Bakken Study Analyzes Impact of Oil Prices on Development

October 23, 2014 Kirk Eggleston

Bakken Well Recovery Costs Graph

Bismarck, ND-based KLJ Engineering recently completed a study commissioned by the North Dakota legislature to provide decision makers with data about the Bakken's potential economic impact on the state through 2019.

The full KLJ report, released in September of 2014, focused on 19 oil & gas producing counties in North Dakota, and incorporated three approaches to forecast the sustainability of oil and gas production:

Economic analysis of the Bakken and Three Forks formation
Projections of population, employment and housing needs
Potential for CO2 enhanced oil recovery (EOR)

Of particular interest to industry is the impact of falling oil prices on future development. Earlier this month, Lynn Helms, the Dir. of North Dakota's Department of Mineral Resources (DMR), said two things could hurt production: low oil prices and new flaring regulations.

The KLJ study provided some interesting insight into how oil prices would impact production based on (IP) rates. In the core areas for development (McKenzie, Williams, Mountrail and Dunn Counties) most wells are well above 1,000 b/d, but on the fringes of these core areas, IP rates tend to be lower.

According to the study, at the $70 per barrel price, a well IP of 500 b/d would never recover its costs. In order to recover well costs within 5 years, a 500 b/d IP well would need oil prices to exceed $100 per barrel. In stark contrast, modeling sensitivity scenarios such as large drops in prices down to $35 per barrel with high IP wells, which are common in parts of the Bakken/Three Forks, still have positive economic returns. Based on modeling outputs, IPs of 500 b/d or less will not be attractive to companies if well costs equal $7.5 million, and oil prices are in the vicinity of the 2014 average price of $85 per barrel. Conversely wells in the 500 to 750 bpd IP range are attractive, but susceptible to oil price fluctuations. Wells having at least 1,000 bpd IPs are attractive at current or higher oil prices, and for the most part, will still be attractive even with a reduction in oil prices. In discussions with industry representatives, companies generally expect to recover costs in three years or less, and a five-year payback time frame would be acceptable only in very unusual circumstances.

BakkenShale.com will provide additional details and commentary centered around the KLJ study in future posts.