Trisha Curtis, Director of Research, Upstream and Midstream Energy - - PowerPoint PPT Presentation

Trisha Curtis, Director of Research, Upstream and Midstream Energy Policy Research Foundation, Inc. (EPRINC) DUG Bakken and Niobrara - Hart Energy - Denver, CO April 2nd, 2015

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Bakken - Diamond in the Rough

Appreciating the complexities of Bakken crude in a low oil price environment

Photo by Trisha Curtis

About EPRINC

• www.eprinc.org
• Oil and Gas Journal
• Embassy Series
• Presentations at Imperial College

London, Colombia University, Wyoming Pipeline Authority, EPA, Oxford Institute for Energy Studies

• Infrastructure Paper

http://eprinc.org/wp- content/uploads/2013/10/EPRINC- PIPELINES-TRAINS-TRUCKS-OCT31.pdf

• Department of Energy – Quadrennial

Energy Review

• Department of Defense
• Rin App http://eprinc.org/2014/02/rins-

around-rosy-app-available-ios/

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What sets the Bakken apart?

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• Globally coveted rocks
• 10,000 plus feet so more expensive to drill
• Break evens vary
• Good and stable crude quality
• Distance from markets – cost of transportation
• Rail accidents
• And other crudes going to those markets (has to go east or west)
• Bakken’s complexities make it tricky in the short-term in a low oil price

environment

• The Bakken is the best known shale/tight/unconventional oil play in the world and

there is still a lot to learn. Long-term attraction/investment will continue

• This is a boom and bust business. Right now it is busting, but it will boom again
• Broader market
• Put Bakken in context
• Issues

2000 4000 6000 8000 10000 12000 14000 Thousand Barrels Per Day Canadian Crude Oil Production U.S. Field Production of Crude Oil Mbbl/d

North American Oil Production

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Source: EIA

U.S. 9.226 mbd (Dec 2014) Canada 3.677 mbd (Oct 2014) North America = 12.9 mbd

When oil prices started to slip

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Source: Energy Aspects, Aug 24th, 2014, WSJ Nov 4 2014

Several events taken together along with lowered expectations of Chinese and European economic growth caused oil prices to weaken

• 9 mbd plus U.S. production
• Some strong non-OPEC production in 2014
• significant volumes of crude moving from the

U.S. to Canada displacing African barrels

• Libyan crude unexpectedly comes on the

market

• ISIS is pushing barrels on the market
• Draghi spooks markets with negative inflation

expectations for Europe in Jackson Hole Sept 2014

• People begin to actually believe the negative

data out of China Saudi’s take…

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EPRINC Production Evaluation…what production could be…

Source: EPRINC/Ponderosa

2 4 6 8 10 12 14 16 18 20 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Production mbd

0-25 25-35 35-42 42-50 50+

Potential

• utcome

with decline in prices

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CAPP’s Canadian crude oil forecast

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Source: CAPP 2014, “Crude Oil Forecast. Markets, and Transportation”

EPRINC LINE - 2015 likely to be revised slightly lower with additional postponements and cancellations in some future projects

2000 4000 6000 8000 10000 12000 Jan-60 Feb-62 Mar-64 Apr-66 May-68 Jun-70 Jul-72 Aug-74 Sep-76 Oct-78 Nov-80 Dec-82 Jan-85 Feb-87 Mar-89 Apr-91 May-93 Jun-95 Jul-97 Aug-99 Sep-01 Oct-03 Nov-05 Dec-07 Jan-10 Feb-12 Mar-14 Apr-16 9

US Crude Oil Production and 2015/2016 Possible Projection

Source: EIA, EPRINC

Dec 2014 (latest available data) oil production was just above 9.2 mbd

Likely trend prior to oil price drop Possible

• utcome of

modest growth with a slight uptick in late 2016 should prices begin to improve

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100 200 300 400 500 600 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Thousand Barrels Per Day Gulf Coast (PADD 3) Exports of Crude Oil Mbbl/d U.S. Exports of Crude Oil Mbbl/d

U.S. exports of crude oil

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Source: HPDI Aug 2014

Bakken and Gulf Coast crude being sent to eastern Canada pushing out light MENA barrels further depressing prices Over 500,000 b/d to Canada in Jan with most to eastern Canadian refineries – capacity about 800,000 b/d

• over 100,000 b/d from

ND

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U.S. imports of Canadian crude oil

Source: EIA

500 1000 1500 2000 2500 3000 3500 JAN-90 OCT-90 JUL-91 APR-92 JAN-93 OCT-93 JUL-94 APR-95 JAN-96 OCT-96 JUL-97 APR-98 JAN-99 OCT-99 JUL-00 APR-01 JAN-02 OCT-02 JUL-03 APR-04 JAN-05 OCT-05 JUL-06 APR-07 JAN-08 OCT-08 JUL-09 APR-10 JAN-11 OCT-11 JUL-12 APR-13 JAN-14 OCT-14 Thousand Barrels Per Day

Dec 2014 - 3.3 mbd

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Cushing stockpiles and WTI

Source: EIA

$- $20 $40 $60 $80 $100 $120 $140 $160 10000 20000 30000 40000 50000 60000 Thousand Barrels Weekly Cushing OK Ending Stocks excluding SPR of Crude Oil Thousand Barrels Cushing OK WTI Spot Price FOB $/bbl

U.S. rigs and WTI

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Source: Baker Hughes

$- $20 $40 $60 $80 $100 $120 $140 $160 500 1,000 1,500 2,000 2,500 1/07/2000 6/09/2000 11/10/2000 4/12/2001 9/14/2001 2/15/2002 7/19/2002 12/20/2002 5/23/2003 10/24/2003 3/26/2004 8/27/2004 1/28/2005 7/01/2005 12/02/2005 5/05/2006 10/06/2006 3/09/2007 8/10/2007 1/11/2008 6/13/2008 11/14/2008 4/17/2009 9/18/2009 2/19/2010 7/23/2010 12/22/2010 5/27/2011 10/28/2011 3/30/2012 8/31/2012 2/01/2013 7/03/2013 12/06/2013 5/09/2014 10/10/2014 3/13/2015 # of Rigs Oil Gas Total Cushing OK WTI Spot Price FOB $/bbl

Permian takes the biggest rig dive

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Source: Baker Hughes

100 200 300 400 500 600 Williston Total Permian Total Eagle Ford Total

• 200,000

400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Barrels Per Day Eagle Ford North Dakota Permian Basin Wyoming Colorado

Permian 1.7 mbd

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Shale oil play production

Source: HPDI March 29, 2015, EIA, NDPA

Eagle Ford 1.5 mbd

North Dakota 1.2 mbd

Colorado 251,000 b/d Wyoming 216,000 b/d

ND Crude Forecast

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Source: Deep Debt Keeps Oil Firms Pumping Producers Have Increased Their Borrowings by 55% Since 2010 By ERIN AILWORTH, RUSSELL GOLD and TIMOTHY PUKO January 6, 2015

Able to sell more bonds and take on more debt

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Drilling more and completing less

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• Recent conference calls suggest completion costs are roughly 60% of

well costs

• Pressuring service costs lower, drilling, but not completing
• Refracing can work, but need to test it and need a good wellbore to

start with

• ND wells waiting on completion are about 1,000 and likely similar

across the country

• Reservoir performance, completion best practices, and cost reduction?
• Job losses and ability to quickly turn on production…?

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Technology advances and then oil prices drop

Source: The American Oil and Gas Reporter, Dec 2011; Continental Resources November 2014 Investor Presentation; Cosima Theloy and Steve Sonnenberg, SPE Paper 168870, presented Denver Aug 2013, “Integrating Geology and Engineering: Implications for Production in the Bakken Play, Williston Basin” Source: Continental Resources March Investor Presentation, Permission granted

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A little dive into ND data

Source: NDIC

January 2015 – 825 wells WOC Dec – 750 Nov – 775 Oct 2014 – 650 Sept 2014 – 610 2014 avg - 646 2013 avg - 478

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Infrastructure and Pricing

January 2015 Williston Basin Crude Transportation

Source: NDPA, EPRINC Estimates

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Tesoro Refinery: 68,000 b/d Truck to Canadian Pipeline: 12,000 b/d Rail: 762,258 b/d Pipeline: 472,939 b/d (up about 40,000 b/d from Aug 2014)

Williston Basin Production: 1.3 mbd North Dakota: 1,190,511 b/d South Dakota: 4,686 b/d Eastern Montana: 78,000* b/d

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Williston Basin Rail Estimates

Source: NDPA

• 100,000

200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15

Barrels Per Day

Low High

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EIA’s New Rail Data

Source EIA March 31, 2015:

Regional Pricing Disparities

Source: Map from AFPM, Flint Hills, EIA, CME Group, and estimates

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Price Comparison

Source: EIA, Flint Hills, CME Group,, Bloomberg

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$0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00 $160.00 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 WTI Bakken (North Dakota Light Sweet Flint Hills) WCS (Western Canadian Select) Brent

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Source: Flint Hills ND Light Sweet, *Estimates from RBN blog Feb 2015

Bakken netbacks under pressure

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West Coast by Rail $10 - $15 Gulf by Rail $10 - $15 Gulf by Pipe $11* East Coast by Rail $10 - $15 Cushing by Rail $10 - $15 Cushing by Pipe $9* 4/1/15 $34 $50 $57 $57 $55 Good crude, but not close to major markets

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Refining/Downstream

Bakken Quality Comparison

Source: Continental Resources March Investor Presentation, Permission granted

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Bakken crude quality

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In comparison to other light sweet crudes being produced in the U.S., the Bakken shakes out well

• Natural fit for more simple East Coast refineries
• Good resid cracking feed properties
• East Coast will continue to be a long-term home for

Bakken crude

• Decent distillate yield
• High level of reformer feed can cause some naptha

handling issues

Bakken Pipeline and Refinery Capacity

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Source: NDPA

Bakken transportation optionality

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Rail…

Do exports matter for Bakken crude?

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Source: Drilling Info and EOG Investor Presentation

• Yes. Not as important as Gulf, but more room

for Bakken crude to move throughout the U.S.

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Additional Challenges and Regulatory Uncertainty

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Oil Conditioning Rules Effective April 1, 2015

BLM Fracking Regulations

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It is really going to be about implementation Really seems to be about proper casing and frac water management Submit detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, the depths of all usable water, estimated volume of fluid to be used, and estimated direction and length of fractures, to the BLM with the APD or a Sundry Notice and Report on Wells (Form 3160–5) as a Notice of Intent (NOI) to hydraulically fracture an existing well;

Source, USGS http://nationalmap.gov/small_scale/printable/images/pdf/fedlands/DOI_ALL_2.pdf Source: http://www.gpo.gov/fdsys/pkg/FR-2015-03-26/pdf/2015-06658.pdf

Crude by Rail Accidents

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LAC MAGENTIC: AP PHOTO/THE CANADIAN PRESS, PAUL CHIASSON http://usnews.nbcnews.com/_news/2013/12/30/22113442-mile-long-train- carrying-crude-oil-derails-explodes-in-north-dakota?lite

Continued…

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• July 6, 2013, a run-away train crashed and exploded in Lac-Mégantic, Quebec, killing 47 people and destroying parts of

the town

• November 8, 2013, about 12 cars derailed in a unit train of 90 cars carrying crude oil near Aliceville, Alabama (45 miles

SW Tuscaloosa). Nobody was injured, but three of the cars exploded.

• December 30, 2013, a train hauling grain derailed near Casselton, ND hitting a 106 car unit train of crude oil which

caused 18 crude tank cars to derail causing a massive explosion and fireball

• January 7, 2014, a Canadian National train jumped tracks in Plaster Rock, New Brunswick. 15 cars derailed and caught
• fire. The train was carrying propane and crude oil from Western Canada
• January 20, 2014, a CSX train derailed in Pennsylvania on a railroad bridge and close a busy expressway (Schuylkill), but

did not leak any crude oil.

• January 31, 2014, a CN train carry heavy Canadian crude and other products derailed and leaked in New Augusta, MS
• February 13, 2014, 21 of 120 NS cars carrying heavy Canadian crude derailed in Vandergrift, PA
• April 30, 2014, oil tanks cars on CSX derailed and caught fire in Lynchburg, VA (3 of 15 cars that derailed caught fire).

Nobody was injured by 300 people were evacuated temporarily

• January 31, 2015, tank cars derailed in CSX in Philadelphia, PA, but did not rupture
• February 14, 2015, 29 of 100 cars derailed on CN in Timmins, Ontario transporting crude and product, 7 out of the 29

caught fire

• February 16, 2015, 26 cars in a 109 CSX unit train carrying Bakken crude derailed in Mount Carbon, VA. 19 of the 26 cars

caught fire. A home was destroyed and a person was injured. Drinking water was contaminated. The psi was said to be 13.9 which would be above the new standard to set to be implemented in ND in April at 13.7.

• March 5, 2015, 21 of 105 carrying Bakken crude derailed on BNSF in Galena, IL. At least 2 cars caught fire
• March 7, 2015, 39 cars derailed on a 94 car CN train in Gogama, Ontario carrying heavy Canadian crude. 7 cars caught

fire and 5 entered the Makami River

Recent Sandia Report

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“This initial investigation identified gaps in important crude oil characterization data, uncertainty regarding how best to sample and analyze crude oil to ensure that its properties are accurately determined, and deficiencies in the understanding of how crude oil properties impact its potential for accidental ignition, combustion, and explosion.”

Conclusions

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• Bakken’s complexities will continue and potentially

be exacerbated in a low oil price environment (drilling costs, transportation costs and issues, etc.)

• In the long run, the Bakken is a stable and well

understood production platform which will attract long-term investment