Bakken Gets Squeezed By Low Oil Price

Bakken Gets Squeezed By Low Oil Price

29th January 2016

The onshore rig count decline of 17 this week, 16 in the Permian Basin, continues to indicate the damage being inflicted on the LTO operator Balance Sheets.  With cash flow being hammered by current low price, the Permian and Williston rigs are down ~10% the past four weeks and Eagle Ford down 3% in the same time period.

Non-OPEC Russia said this week it could cooperate with OPEC on production curbs, something it had been refusing to do for 15 years.  Although Saudi Arabia has yet to comment on this, a 5% production cut by just Saudi Arabia and Russia and the continued decline of U.S. LTO production should be sufficient to bring the market close to balance and provide price support.  However, any abrupt upward movement in oil price could also bring U.S. onshore rigs back to the well pad.

The current oil price environment is intensifying the competition in supplying the market among the major LTO plays, with the Bakken showing signs of losing out against its peers.  In the last few weeks of 2015, both the Eagle Ford and Permian added a couple of rigs, while rig count in Bakken continued dropping.  In the first month of 2016, Bakken still leads the activity decline.  This week, Bakken is reported to have 44 active rigs, 25% of its mid-2014 activity level, compared to 30% for Eagle Ford and 36% for Permian.

Source: BHI Weekly Rig Count and GCA Analysis

While most shale wells in the U.S. are challenged at the current price level, Bakken production has the extra burden of high transportation cost.  Unlike in Eagle Ford and Permian where most production is linked to pipelines, a significant portion of Bakken production has to utilize railways and trucks to reach the market, which can add as much as US$6-12/Bbl to production cost.  As a result, Bakken has the highest price differential to WTI.

The disadvantageous position of Bakken is also clearly reflected in producers’ actions.  Recently, two major Bakken producers, Continental Resources and Hess Corporation, unveiled their 2016 guidance.  Continental has said that it plans to spend a third of its 66%-reduced capital budget in Bakken, about US$300 MM, to drill 86 wells and complete 26 with the balance going into DUC inventory, compared to over a US$1 B spent and over 200 wells on-stream in 2015.  It also reduced its rig contracts from eight in Q4 2015 to four in 2016.  Hess has stated that it plans to spend US$425 MM in the Bakken and to operate two rigs rather than seven in 2016.

With oil price bouncing around the US$30 to US$40 per barrel range, Bakken producers have no choice other than delaying, deferring and reducing activities, and giving over market share to regions with lower breakeven.

Drilling Activity…..

The total number of active onshore rigs now stands at 591, down 1,285 (~69%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total declined to 286 (down 16 last week) with Eagle Ford flat, Williston down 1 and Permian down 16.  Horizontal rigs lost 13 and now stand at 487, down 681 year to date.

Total U.S. rig count (including the GOM) declined 18 last week, with rigs targeting oil down13 for a 22-week total decline of 177.  The average decline stands at 8 rigs per week.  Rigs targeting gas declined 5.

Oil Price….

Oil rose about 25% from the 12-year lows seen earlier in January, on prospects that a deal between major exporters to cut production could help reduce one of the worst oil gluts in history.

Brent, the global benchmark for oil, was up US$2.88 at US$34.20 a barrel, rising 9% on the week.

U.S. crude rose US$1.72 to US$33.26 a barrel, up 5% on the week.

U.S. Supply and Demand…..

U.S. crude oil refinery inputs continued to decline to an average 15.6 million barrels per day, with refineries at 87.4% of their operating capacity last week.  This continues to be on trend with the 2015 decline as refineries take seasonal maintenance outages.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was flat last week, with total production remaining at 8.703 million barrels per day.    

U.S. crude imports averaged 7.6 million barrels per day last week, a decrease of 170,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, ~7% above the same four-week period last year.

Crude oil inventories increased ~8.4 million barrels from the previous week, the stock change being driven by the decline in refinery input demand.  Cushing’s storage (the main price point for WTI) decreased by 0.8 million barrels, taking the total to 63.4 million barrels of crude in storage (~71% utilized).  Cushing decreased for the first time in eight weeks.

Source: EIA Weekly Update and GCA Analysis



Bakken Gets Squeezed By Low Oil Price

P Kevin Galvin

Facilities/Cost Engineer -
Bakken Gets Squeezed By Low Oil Price

Bob George

Global General Manager -

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