Industry Trend Analysis - Bakken Production Approaching A Wall - SEPT 2017

BMI View: Crude production in the Bakken shale play will struggle to reach the 1.1mn b/d mark over the next year. Midstream delays, accelerating decline rates and a lack of skilled workers will cap production rates well into 2018.

A return to growth will be hard-fought in the Bakken shale play. While the major Texas plays on either side of the state are developing upstream in spite of sustained price weakness, the Bakken's less favourable location and wider price differential have held back progress over the past six months.

As of the week ending July 14, the number of crude-directed oil rigs in the play had reached 53 units, a 20-unit increase since the start of the year. This compares to a 106-unit bump in the Permian and a 31-unit increase in the Eagle Ford over the same period.

Bakken Falling Behind
US - Oil Directed Rig Count by Play, % y-o-y
Source: Baker Hughes

While production in the play has recovered from a low of 960,000b/d in December 2016 to an estimated 1.03mn b/d in May of this year, we caution that further gains will be capped over the coming year for several reasons:

  • DAPL experiencing delays: The long-awaited Dakota Access Pipeline (DAPL) began commercial operations on June 1, creating a path for 470,000b/d of Bakken crude to move south. However, the project is not expected to reach full capacity until next year, thereby maintaining downside pressure on Bakken crude prices to compensate for more costly transport by rail. Moreover, continued legal challenges to the project could delay operations to a greater extent. In June, a federal judge in Washington, DC ruled that the US Army Corps of Engineers must conduct further environmental studies of the project, which is likely to take place at the end of this year.

  • Labour shortages plaguing the play: Upstream operations in the Bakken have been unable to accelerate due to a lack of skilled labour in the field. Large-scale layoffs over the past two years have resulted in a shortage of trained frac crews in the play. Moreover, employers are now searching for more technologically-savvy candidates to fill vacancies given technological advances within the industry since 2014. This has resulted in an increase in the number of drilled and uncompleted (DUCs) wells in the play, from 801 in January to 819 in June, a trend we expect will remain in play over H217.

The Drawdown Has Reversed
Bakken - DUCs by Month
Source: EIA
  • Well performance on the decline: Production metrics within the Bakken are also struggling, suggesting greater investment is needed to improve output. In the month of May (latest data available), the North Dakota Department of Mineral Resources (NDMR) reported that the number of oil wells producing within the play had reached an all-time high of 13,559. However, the daily production of oil per well has fallen considerably over the past two years, from approximately 100b/d in Jan 2015, to around 77b/d over H117.

Oil Recovery Falling Behind
Bakken - Oil Wells Producing, b/d per Oil Well
Source: NDMR

Given these factors, coupled with additional downside pressure on oil prices, we believe output will remain below the 1.1mn b/d mark over the next year. Operators will need to increase their investment into the play to boost efficiencies and maximise returns. However, we maintain that it will be difficult to attract workers into the play amid a tighter labour market and elevated uncertainty regarding a sustained market recovery ( see ' Companies Face Challenges Attracting New Workers ', May 30). This will limit upstream momentum and cap production gains through 2018.

Limited Room To Run
Bakken - Crude Production Forecast
May 17 - Jun 18 = BMI forecast. Source: EIA, BMI

We estimate crude production in the play will average 1.03mn b/d in 2017, a 2.9% y-o-y decline versus 2016. Output will fall by an additional 1.8% y-o-y in 2018 as upstream investments continue to be directed toward the larger Texas plays.