The one that involves Franzen’s son or Veeder’s youngest daughter moving to town for a lifelong career; a leadership team capable of collaborating on projects and making them happen in a financially-impossible situation, and a town that has proven, if given the chance, it can turn modern-day homesteaders into first-generation Watford City residents capable of serving the Bakken for generations to come.

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

THEBAKKEN.COM

37

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EXPLORATION & PRODUCTION 0

50

100

150

Months Before Payback - $7.5 Million Well $100/barrel oil

$85/barrel oil

$70/barrel oil

Development/Infill Drilling Ratio Source: KLJ

80% 60% 40%

Development

Infill

Example of field decline curve Source: EERC

80,000 Secondary Production Peak

70,000 TOTAL OIL - bopd Proj Primary - bopd Proj Waterflood - bopd Main Pay EOR Baseline

60,000 50,000 40,000

Tertiary CO2 Production Peak

Primary Production Peak

30,000

Tertiary Cum = 200 mm bbls

20,000

Secondary Cum = 325 mm bbls

10,000 Primary Cum = 125 mm bbls

0 0

10

20

30

40

YEAR

The BAKKEN MAGAZINE OCTOBER 2014

50

60

70

2/1/14

9/1/13

4/1/13

11/1/12

6/1/12

1/1/12

8/1/11

3/1/11

10/1/10

5/1/10

12/1/09

7/1/09

2/1/09

9/1/08

4/1/08

11/1/07

6/1/07

1/1/07

20%

40

50,000 40,000

Primary Production Peak

30,000 20,000 10,000 Primary Cum = 125 mm bbls

0 0

100%

0%

ANNUALIZED OIL PRODUCTI

500

ANNUALIZED OIL PRODUCTION IN BOPD

IP

750

Proj Waterflood - bo Main Pay EOR Basel

10

20

EXPLORATION & PRODUCTION

THE 5-YEAR BAKKEN OUTLOOK KLJ has completed an unprecedented study assessing the future of oil and gas production in North Dakota over the next five years

By Emily Aasand

Payback Timeline Comparisons Source: KLJ

IP of Well in bpd

3,000 2,000 1,500 1,250 1,000 750 500 0

50

100

150

Months Before Payback - $7.5 Million Well $100/barrel oil

$85/barrel oil

$70/barrel oil

Development/Infill Drilling Ratio Source: KLJ

100% 80% 60%

THEBAKKEN.COM

41

EXPLORATION & PRODUCTION

North Dakota-based KLJ recently completed a study commissioned by the North Dakota legislature to provide state leaders with a better understanding of the Bakken’s economic impacts on the state through 2019.

“The objective of the study was to provide the North Dakota legislature with a view into the future of oil development in the state that would assist them in developing appropriate long-term policy,” says Mike Wamboldt, the project manager at KLJ who helped to lead the study through the research and completion process. “They wanted us to

address the effect of technological advances, especially in CO2-based enhanced oil recovery (EOR), the maturation of the oilfield’s development and the impact of infrastructure and environment.”

The study area focused on the 19 oil and gas producing counties in North Dakota and incorporated three approaches to forecast the sustainability of oil and gas production including economic analysis of the Bakken and Three Forks formation, the projection of population, employment and housing needs, and the potential for carbon dioxide (CO2) enhanced oil recovery.

Population increase forecast at the county level BURKE

RENVILLE

Annual: 1.1% Total: 5.3%

WILLIAMS Annual: 6.3% Total: 31.7%

BOTTINEAU

Annual: 1.5% Total: 7.7%

Annual: 1.8% Total: 9.1%

DIVIDE

Annual: 6.4% Total: 32.0%

MOUNTRAIL

MCHENRY

WARD

Annual: 2.7% Total: 13.5%

Annual: 2.2% Total: 11.0%

Annual: 1.6% Total: 8.2%

MCKENZIE

Annual: 6.2% Total: 31.2%

MCLEAN

SLOPE

Annual: 6.4% Total: 32.0%

BOWMAN

Annual: 5.1% Total: 25.7%

MERCER

Annual: 0.3% Total: 1.5%

BILLINGS Annual: 4.6% Total: 22.8%

GOLDEN VALLEY

Annual: 4.9% Total: 24.3%

DUNN

Annual: 5.3% Total: 26.7%

STARK

Annual: 5.4% Total: 27.0%

HETTINGER

Annual: 4.6% Total: 23.1%

ADAMS

Annual: 4.7% Total: 23.6%

Source: NDSU Department of Agribusiness and Applied Economics

42

Annual: 0.2% Total: 1.2%

The BAKKEN MAGAZINE OCTOBER 2014

LEGEND

32%-25% 24%-15% 14%-5% 5%-0%

Oil Production Picture

Mark Luther, a geologist for KLJ, headed the economic analysis portion of the study by looking at several factors, including the steep decline curves associated with Bakken wells and the role increasing initial production rates will play in the future development of the Bakken and Three Forks formations.

The study, completed in partnership with North Dakota State University’s Agribusiness and Applied Economics Department and the University of North Dakota’s Energy and Environmental Research Center, revealed that, based on the past 18 months of oil production, North Dakota has the potential to add 18,000 new barrels of dailly oil production oil per month for the next five years.

Oil production increases at that level could put the state’s daily oil production at roughly 2 million bopd, a number higher than Niles Hushka, CEO of KLJ, and his team thought was possible at the outset of the study. According to Luther, these numbers are feasible because oil producers are focusing their activities on more productive parts of the play, and there have been significant improvements in well completion techniques since the early days of the play which started around 2007 in North Dakota.

The main areas of production will continue to be in the Bakken and Three Forks during the timespan for which the study was completed, Luther says regardless of interest and work being done in other formations such as the Tyler. “In the grand scheme of things, with the drilling that will happen in the next five years, the activity [in other formations located in North Dakota] will be so minimal, that it will really have no impacts on production over the next five years.”

Production could reach the 2 million bopd mark based on the industry’s ability to cope with current challenges, according to Hushka. Market constraints linked to rail, infrastructure and oil price have all subsided or been addressed by the industry, Hushka says making the 2 million bopd milestone a highly probable outcome.

EXPLORATION & PRODUCTION

'If oil prices go up, then other areas that aren’t getting attention will definitely be seeing more activity.'

Mark Luther, KLJ

With the possibility of a 2 million bopd projection, the issue of oil exports becomes prevalent.

“I think export policies will change. We’re getting to within 1.5 million bopd of remaining light oil refining capacity and the oil companies are going to need to export crude otherwise there will be a lot of oil here (in the U.S.) and prices will go down,” Luther says.

While exports may be on the minds of most industry players, Hushka has said that the study does highlight elements of oil production that aren’t typically discussed. Of the many takeaways from the study, Hushka points out that numbers show a misconception regarding oil producers. “Legislators think producers are making a lot of money, really fast. That isn’t the case,” he says. Because the industry requires high capital investment, the oil production business is not as profitable as people may think.

Data on the best oil producing regions of the Bakken show that.

Although some wells in the core of the Williston Basin offer a payback of roughly six months to two years. Wells outside the core take much longer to pay off, however, the report shows.

Oil price may not have a significant impact on the most productive areas of the play, the study also found. In his research, Luther ran models calculating profits for producers at $35 dollars per barrel. According to Luther’s calculations, several parts of the play will still be profitable at $35 oil. Certain areas of the play, in many cases, are immune to price inflections, Luther says.

“If oil prices go up, then other areas that aren’t getting attention will definitely be seeing more activity,” he also said.

Under current regulations and policies, roughly 20 percent of the Williston Basin is untouchable for development and onethird of all oil produced in the state comes from the Fort Berthold Indian Reservation.

Housing Supply

The study includes a look at the housing needs and growth projections for the Minot, Dickinson and Williston regions, which included the 19 counties, along with water production across the play, both elements that Hushka hopes will help the industry and

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THEBAKKEN.COM

43

EXPLORATION & PRODUCTION

other developers plan for the future. Current traffic levels and development-related activity should be considered the norm, but the state needs to remain diligent and focused on maintaining existing infrastructure.

While conducting the study, Hushka mentioned that there were constant changes happening throughout the study, which Wamboldt credits to the “dynamic oil and gas industry.”

ber of temporary or nonpermanent residents.

“The two estimates combine to produce a service population, which includes individuals that work in North Dakota and live elsewhere,” the study says.

Employment in the oil and gas industry in the Williston Basin is likely to continue to grow at a pace slower than observed from 2009 to 2014 due to a combination of growth in the industry and secondary job creation.

Study Scenarios

Population Growth

The scope of the study was divided into three scenarios to address the uncertainty associated with the rate and extent of future oil field development. The low scenario is the basic premise that economic conditions or overall conditions remain relatively similar to conditions in 2013. The medium scenario centers on the premise that economic conditions remain relatively similar to conditions in 2013, and the high scenario considers an improved economic climate relative to conditions in 2013.

The following employment, population and housing potential estimates, not projections, are based on medium scenarios.

Employment Potential

The employment potential consists of three main components: direct employment in the oil and gas industry, secondary job creation and employment in other industries and sectors.

Research conducted by NDSU shows that the Williston region could see a 2019 employment forecast of 65,000 and 70,000; the Minot region could see an employment potential of between 55,000 and 60,000; and that the Dickinson region could see a potential growth in employment to of 40,000 and 45,000.

Employment growth is what is driving population estimates, the study says. Population forecasts showed that population will continue to be comprised of a growing number of permanent residents and a steady num-

44

Based on projections in the KLJ study over the 2014-2019 period, the Williston region could have a total population potential around 97,000 at the end of 2014, which includes permanent residents, shift workers, seasonal construction workers, and depen-

dents and spouses of workers living in nonpermanent lodging arrangements. The total population potential in 2019 has potential to reach 130,000 for the Williston region, “assuming housing is supplied and occupancy rates remain valid.”

The Minot region could have a total population potential of around 123,500 at the end of 2014 and a total population potential of 137,000 in 2019. The study also found the Dickinson region to have an estimated population potential around 60,000 at the end of 2014 and a population potential in 2019 of around 77,000.

“Permanent population will be largely driven by the supply of permanent housing in the region,” the study says. “Due to a lack of housing, the region will continue to have a

Housing Needs, Total Units, by Scenario, Dickinson Region, North Dakota, 2014-2019 Year

Low Scenario

Medium Scenario

High Scenario

2014

31,908

32,439

33,311

2015

34,358

35,111

36,117

2016

36,560

37,408

38,467

2017

38,549

39,410

40,672

2018

40,406

41,140

42,921

2019

41,573

42,606

45,016

Housing Needs, Total Units, by Scenario, Minot Region, North Dakota, 2014-2019 Year

Low Scenario

Medium Scenario

High Scenario

2014

54,903

55,312

55,873

2015

56,170

56,796

57,458

2016

57,401

58,175

58,808

2017

58,361

59,334

59,934

2018

59,564

60,656

61,312

2019

60,476

61,741

62,372

Housing Needs, in Total Units, by Scenario, Williston Region, North Dakota, 2014-2019 Year

Low Scenario

Medium Scenario

High Scenario

2014

41,063

42,353

45,100

2015

44,397

46,622

50,737

2016

47,770

50,660

55,754

2017

50,173

53,778

59,190

2018

52,069

55,916

61,307

2019

54,071

58,037

63,420

The BAKKEN MAGAZINE OCTOBER 2014

EXPLORATION & PRODUCTION

RIG COUNT: As operators continue to focus on the most productive zones of the Williston Basin, oil price will dictate whether the state's rig count increases or decreases in the play's fringe areas.

total (service) population that is substantially larger than the permanent population measured by the U.S. Census.”

Housing Needs

The study distinguishes permanent housing, which is based on permanent employment, from temporary housing, which is based on temporary employment related to oilfield development activities. Since the permanent workforce and related secondary job response continues to expand, the housing demand continues to be on the rise.

Housing growth in the Dickinson region could increase by roughly 28 percent from 2014 to 2019, which translats into an increase in housing needs of about 9,500 units. The Williston region has potential to see a housing needs increase of more than 15,000 units

from 2014 to 2019, while the Minot region could see a 12 percent increase or by 6,430 units within the five-year time frame, according to the study.

CO2 EOR

The EERC conducted a baseline study of the potential future oil production from CO2 enhanced oil recovery operations in North Dakota’s oil fields. The study focused on an examination of existing conventional oil fields currently undergoing secondary recovery operations and provides the basis for estimates of incremental oil production through the process of CO2-based EOR. CO2 used for EOR can restore underground pressure in and around depleted wells to the level that existed when the wells were first drilled and the study points out that CO2

EOR should be recognized as part of a longterm production strategy for North Dakota oil fields.

The study found that there is significant opportunity in North Dakota to produce additional oil from well-established conventional oil fields through CO2 EOR and that the top 10 ranked conventional oil units in the Bakken have a combined estimated recovery of 82.7 million to 186.2 MMbbl, which would require between 13.9 million and 83.6 million tons of CO2.

“The primary challenges in the near term are all the acquisitions of sufficient CO2 supplies and a focus by operators on this target and away from the attractiveness of the Bakken petroleum system,” the study says. “There is strong potential that, within the five-year time frame, which is the focus area of this

THEBAKKEN.COM

45

EXPLORATION & PRODUCTION

study, the Bakken petroleum system may develop into a CO2 EOR target, which would have a large effect on these projections and would be expected to be a strong driver of CO2 EOR in North Dakota.”

In its study, the EERC only found two substantial sources of CO2 that had high likelihood of availability within the next five years.

Determining Factors

It goes without saying that there is more than a handful of variables to consider when looking at the bigger picture of the Bakken’s growth.

The study found that global and local economics, infrastructure, environment, technology and socio-economics would have the greatest potential impact on oil and gas development in the study area during the 2014 to 2019 time frame.

Various factors to take into consideration include, but aren’t limited to, U.S. crude oil exports, North Dakota pipeline capacity, North Dakota landowner issues, oil rig counts on federal surface ownership, gas hub prices, Williston Basin crude prices, North Dakota weekly oil and gas permits and North Dakota oil production.

“The final baseline assumptions were influenced by variables such as: number of drilling rigs, producing wells in a specific region, technological advances in drilling and completion, development of oil, gas and water transportation infrastructure, environmental regulations, global markets and economics,” the study says.

While conducting the study, Hushka mentions that there were constant changes happening throughout the study, which Wamboldt credits to the “dynamic oil and gas industry.”

“Change occurs very rapidly and what we might’ve thought was going to happen six months ago can completely change overnight,” said Wamboldt. “It’s a constant evolution that generally boils down to global economics and the producer’s ability to make money.”

Author: Emily Aasand Staff Writer, The Bakken magazine eaasand@bbiinternational.com 701-738-4976

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IN PLAY NORTH DAKOTA VENDORS BY CONGRESSIONAL DISTRICT District Location

State: North Dakota Vendors by Congressional District

At Large District

Congressional District

Total

Congressional District (At Large)

876

Grand Total

876

Top Cities Williston = 179 Dickinson = 96 Minot = 93

Sources: Esri, DeLorme, NAVTEQ, TomTom, Intermap, increment P Corp., GEBCO, USGS,FAO, NPS, NRCAN, GeoBase, IGN, Kadaster NL, Ordnance Survey, Esri Japan, METI, Esri China (Hong Kong), and the GIS User Community

Economist Examines API Survey of Bakken studies the Bakken. “In that regard, I don’t think it’s anything too remarkable to anyone who’s paying attention to what’s going on in North Dakota.”

The industry supports $6.6 billion of the North Dakota economy or 12.3 percent of the state’s total economic activity, according to the study conducted

by PriceWaterhouseCoopers for “Living here, this confirms API. most everything else I’ve read, North Dakota is second seen or heard,” says Flynn, who only to Texas in oil production

For University of North Dakota economics professor David Flynn, there were few surprises in a survey of U.S. businesses undertaken by the American Petroleum Institute showing the oil and gas industry’s considerable impact on North Dakota’s economy.

By Patrick C. Miller

and has a 2.6 percent unemployment rate, the lowest in the U.S. The study also found that the oil and natural gas industry in North Dakota provides about 64,000 jobs—12 percent of the state’s total employment. Labor income supported by the oil and natural gas industry comes to $3.8 billion annually or 13.1 percent of the state’s total labor income.

One aspect of the study of concern to Flynn is that North

IN-THE-KNOW: David Flynn, professor of economics at the University of North Dakota, studies the economic impact of the Bakken PHOTO: UNIVERSITY OF NORTH DAKOTA

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IN PLAY

Dakota isn’t listed in the top 15 salary in North Dakota across states in terms of the total num- all industries and sectors is ber of jobs directly or indirectly $48,740, the average oil and gas attributable to the oil and natu- industry salary (excluding gas ral gas industry in 2011. stations) is $90,171 annually.

“As low as our unemploy“That’s a plus and a minus ment rate is and as fast as the in some ways,” Flynn notes. “I labor force is growing out in worry about the labor constraint western North Dakota, they issue and the fact that we do still can’t fill their jobs, and so have such a terribly low unemthey go without the right level ployment rate. We have a boomTHE INDUSTRY TO that is essentially of employment out there CONTRIBUTES for a ing industry NORTH DAKOTA’S ECONOMY variety of jobs, including oil,” pulling workers from all other Flynn says. “As a result, you’re kinds of industries around the leaving growth on the table. state. There is a transition goWhen you’re dealing with a la- ing on, and it is causing a lot of bor shortage, you prioritize. disruption around the state as And some things get left until well.” you have enough labor or everyTotal North Dakota jobs thing else is not needing labor as supporting oil and gas develwell.” opment in the Bakken reached SUPPORTED BY OIL AND In addition, the studyGAS notesINDUSTRY 71,824 in 2012 and is expected NATURAL that while the average annual to rise to 114,240 by 2020. The

$6.6 BILLION

64,000

NORTH DAKOTA JOBS

AVERAGE ANNUAL SALARY COMPARISON 100k

$90,171

90k 80k 70k 60k 50k

$48,740

40k 30k Avg. Annual North Dakota Salary

Avg. Oil and Gas Industry Salary

'As low as our unemployment rate is and as fast as the labor force is growing out in western North Dakota, they still can’t fill their jobs, and so they go without the right level of employment out there for a variety of jobs, including oil.' survey shows that at least 876 businesses across North Dakota are part of the larger oil and natural gas supply chain.

“I think the oil industry is doing well for North Dakota,” Flynn says. “There’s a lot of wage and salary adjustment going on across the state because of that boom, even if you’re not located in that boom area. Because we can’t get all the labor we want into North Dakota— we just can’t fill all the jobs we have—we do lose out on some of those economic impacts.”

Flynn stresses that even in a booming economy, a certain amount of “economic chaos” occurs.

“I’m not going to say it’s a bad thing, but it creates the need for adjustment on the part of a lot of people, including those who feel like they don’t directly benefit from the oil economy,” he explains.

The API survey of domestic oil and natural gas vendors provides a glimpse into the job and business creation engine of the oil and natural gas industry.

Included nationally are companies providing goods and services for onshore oil and natural gas development, either as

operators, contractors, service companies and suppliers or as other vendors.

The API report said, “The key to this success, according to a study sponsored by the Manhattan Institute for Policy Research, has not been the efforts of ‘a handful of ‘Big Oil’ companies.’ Instead, it is ‘a broad array of small and midsize oil and gas companies that are propelling record economic and job gains.’”

A telephone poll of 1,012 registered voters across the country, conducted on behalf of API, found that 77 percent of Americans, regardless of party affiliation, support increased production of oil and natural gas resources located in the United States.

Author: Patrick C. Miller Staff Writer, The Bakken magazine pmiller@bbiinternational.com 701-738-4923

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