By John Kemp
LONDON Nov 12 North Dakota's Bakken oil fields
are so important for the growth of U.S. production, and as the
herald of a worldwide shale revolution, that any sign output is
starting to peak would have huge consequences for the oil
In recent months, the number of rigs drilling in North
Dakota has fallen around 10 percent from just over 200 in June
to about 180 in October, according to weekly counts published by
oilfield services company Baker Hughes.
The downturn has led some analysts to speculate that Bakken
might be becoming less attractive due to its high costs and
softening U.S. oil prices, anticipating that production might
start to level off in the near future.
"The boom is far from over ... (but) North Dakota's role as
a source of strong incremental demand for drilling rigs may be
waning," analysts at Barclays Capital explained in a note last
week ("WTI: No longer worth the wait" Nov 7).
"Oil drilling is now lower year on year in North Dakota, the
only one of the top 10 oil-drilling states to show a fall. We
believe that rising costs and development bottlenecks may
explain why North Dakota has a lower bid for incremental
drilling," they wrote.
"There are lags, as well as efficiency and productivity
effects, that slow and complicate the mapping between rig counts
and output," Barclays added. "Falls in rig use do not herald any
immediate tailing off in output."
Nonetheless Barclays concluded: "North Dakota no longer
looks like the most attractive new frontier for business
Except that total drilling activity, when measured by the
number of new wells started and total footage drilled, has
continued to surge even as the number of rotary rigs operating
in the state declines.
By focusing on rig counts rather than the number of new
wells started ("spudded"), analysts are under-estimating the
total volume of drilling in the state and the potential for
continued production growth.
FEWER RIGS, MORE WELLS
Rising costs have forced exploration and production
companies to become more efficient, slashing the amount of time
they take to drill and complete each well as well as the dead
time involved in moving rigs from one location to another.
The mix of wells has also changed as the play matures, with
fewer speculative wildcat wells prospecting in new areas and
more development wells aimed to exploit well known existing
As a result, fewer rigs are drilling more wells and adding
more to production than ever before.
The total time taken to drill and complete a single well has
been reduced by around 25 percent this year compared with 2011,
from 50 days to 37, according to Continental Resources,
the leading exploration and production company in the play.
Efficiencies have resulted in 40 percent more wells being
drilled per rig. In 2012, each of Continental's rigs will drill
an average of 11 wells, compared with seven last year.
Continental has cut drilling times by focusing on process
efficiency. For example, the company has slashed the average
number of "trips" needed to drill each well from 3.7 per well in
the first quarter of 2011 to 2.3 in the second quarter of 2012.
A trip is the complete cycle of pulling the drilling
equipment out of the well and putting it back in, as for
instance when a piece of equipment fails or needs replacing. It
is a complicated and time-consuming procedure that adds
enormously to total costs, especially when the day rates for
rigs and crews are high.
Continental has also focused on optimising the movement of
its rig fleet and on drilling multiple wells from a single
location to reduce the amount of dead time as rigs move from one
location to another.
As a result, the company expects to drill 235 wells this
year and 262 in 2013, up from 175 in 2011.
COUNT SPUDS NOT RIGS
The same pattern of drilling more wells using fewer rigs is
being replicated across the state as best practice spreads from
industry leaders such as Continental to other firms.
In September, there were on average 190 rigs active in the
state, according to North Dakota's Department of Mineral
Resources (DMR), down from 209 in April. But those crews spudded
262 new wells, an increase of 32 (14 percent) compared with six
Spuds rather than rig counts provide a much more accurate
gauge of drilling activity because they take into account
efficiency improvements. The number of new wells spudded each
month has continued to climb steadily this year, even as the
total number of rigs has peaked (Chart 1).
PERMIT APPLICATIONS RISE
The number of applications to drill new wells continues to
surge. In September, exploration and production companies
applied for 273 new well permits with the Department of Mineral
Resources, up from 167 in April.
The mix is also changing as the play matures and companies
focus on infill development wells in the best explored and most
productive areas rather than outlying and more speculative
Almost all new well applications since April have been for
development wells. Between April and September, the Department
of Mineral Resources granted 1,233 permits for development
wells, up from 823 in the same period last year. Permits for
wildcats, by contrast, fell from 108 to 33 (Chart 2).
Because the scope of the play is now much better defined,
and the most productive areas have been identified, drillers can
focus on the most promising sites to maximise production growth.
Greater efficiency explains why production has continued to
rise steadily at a rate of around 65 percent per year since late
2009 (Chart 3).
BOOM NOT OVER YET
Initially, North Dakota added more production by adding more
rigs. Now it is adding more production by using the existing
fleet more effectively. In the process, some rigs and crews can
be redeployed for use in other states and Canada.
For example, there has been a marked increase this year in
the number of rigs operating across the state line in the "other
Bakken" in eastern Montana (Chart 4).
Since 2005, North Dakota has pioneered the application of
horizontal drilling and hydraulic fracturing to unlock oil from
tight shale formations. Now the state is pioneering more
efficient approaches to the drilling process to control costs.
Process improvements introduced by Continental and others
are revolutionising drilling and costs across the state and will
spread to other plays across the country.
Bakken's transformative impact on the oil industry still has
a long way to go.