(John Kemp is a Reuters market analyst. The views expressed are his own)
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 industry.
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 opportunities".
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 deposits.
As a result, fewer rigs are drilling more wells and adding more to production than ever before.
Chart 1: link.reuters.com/zyx83t
Chart 2: link.reuters.com/caz83t
Chart 3: link.reuters.com/vys83t
Chart 4: link.reuters.com/gaz83t
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 months earlier.
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 wildcats.
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. (editing by Jane Baird)