E Bakken Update: Rig Counts Tell Us Little As Horizontal Production Has Changed The US Oil Market

I have said on multiple occasions that rig counts aren't necessarily the best way to follow the health of the US oil markets. The oil price pullback forced many operators to drill a bunch of holes. These holes were left uncompleted and named the US fraclog. Operators put capital to work and prepared for the return of higher oil prices. I don’t think anyone saw how long and drawn out it would be, nor did operators think they would be sitting on this large a number of uncompleted locations. With such a large number, many operators have dumped the majority of rigs and are just focusing on the best core leasehold. These wells are profitable at today’s prices, but much of the fraclog is not. In states like North Dakota there is a limit to how long a well can sit uncompleted, but it changed those rules to help operators through this difficult time. 

Companies that provide drilling rigs have been hit especially hard. There may not be a light at the end of the tunnel, as we continue to see utilization and rates struggle in today’s environment. Although rig numbers had been a very good indicator as to the health of the US oil industry, things may have changed. Forty years ago the majority of locations drilled were conventional wells. An operator would drill to the depth of either oil or natural gas. This was a much easier and cheaper way to collect resource. Less complex rigs are needed to drill vertical wells, and those rigs are seeing a decreased demand. When conventional production provided the bulk of US oil production, rig numbers were much more important. One could derive production numbers based on this, but today this is much more difficult.

Conventional production declines differ from new horizontal wells. When a conventional well begins production, less is seen upfront. A typical conventional well will also exhibit less upfront, but provide reliable numbers with less decline. A conventional well will begin production and immediately see an approximate 4% decline rate. These wells will produce for decades, until production dips to a point where it is uneconomic. At that point, it becomes a stripper well. Keep in mind, some wells will be shut in, but if oil prices increase may start producing again. Horizontal production differs significantly. Although production declines are much larger, and a large percentage is upfront. Costs are also generally much greater. These declines differ by geology. Intervals that produce more natural gas will have greater well pressures. This means resource (including oil) will be pushed up and out of the well bore at a greater rate. It also means declines may be greater because production began with higher pressures that will decline as the well produces. The deeper the source rock, the greater well pressures will be. So although it will be more expensive to bring that well online, one would hope better pressures would decrease payback times. Because production rates differ by play and depending where in the play it is located, production increases are a little more difficult to estimate. A Horizontal well will produce roughly half of its resource at 5 years. This differs significantly by play and well design, but is a rough estimate to follow. Wells that use too little propellant or the wrong type may see faster decline rates. If the fractures created during completion are not propped open well enough, it will close and shut off production. In some plays, ceramics must be used but we are starting to see all sand fracs in all of the major plays. Operators are having good luck with sand intensive fracs that use huge volumes in horizontals that use better stimulation techniques focused near the well bore. In 2008, we saw more unconventional horizontals decline at a 98% rate over the first year. This has improved dramatically, as we are seeing some decline between 70% and 80%. 

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Michael Harper 2 years ago Member's comment

Always learn from reading you Michael. How does a zipper frac work??

Alexa Graham 2 years ago Member's comment

I'm curious about this as well. First time I've heard the term.

Michael Filloon 2 years ago Author's comment

Thanks for commenting Alexa and Michael. Great question, and one that I should have described better or in more detail in the article. A zipper frac is done on one well pad with several drilled but un-completed welds are located. The completion crew can complete those wells at (not exactly the same time) the same time. Once the crew gets started on the first it starts the second and the third, etc. it saves a significant amount of time which also saves a lot of money. The more wells done on one pad the more money saved

Dan Richards 2 years ago Member's comment

Fascinating, thanks for explaining.

Michael Filloon 2 years ago Author's comment

Your welcome Dan, let me know if you ever have any questions.