Bakken is OPEC’s Elephant in Its Living Room

This article was published by The McAlvany Intelligence Advisor on Monday, May 15, 2017:

Setting the stage for the OPEC meeting on May 25, Saudi Arabia’s Oil Minister Khalid al-Falih, promised on Friday that “OPEC will do whatever it takes to rebalance the global oil market.” Whatever that means, and whatever comes out of that meeting, it won’t be enough to“rebalance” the oil market (rebalance: raise the price of oil sufficiently to reduce significantly the deficits the cartel’s members are currently running).

If the cartel repeats and extends the present agreement by six months, it’s likely to have the same impact: immeasurably small. The last agreement promised to cut 1.8 million barrels per day (bpd) from its overall production. It managed to cut production by less than half that, 800,000 bpd. In the grand scheme of things (world production of oil is just over 80 million bpd), this represents a one percent reduction in global production of crude. Wahoo.

What will be discussed in Vienna will no doubt include who is going to be doing the heavy lifting, and how much. Will there be exceptions to the extension as there is in the present one? Will there be failures to comply, as there were under the present one? Will there be sanctions applied to those who cheat? What about non-members? Will they somehow be persuaded to engage in the farcical extension? From here the meeting has all the makings of Shakespeare’s comedy “Much Ado About Nothing.”

What isn’t likely to be a topic of discussion is what’s happening in North Dakota. Even before the Dakota Access pipeline protesters were removed (many, by force), activity above the Bakken oil formation was already heating up. In March the state’s production of crude exceeded a million barrels a day, up from 942,000 in December and close to double its production from five years ago.

In Bismarck there are hundreds more jobs being offered than takers, according to the Associated Press (AP), with “for hire” signs appearing once again in stores, shops, and restaurants downtown. In Williston there are 500 more job listings today than there were a year ago. Williston Republican state senator Brad Bekkedahl, whose district sits on top of the massive Bakken oil shale deposits, told AP that “There is a long-term optimism that was not here a year ago.”

In the oil business “long-term” is measured in months, not years or decades. In March 2012 there were 6,954 oil wells producing 580,000 barrels of crude every day. In March this year 13,632 wells produced 1.025 million barrels daily.

And it’s not all due to the Dakota Access pipeline, which be operating at full capacity within a month, either. The recent bump-up in oil prices from $45 two weeks ago to $48 as of Monday is pure profit for producers in the state. Profit margins have expanded thanks to continually improving technology bringing breakeven (b/e) costs to lift a barrel of oil to the surface down ever further. Shipping costs are about $3 a barrel less using the Dakota Access pipeline compared to mile-long tanker trains. But, most importantly, the Bakken crude can either be refined on the Gulf Coast or shipped abroad where prices are higher than in the US. Ron Ness, president of the North Dakota Petroleum Council, put it well: “We can [now] compete with the world.” 

The improvements in technology are breathtaking. For example a year ago it would take 20 days to drill a fracking well. Today, according to Ness, it takes less than 12. This has forced the b/e point to under $30 a barrel in Bakken, while in Dunn County, atop the richest reserves, the b/e point is $15 a barrel. And that number was from November. It’s even lower now.

This compares very favorably to the lifting costs of the major OPEC players, about the same as Iran’s and only slightly above Iraq’s. And the math continues in Bakken’s favor.

No one in Vienna is likely to talk about just how large Bakken really is, partly because no one really knows, and partly because if they did really know, they would cancel the meeting and call it a day. Every time Bakken is analyzed for “recoverable” oil, the number expands. It is influenced not only by improving technology but by more accurate estimates of its size. In April 2008 a USGS (the United States Geological Survey) estimated it contained 3.6 billion barrels of oil. To put that into perspective, if North Dakota oil producers only produced a million barrels a day from here on out, it would take 3,600 days, or ten years, to drain the field.

But five years later the USGS took another look and raised its estimate to 7.4 billion barrels. Now estimates from other sources are coming in at 24 billion, with one outlier estimating that the field that occupies about 200,000 square miles underlying Montana, North Dakota, Saskatchewan, and Manitoba contains 400 billion barrels of recoverable oil.

Bakken isn’t a game-changer. It ends the game altogether: Bakken 25, OPEC 0.

The miracle taking place in the oil patch isn’t limited to the Bakken formation by any means. The technological advances are taking place everywhere in the country, reducing the lifting costs in every one of the more than 100 oil fields currently in play in the United States. The Bakken is nearly a household name, along with the Eagleville (Eagle Ford Shale), Sprayberry Wasson formations in Texas, Wattenberg in Colorado, Belridge South in California, and the Mississippi Canyon (Thunder Horse) and Green Canyon (Atlantis) on the Gulf Coast.

The meeting in Vienna is all for show. It’s a replay of those heady days when such meetings really mattered, when OPEC and the Saudis could swing the oil market in their favor, and shut down the American economy, forcing long lines at gas stations and tomfoolery like instituting Daylight Savings time.

Those days are over, all thanks to George Mitchell, the father of fracking. Mitchell just knew there was oil in that shale, but he just didn’t know how to get to it. After nearly going broke he found the combination of water, sand, and detergent that would unlock the golden door.

Bakken wins this one in a walk. 

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Sources:

Times Record News: Current oil production as of January 2017: 80.7 million bpd

Shakespeare’s comedy

Associated Press: SIGNS OF OIL BOOMLET IN NORTH DAKOTA AFTER PIPELINE FINISHED

Minot Daily News: ND oil production bouncing back

North Dakota oil boom

The Bakken Formation in North Dakota

Reuters: Leaner and meaner: U.S. shale greater threat to OPEC after oil price war

2017 MONTHLY STATISTICAL UPDATE through March

North Dakota Drilling and Production Statistics

Top 100 U.S. Oil and Gas Fields