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Bakken Update: Significant Oil Production Increases Seen In Subpar Bakken Geology Due To Mega-Fracs

Summary

Enhanced completions continue to improve initial production rates in US unconventional plays.

Mega-fracs were only used sparingly in 2015, but still improved 270-day production year over year by 22%.

As oil prices improve, we will find that improvements in well design provide a much larger footprint of development in US plays.

If correct, production increases could be much more substantial at lower prices than analysts expect.

Mega-fracs continue to improve unconventional production in the US. The changes to well design are significant, and many do not understand how much it may be changing the world oil markets. OPEC has tried to crush the US oil business, and spent a significant number of calendar days during this process. In the past, the Saudis had done an excellent job of evaluating breakeven prices of other plays. As the low cost producer of crude, it used this to push others out of business when too much production entered the market. I'm not saying this is wrong or right, as I believe in supply and demand. The point I would like to make, is this may not work. Current technologies are improving oil extraction at a much faster rate than anyone has expected. We believe this will continue for several reasons. If oil prices remain low so with the US Oil ETF (NYSEARCA:USO).

There are several other ETFs that focus on U.S. and world crude prices:

  • iPath S&P Crude Oil Total Return Index ETN (NYSEARCA:OIL)
  • ProShares Ultra Bloomberg Crude Oil ETF (NYSEARCA:UCO)
  • VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWTI)
  • ProShares Ultrashort Bloomberg Crude Oil ETF (NYSEARCA:SCO)
  • U.S. Brent Oil ETF (NYSEARCA:BNO)
  • PowerShares DB Oil ETF (NYSEARCA:DBO)
  • VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA:DWTI)
  • PowerShares DB Crude Oil Double Short ETN (NYSEARCA:DTO)
  • U.S. 12 Month Oil ETF (NYSEARCA:USL)
  • U.S. Short Oil ETF (NYSEARCA:DNO)
  • PowerShares DB Crude Oil Long ETN (NYSEARCA:OLO)
  • PowerShares DB Crude Oil Short ETN (NYSEARCA:SZO)
  • iPath Pure Beta Crude Oil ETN (NYSEARCA:OLEM)

Mega-fracs are just a term for a process of creating more fractures in rock.

(Source: Fidelity E&P)

The picture above shows just one way an operator is increasing production. Each red area is where frac's or fractures are made in the interval. The rock contains oil, natural gas, and natural gas liquids. When the interval is opened, the resource flows in the lateral, and is pushed up and out. The more source rock frac'ed, the more resource collected. This is a very complicated process, but I will try to keep it simple.

(Source: Whiting)

Whiting (NYSE:WLL) shows this process better. By using several perf clusters as opposed to one frac port, it can fracture the interval closer together and at differing angles. There is a much greater surface area covered, and this provides more square feet of contact with the well bore.

(SOURCE: EOG)

EOG Resources shows over 700% more events (fractures) than back in 2010. More importantly, these events are closer to the well bore. It is possible locations can be placed closer together. This would mean more wells per section. The pink dots show where the fracs are located, and we see a very complete infill of fractures. With more square footage opened up, more proppant is needed. This is why we see large volumes of sand in mega-frac well designs. Even with the downturn, frac sand producers like US Silica (NYSE:SLCA), Hi Crush (NYSE:HCLP), Emerge (NYSE:EMES), Select Sands (OTC:CLICF) and Fairmount (NYSE:FMSA) have seen recent up ticks in stock price. Frac fluid usage also increases. Producers like Flotek (NYSE:FTK) and Newpark (NYSE:NR) will also provide more volumes per foot. All of this is due to better source rock stimulation.

Better well designs have produced positive results in fringe areas of US plays. Initial testing was seen mostly in the core. This left little data in marginal areas. Initial results have shown core wells benefiting more from mega-fracs, but this may be changing. Recent results from lower pressured geology seems to point to an expansion of usage. If operators begin using this design in all wells, breakeven prices should decrease throughout all US plays. This means a lessor quality geology could be economic in this lower for longer environment. It doesn't mean today's economics will support fringe acreage, just that improvements could push down the longer term price of oil.

Looking at the Bakken, there are two main targets. The first is the middle Bakken. This is what the Williston Basin is known for. As a general rule, the best wells will produce from this zone. The Three Forks has a series of up to 4 intervals. There has been little said about the fourth bench, and only a few wells have targeted the third. The upper Three Forks has seen the majority of activity, but in some areas there have been good 2nd bench completions. The middle Bakken core is located around the Nesson Anticline but also includes Parshall and Sanish fields.

(Source: Continental)

Continental Resources (NYSE:CLR) shows where the area of greatest pressures are seen in North Dakota. As a general rule, the higher the well pressures, the better the well results...


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