Banking on Bakken

The Bakken-Three Forks shale play, a multiâ€stacked system composed of the Bakken formation with its upper, middle, and lower members, and the underlying Three Forks formation, lies in the Williston Basin in northeastern Montana and northwestern North Dakota. Pronghorn Sands exist between Lower Bakken and Three Forks in some areas of the play. Historical Bakken production has been from the naturally fractured areas of the play, or from the Sanish Sand between Bakken and Three Forks, with most of the production originating from the Middle Bakken formation.

In the past few years, hydraulic fracturing and horizontal drilling techniques have unlocked the potential of other areas of the play, including the Three Forks formation. Unconventional development began around 2005 and thus bypasses the declining conventional production at Elm Coulee.

Yet, as with other prolific plays, the Bakken's success is also its setback. In 2011, despite drilling that mainly targeted the Bakken Formation to hold units in less mature areas, an increasing number of Three Forks wells were tested and put into production. As a result, the major buzz in the Bakken is that production has passed a critical level, above which minor midstream interruptions can lead to the accumulation of huge quantities of oil and degeneration into a state of local oversupply, thus leading to discounted netback prices for producers.

According to Hart Energy Research, the typical spread between Bakken and West Texas Intermediate (WTI) is $1 per barrel (bbl.). However, if supply surpasses transportation capacity, the Bakken price (quoted at Clearbrook, Minnesota, and Guernsey, Wyoming) will be significantly below WTI priced at Cushing. The constant increase of Bakken oil production (also from Canada) might seriously threaten companies that haven't been able to reduce costs and must rely on alternative routes (such as rail transportation) to take advantage of the price differential between WTI and Brent to ship oil to distant markets.

Bakken milestones

In December 2011, North Dakota production reached 510,000 bbl. per day. In January 2012, production rose to 546,000 bbl. per day, as reported by the Department of Mineral Resources of North Dakota, overtaking California.

In February 2012, three important events impacted Bakken producers and midstream providers. First, the Obama administration rejected TransCanada Corp.'s application to build the Keystone XL pipeline, but maintained that this was not a final judgment on the project. The pipeline would include the capability to pick up Bakken oil and move it to southern markets. TransCanada has applied for a new permit.

Second, the Bakken (Clearbrook, Minnesota) crude oil spot price dropped for a week, touching a minimum of $71 per bbl., corresponding to a $45 differential to Brent. Meanwhile, Enbridge Inc.'s pipeline capacity became fully utilized.

And third, the Department of Mineral Resources of North Dakota announced that rig counts in the Williston Basin are increasing very slowly, and that adding rigs now requires new builds because more than 95% of the rigs capable of drilling 20,000 feet or more in the Rocky Mountain area are in use.

Historically, the Bakken has had an extensive midstream infrastructure in place. But with the rapid increase in production, the midstream industry is challenged to build new pipelines and find new markets to meet the production pace. While some operators plan to seek or increase oil take-away capacity in the region, a few operators are flaring some natural gas as they focus on capturing liquids value.

Meanwhile, gas processing capacity is expanding to handle the increased natural gas and liquids production. Operators are capturing the natural gas liquids (NGL) value and sending it to markets via truck or rail. Thus, gas flaring will be significantly reduced when NGL facilities and processing plants come online.

As production continues to outpace pipeline take-away capacity, producers are turning toward expensive railways and trucking for near-term capacity shipping until the proposed pipelines come into operation. In fact, third-party companies are planning to build even more rail load-out terminals, giving producers more flexibility to move products to markets.

Yet, the risk that keeps operators up at night is the fear that production in the Bakken might be affected if the newly proposed take-away projects are delayed.

Major producers

IHS Herold, a subsidiary of IHS Inc., has been keeping a close eye on the Bakken for its clients. The company, which was formed in 1959 and is headquartered in Englewood, California, specializes in the analysis of company valuations, strategies and transactions and provides independent transaction valuation, research and strategic analysis on energy companies worldwide.

"A lot of the best Bakken acreage is held by private companies," says Christopher Sheehan, director of M&A Research for IHS Herold. "Most of the prospective acreage in the play is already leased, so companies wanting to enter have to buy their way in and pay robust acreage prices."

Since 2010, nearly $11.5 billion of assets have traded hands, with many sellers of assets preferring to remain undisclosed to public records. Three major corporate sales included the sale of American Oil & Gas LLC to Hess Corp., the sale of NuLoch Resources Inc. to Magnum Hunter Resources Corp. and the major kicker, the sale of Brigham Exploration Co. to Statoil ASA. Publicly traded producers with significant exposure include Continental Resources Inc., Hess Corp. and Whiting Petroleum Corp., among others.

For buyers, formation evaluations can be difficult. Well performance results vary considerably, Sheehan explains. As a result, some operators are replacing reserves more efficiently than others. As the reserves replacement becomes better known over time, Sheehan believes the data will lead to further corporate consolidation in the upstream space.

"Resource potential continues to be high in this liquids-focused play," he says. "A fairly new focus area is the multiple dolomite benches in the Three Forks, where wells are being tested for oil potential."

Fortunately, this year, the winter season in North Dakota has been conducive to continued drilling efforts and midstream construction, according to Justin Kringstad, director of the North Dakota Pipeline Authority.

"It's been a good year for the Bakken folks to catch up on projects. We've been fortunate to have a relatively warm winter. Personally, I don't think I've shoveled snow more than just a couple of times all winter."

As a result, Bakken production continues to grow at a healthy pace. "As of January of this year, production is about 550,000 bbl. per day," he says. In fact, by 2016, production for all of the Williston Basin, including North and South Dakota and eastern Montana could reach 1,000,000 bbl. per day, and could continue to grow to about 1,300,000 by 2025.

Midstream to market

While the mild winter presented an opportunity to work through the winter, the Bakken still poses three main challenges, says Kringstad.

"The first major challenge, and the one that is most widely discussed is the issue of how to move crude oil production within the Williston Basin or outside of the basin to market," he says Kringstad.

"Challenge number two is to efficiently and safely move crude oil from the wellhead to other mode of transportation, such as a rail or pipeline facility. And challenge number three, which recently has become more of an issue, is the current pricing structure for oil, such as the Cushing to the Gulf Coast price differentials. But now we are seeing another bottleneck in the Great Lakes and Midcontinent to Cushing."

The challenges create two tiers of discounts that producers are facing in Western North Dakota and the pricing has been quite poor during the past few months, he says. However, many new projects and proposals are underway to address those challenges.

"Right now, with the combination of pipeline and rail infrastructure, we do have an adequate means of getting oil production to markets. About 10% of the oil production stays in North Dakota and is processed at the Tesoro Corp. refinery, and the remainder of it is shipped out via pipeline or railcar."

North Dakota first began shipping oil by rail in August of 2008, Kringstad explains. Since that time, the area has seen a tremendous period of growth of new rail facilities and the volumes of oil being shipped.

Some of the older rail facilities are the manifest-style trains, which can be loaded by pulling a tanker truck up to an empty railcar and pumping the crude oil into it. Those types of rail systems can come on line very quickly, he says.

The new railway projects are all planned to be unit trains with up to three large track loops so the trains can pull in and out quickly. The choice of train facilities versus pipelines will depend on the economic decisions of the producers and the timing of the pipelines projects. The take-away infrastructure via all systems is not likely to be over built due to the uncertainty of the dynamics of those key decisions.

"As a rule of thumb, shipping by rail is $2 to $3 per bbl. more expensive," says Kringstad. "But it is difficult to say that, because the trains do not go to the same locations as the pipelines. Most of the rail is moving bbls. to the Gulf Coast or the East and West Coasts, where pipeline access does not exist."

Yet, the high price of Brent crude at the premium destinations of the coastal markets continues to make shipping by rail to those markets still attractive. As of January 2011, railways were shipping out about 150,000 bbl. per day

"Going forward, for the next few years, railway will continue to be a key portion of the area's transportation infrastructure," he says. By 2015, railway take-away will command a large marketshare of the expected 1,750,000 bbl. per day total transportation capacity in the Williston Basin.

"Also, many pipeline projects are in the planning and open season stages, so within the next three to six months, a lot of details are going to shake out as to what these projects are going to look like once the commitments are received."

Kringstad says that whether he is too conservative with his production forecast or too optimistic, either way it looks like producers will be able to move oil out of western North Dakota to markets outside of the region.

Trucking troubles

Meanwhile, sufficient crude oil gathering is critical due to the pace of development in western North Dakota, but three challenges must be overcome. "First, there is a big push to take as many trucks as possible off of the road systems due to the wear and tear on the roads and the safety of the other folks using those road systems."

Second, the winter of 2010 to 2011 included several large blizzards in the area, which shut in a significant number of wells. "Because of those snow storms, it became extremely difficult or impossible to get trucks to the well sites to load crude. It put an exclamation point on the importance of getting crude oil gathering infrastructure in place."

And third, the area is home to significant shortage of qualified truck drivers and housing for the influx of personnel needed to expand infrastructure.

For now, about 25% of the gathering from the wellhead to major pipeline injection point or rail facility is accomplished by gathering pipelines, with the rest moved by trucking. As an example of the importance of gathering pipelines, the Four Bears Pipeline gathering system that was commissioned in January 2012 is a 77 mile, 12-inch diameter, 105,000 bbl. per day system that removed 50,000 to 75,000 truck-miles from roadways per day. Bridger Pipeline LLC owns and operates the system that moves crude production in central McKenzie and Dunn counties.

Another example is Enbridge Energy Partners LP's four station upgrades that included new truck lots and tanks, which can remove about 50,000 to 143,000 truck-miles per day.

"North Dakota gas infrastructure projects have another whole set of challenges," says Kringstad. "But much progress has been made by industry to capture Bakken and Three Forks natural gas, which is heating more than 2,000,000 homes."

The root of the challenge for North Dakota natural gas is the sheer size of the resource that is under development, says Kringstad.

"This is a 15,000- to 18,000-square-mile oil field," he says. "Up until this point, industry had never taken on a challenge of this size before. Many of these new producing areas of North Dakota are outside of the historical petroleum development. We need all new pipelines, all new processing, all new infrastructure to get these wells connected to the gas facilities to eliminate the flaring and get the gas captured and sent to market."

For now, about 4,000 wells have gas sales, and slightly more than 1,000 wells do not have sales and the gas must be flared. Many of the 1,000 are historical wells, and much of that gas is flared due to the distance to market or the quality of the gas.

But progress is being made. For now, about 100 to 140 gas wells per month, on average, are being hooked up to sufficient infrastructure to get gas to market. "The past winter, we saw the highest number of wells being connected that has ever been. That is very encouraging and a good boost to the development."

New investment

Oneok Partners LP, based in Tulsa, Oklahoma, is one of the midstream companies that plan to increase investment in gathering, processing and transmission assets (mostly fee-based) in the Bakken shale—to the tune of about $2 billion—because "the Bakken continues to be a very busy area for both upstream and midstream developments," says spokesperson Brad Borror.

"We have a number of projects in the Bakken that are in various stages. We will construct and operate those assets. For example, this spring, we will begin construction on our 500-mile NGL Bakken Pipeline."

The 12-inch diameter liquids pipeline originates just south of Sidney, Montana, and will terminate in northern Colorado at Oneok Partners' 50%-owned Overland Pass Pipeline. The line will transport Bakken NGLs for further processing at the company's fractionation facilities in Central Kansas, he says.

About 60,000 bbl. per day is fully subscribed. "Our Bakken NGL line is expandable up to about 110,000 bbl. per day, if we see a demand for that once it is in service," he says.

Also, Oneok Partners is building three natural gas processing facilities, each with a capacity of 100 million cubic feet (MMcf) per day.

"The first one, Garden Creek, went online in December of 2011. The two additional facilities are now under construction in Williams County, North Dakota. The first is Stateline I, which is expected to be in service later this year. The second, Stateline II, is being built adjacent to Stateline I. That will be in service in the first half of next year," says Borror.

The company's main contractor for the gas plants is Linde Corp. "It's fascinating what they do," says Borror. "They actually construct the majority of the plant at their facility in Oklahoma and they ship it on rail cars to the site and re-assemble it. It's like a big erector set."

New gas gathering

To serve the gas processing plants, Oneok Partners is building the necessary gathering infrastructure. "In fact, we just announced an additional gathering system for Divide County."

The investment will include a new $160-million, 270-mile, natural gas-gathering system and relevant infrastructure to move about 100 MMcf per day from Divide County wells to its Stateline II gas processing facility in Williams County, North Dakota.

The company's existing Bakken infrastructure includes its 100 MMcf per day Grasslands processing plant.

"We've been operating that for a number of years. With the completion of these three new plants, that will bring Oneok Partners' overall gas processing to about 400 MMcf per day in the Bakken. That makes us the largest operator of gathering and processing assets in that region."

Is there any danger of overbuilding Bakken processing capabilities? No, says Borror. "We are confident that the investments that we have announced and that we are executing in the region will be met with available gas production to fill up these facilities."

Will Bakken liquids continue to be highly valued during the next few years? "Absolutely," he says. "And if we look at a bbl. of Bakken resource production, about 91% of that is oil, and about 6% of that is NGLs. Another 3% to 4% is natural gas. We are interested in that 9% to 10% as NGLs have become a very large part of our business. We have one of the largest NGL operations in the country, so we are certainly looking to take advantage of the liquids coming out of that region."

New oil pipeline

On the oil side, in early April, Oneok Partners announced plans to build a $1.5-billion to $1.8-billion, 1,300-mile, crude oil pipeline to originate at Stanley, North Dakota, and culminate at Cushing, Oklahoma. The oil pipeline is slated to transport 200,000 bbl. per day by early 2015.

Following receipt of the necessary permits and compliance with customary regulatory requirements, construction of the Bakken Crude Express Pipeline is expected to begin in late 2013 or early 2014 and be completed by early 2015.

Based on supply commitments prior to construction, the capacity can be increased. The proposed pipeline route will be positioned to transport crude-oil production from the Niobrara shale as well as the Bakken. The route is expected to parallel more than 80% of Oneok's existing and planned NGL liquids pipelines.

"We have not had our open season. We have pending negotiations and discussions that have to take place yet," says Borror. Additionally, the partnership has a $1 billion-plus backlog of unannounced growth projects that will be announced when sufficient supply commitments are completed.

New civil infrastructure

Although the new infrastructure is well-planned and execution is underway, some challenges must be overcome, as is the case with almost all of the relatively new unconventional play regions.

"Housing for constructions workers is a challenge up in that region," explains Borror. "Particularly in the small communities, such as Watford City and Williston that are located near our new plants that we are building, there has been a lot of strain put on their local infrastructure.

"And it is not only the services that the cities provide, but those of the county as well. All the increased activity has had its effect on their roads and other services. They are experiencing growing pains. But we also see a lot of man camps that have popped up to house labor working on ours and other projects, so that helps."

For more on Bakken upstream and midstream activities, see Bakken's Rapid Ascent in this issue and www.midstreambusiness.com.