In the Bakken, production growth steals all the headlines. But there’s a far more important development taking place: the lowering of drilling costs.
Challenging environment
Explosive production growth is the big story out of the Bakken. North Dakota’s portion of the shale field produced 756,980 barrels a day in June compared to less than 70,000 barrels a day the same month five years earlier. The question among many analysts is whether the region can crack one million barrels per day for oil production?
The problem is that the Bakken is an incredibly tough area for producers to drill which is why the formation has the highest well completion costs in the U.S. Companies spend between $8 – $15 million to drill a single well. This compares to $5.5 – $9.5 million to drill a well in comparable shale plays like the Eagle Ford.
That’s a huge upfront cost. The break-even price for each Bakken well is between $70/$90 per barrel once royalties, taxes, and expenses are included. When you combine this with chronic labor shortages and limited infrastructure, you have a recipe for sky-rocketing drilling costs.
Companies bucking the trend
Yet, in spite of ballooning costs, some Bakken producers are bucking the trend.
Continental Resources, Inc. (NYSE:CLR) is leading the way as the region’s low-cost producer. In the past year, the company has been able to cut $1 million off its average well completion costs which comes in at $8.3 million per well. The company expects to shave an additional $300,000 from that figure by year-end.
Other names have seen material cost savings as well. Oasis Petroleum Inc. (NYSE:OAS) has been the best performer in the Bakken. The company has cut drilling costs 20% year-over-year to $8.2 million last quarter. Pioneer Natural Resources (NYSE:PXD) also noted in its earnings release that drilling costs have declined $600,000-$700,000 per well.
What’s driving this trend? Much of these cost savings can be attributed to a new production technique called ‘pad drilling’. Previously, drillers were required to disassemble and reassemble a rig at each well location. Today, a drilling pad may have five to ten wells, spaced only feet apart from one another, which are horizontally drilled in different directions. Once a well is drilled, a fully constructed rig can be lifted and moved to the next location using hydraulic walking or skidding systems.
Experience helps as well. Oasis Petroleum Inc. (NYSE:OAS) reduced the number of days to drill a well from 29 days in 2010 to 23 days in the first half of 2012. Over that same time period the number of days to frack a well has also been cut in from ten to five days.
