Future Bakken Crude Oil Output, Oil Price, USGS Estimates, and Decreases in Well Productivity

Summary Chart ND Bakken/Three Forks Scenarios

There is quite a bit of optimism in the US about potential future crude oil output.  Due to the media reports that the US will become self sufficient in oil output, many Americans believe that oil prices are likely to decline in the future due to the abundance of oil resources.  This view may be too optimistic.

The enthusiasm is based on the success in the North Dakota portion of the Bakken/Three Forks play since 2008. The high oil prices over most of the period from 2008 to 2012 has made the high cost oil from North Dakota profitable. Bakken/Three Forks output in North Dakota has expanded from 43 kb/d in Mar 2008 to 719 kb/d in Mar 2013, a 16 fold increase over 5 years. The media believes these increases will continue, but the rate of increase is slowing considerably.

As a cautionary tale, consider Bakken/ Three Forks crude output in Montana (at link click on formation code in left most drop down box and type "bak" in search box, most output is from the Elm Coulee fields (all charts can be clicked to enlarge):




 

Future output from the Bakken/ Three Forks Play in North Dakota (about 94 % of total Bakken output in 2012) will depend on future oil prices and the decrease in average well productivity as high productivity areas (sweet spots) run out of room for new wells.  We can only guess at future oil prices and average well productivity by creating future scenarios where we make reasonable assumptions about real oil prices (always in Jan 2013 $ unless otherwise noted)  and future average well productivity.

Two reports were used to guide the assumptions about future well productivity and oil prices.  The first is from the United States Geological Survey (USGS) ( see slides 16-18) and estimates 5.8 billion barrels of oil (BBO) from the North Dakota portion of the Bakken/Three Forks play (F95=3.5 BBO, F5=9 BBO).  We use this estimate to create low TRR (technically recoverable resource), mean TRR, and high TRR scenarios where decreases in well productivity are created to match these scenarios.  The second report is the most recent Annual Energy Outlook (AEO) 2013 produced by the US Energy Information Administration (EIA) which gives oil price forecasts.  We have modified the price forecasts slightly because historically the EIA forecasts for oil price have tended to be too low.




Figure 1- Future Price Scenarios

Based on the USGS estimate and using the North Dakota Industrial Commission (NDIC) estimates of 42,500 total wells and 2000 wells added per year, along with decreases in average well productivity as sweet spots become fully drilled we have:



Figure 2

Note that Model 3 is an average well profile discussed in my previous post (see figure 3 below).




Figure 3 - Model 3 Avg Well Profile

 Well productivity declines in a manner which results in total output from 1953 to 2073 of 5.8 BBO, matching the mean USGS estimate for TRR:




Figure 4

Figure 5

Figure 2 does not account for economics, in order for output to be profitable I determined break even real oil prices in Jan 2013 $ and compare this with real oil prices increasing by 6.68 % per year.

To calculate break even oil prices at the refinery gate, we assume well drilling and fracking costs are $9 million per well, OPEX plus financial costs are $7/barrel, transportation cost is $12/barrel, and royalty and taxes are 25 % of the well head revenue (refinery gate revenue minus transportation costs). Then we use a discount rate of 10 % to find the net present value of the net revenue (revenue-cost) stream from oil output over an assumed 30 year well life.  I have calculated the real break even price based on revenue in real dollars (Jan 2013 $), it is assumed real oil prices follow the red dotted line in figure 4, these inflation adjusted prices are used in the break even calculations. 

Note that in different scenarios there are different real oil price scenarios, as the oil price scenario changes, the real break even oil price will also change because of both the price itself and the change in the net revenue stream in real dollars.

Mean TRR and Medium Prices

To account for the fact that real oil prices are not likely to reach $2000/barrel  and that  a 6.68 % rise per year in real oil prices would lead to a reduction in real GDP worldwide, I constructed a more realistic scenario (medium scenario, Figure 1)where real oil prices rise by 3.29 %/year and adjusted the number of wells added per year so that oil production would remain profitable (break even oil prices are less than real oil prices).    Prices reach $411/barrel (Jan 2013 $) by 2056 and rise no further (substitutes for oil become cost competitive and demand decreases as a result).  Note that the decrease in well productivity is different because it is a function of the number of new wells drilled.  If the well productivity decreases by 8 %/year when 2000 wells/year are added, it decreases by 4 % per year decrease if only 1000 wells per year are added.  To match output with break even oil prices, fewer new wells were added after the break even oil price was reached, this resulted in a less rapid decrease in well productivity compared with the steady addition of 2000 wells per year.


Figure 6 Mean TRR (5.8 BBO) Med Price





Figure 7 - Break even oil price, medium scenario

Figure 8 - Well Productivity Decrease, med scenario

Only 24,800 producing wells are reached in this scenario as break even oil prices rise above the real oil price $411/barrel (Jan 2013$) by 2056. Output of crude plus condensate (C+C) from 1953 to 2073 is 5.3 BBO.  Note that current US crude input to refineries is 15 million barrels per day or about 5.5 BBO per year, so the total ND Bakken output (over 60 years) is less than one year of current crude oil input to US refineries.

Low TRR Case and Higher Prices

We will now consider the case where the TRR is at the low end of the USGS estimate for the ND Bakken/Three Forks, which is 3.5 BBO.

If prices can rise to whatever level will cause the oil to be profitable or if we just ignore economics altogether we have the following:




Figure 9 - Low TRR Case

Figure 10 - Well Productivity Low TRR Case

Compared to the previous case using the same well profile (figure 3 above), the well productivity decreases much more quickly.  This could be due to sweet spots being smaller than anticipated or that the areas outside of the sweet spots are less productive than anticipated in the mean TRR case.

The lower oil output would likely lead to higher overall real oil prices so we will consider a higher price path than our Mean TRR/ Medium Price case (high scenario, figure 1).  Real oil prices rise by 0.54 % per month (about 6.676 % per year) from Jan 2013 to July 2034.  At that point real oil prices have quadrupled from the average 2012 level of $102.5/barrel to $411/barrel.  From July 2034 to Dec 2073 it is assumed that real oil prices do not rise above $411/barrel.




Figure 11- Low TRR, High Price Case

Figure 12 - Break even Oil Prices, Low TRR, High Price

Figure 13 - Well Productivity - Low TRR, HighPrice

Note that the URR from 1953 to 2073 only decreases by 0.1 BBO from 3.5 BBO (in the Low TRR case of figure 9) to 3.4 BBO if real oil prices follow the high price trajectory that I have outlined.   The difference in the rate of decrease in well productivity between figures 10 and 13 is explained by the different rates that wells are added in figures 9 and 11.  In figure 9 between 2020 and 2033 wells are added at about 2000 per year, but in figure 11 the rate over the same period is only 163 wells/a (wells per year).  The well productivity decreases more quickly if new wells are added at a faster pace.

High TRR, Low Price Case

For those who are opimistic about future US Oil output, we consider the USGS F5 case where the TRR for the ND Bakken/Three Forks is 9 BBO.  Well Productivity decreases less rapidly than the mean TRR case, 42500 wells are brought into production and a maximum of 2000 wells/a are added.



Figure 14 - High TRR (9BBO)

Figure 15

 Now we assume prices will rise less quickly than in previous cases due to the abundance of oil (low scenario, figure 1).  Prices remain at $102.5/ barrel (Jan 2013 $) until Sept 2018 and then rise at about 2 % per year until 2065 (where they reach $269/barrel in real terms), at that point 42,350 wells are producing and no more wells are added.

Figure 16 - High TRR/ Low Price

Figure 17 - Break even Oil Prices - High TRR/Low Price

Figure 18 - Well Productivity, High TRR/Low Price

One final note is that these scenarios are not forecasts, they are possible futures based on a set of assumptions.  There are several short comings with these scenarios, technology has been assumed not to progress further, any progress might allow higher output, and the model for average well productivity is based on only two years of data and future average well productivity could be higher or lower than shown in model 3.  Finally, I have assumed that well productivity will begin decreasing in March 2013, so far there is not conclusive evidence that the average well brought online in March 2013 is less productive than the average well brought online in Jan 2013, a possible improvement would be to hold average well productivity constant until Dec 2013 and then model well productivity decrease from that point.  A subject for a future post.

DC