E Bakken Update: How To Play The Delaware Basin As Oil Prices Recover

Looking 12 months out many are optimistic for oil. Most believe that $45/bbl WTI cannot support the majority of US unconventional operators. This is probably true, as the Permian and STACK may be the only oil bearing plays that are profitable at those levels. Operators in those plays are not super excited about that price, and most would probably be just holding on. If an oil price recovery is in the works, how does one play it? A smart investor will stick with good balance sheets, but also concerned about acreage. 

Geology is the key for operators, as plays that work especially well with Mega-Frac completion designs will prosper. Others could have some problems. As we have said in the past, the Bakken could have a rough time going forward.  This has nothing to do with geology and more to do with taxes and differentials. North Dakota has one of the highest production tax rates in the country. Although this has been decreased recently, it leads operators to plays in Oklahoma and Texas.

Differentials explained simply is the cost to transport barrels of crude to the final customer, refiners. Refineries are positioned on the coasts. There is a good reason for this, imports. Refineries purchase many different types of crude whether sour or sweet, light or heavy. There are other types and mixes depending on where the crude is from, but refiners purchase the types that are the most advantaged. The crack spread is the margin a refiner makes when it cracks crude into refined products.There are many factors the determine this margin, but the refiner buys what will make it more money. Many ask why our refiners can’t just refine all light/sweet crude. Although this would be great for producers in the United States, it would place refiners at a distinct disadvantage. The distance of the largest refining capacity in the US, the Gulf Coast, is very close to Oklahoma. Much of this is in Texas which keeps differentials low in that locale. North Dakota is very far away from the Gulf Coast, but also has a great distance to California and the Northwest. These areas do not have pipe in the ground.  The rails are more expensive and California has seen many communities move to keep railed oil out of their areas. 

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Rhiannion Stalker 2 years ago Member's comment


Thought I read a news blurb that XOM sold a refinery in Montana or Wyoming? So where/how is that refinery getting its crude? Just wonderin.....

Michael Filloon 2 years ago Author's comment

Yep, its the Billings Montana refinery. It gets the majority of its light crude from Wyoming and its heavy crude from Alberta Canada. It isn't a huge refinery, but does about 60K bbls/d of throughput (I would have to check that).

Rhiannion Stalker 2 years ago Member's comment


Thank you for another exceptional article.

Michael Filloon 2 years ago Author's comment

Thank you Rhiannion! I appreciate it!

Michael Filloon 2 years ago Author's comment

The U.S. oil rig count remains unchanged at 406 following eight consecutive weekly gains, Baker Hughes says in its latest survey.

The total U.S. rig count, which includes a drop of 2 rigs drilling for natural gas to 81, fell by 2 to 489.