There's no quick fix for a Bakken drilling rebound
February 2017 | Nick Barry
Operators are moving back into the Bakken, but how will the budding recovery affect drilling in the formation?
Not by much, according to the latest Energy Insights analytics. Even when we optimistically consider potential boons like the Dakota Access Pipeline (DAPL) or the OPEC cuts’ effect on oil prices, we see that Bakken drilling will be slow to recover. If the DAPL came online next month and drove Bakken-WTI differentials down to USD3/bbl, it would still take two years for drilling to recover to even half the 2014 levels. Likewise for the OPEC cuts—even if the price was USD75/bbl by YE17, it would take the full year to get back to that same drilling level.
The Bakken is not the Permian
The Bakken has been slow to stage a drilling recovery for two primary reasons. First, fundamental economics and break-evens clearly position the Permian more favorably compared to Bakken drilling. The Permian is a huge resource—with stacked intervals such as the Wolfcamp and Avalon Bone Springs, or the Wolfcamp and the Spraberry—that is close to
Second, there is an add-on effect that contributes to the slow drilling recovery in the Bakken. As Energy Insights has pointed out, the length of the oil and gas downturn, coupled with a lower unemployment rate in the economy overall, means that staffing the crews in the Bakken will not be trivial. Moreover, with the Permian providing so much business, service providers may need guarantees to justify moving their crews north. While the break-evens are an economic barrier to recovery, these add-on factors present practical limitations to the pace of the Bakken’s drilling recovery.
As a result, in our business-as-usual scenario, we have the Bakken’s rig activity for 2017 on average to be at only 22% of 2014 levels. In December 2017, when prices would be at USD58.50, Bakken rig count could be at 48 rigs, equivalent to 26% of average 2014 activity.
The upside seems limited
Furthermore, we expect two significant energy industry developments—the OPEC cuts and the DAPL—to likely fail to significantly increase drilling activity in the Bakken. The promise of OPEC cuts has already increased crude prices, and the DAPL, when completed, can decrease the differentials Bakken producers pay to sell their crude. However, we don’t anticipate that either development will help return Bakken drilling levels to even half their 2014 high by year’s end.
At their November 30th meeting, OPEC shocked the world when an agreement was made to cut 1.2 MMb/d starting in January 2017, with options for Russia to cut 600 Kb/d and for the cuts to extend to the second half of the year. The market quickly reacted and prices jumped by 10%. As of early February, the OPEC cuts are reportedly at a remarkable 90% compliance, which is a positive sign for prices. But even in an optimistic pricing scenario, with crude rising to USD75/bbl by YE17, Energy Insights forecasts that it will still take the full year to return to even 50% of the drilling rigs that the Bakken averaged during 2014.
President Trump’s recent executive order has allowed construction to resume on the DAPL, which will add 470 Kb/d in takeaway capacity from the Bakken. Increased pipeline capacity decreases the likelihood that marginal production is shipped by rail, which likely reduces the expected differential Bakken producers must pay. However, with ongoing legal battles and a growing disinvestment campaign, it’s an outstanding question whether the pipeline will be finished or will operate fully. But one may consider whether the eventual use of the DAPL will decrease differentials in a way that significantly increases drilling in the Bakken.
Again, let’s be optimistic. Suppose the DAPL is completed today, and that Bakken-WTI differentials fall to USD3. Under such a differential scenario, Energy Insights forecasts that it will still take 2 years to return to 50% of the drilling rigs that the Bakken averaged during 2014.
Exhibit 1: Scenarios for Bakken rig count
Source: EIA, Energy Insights North America Supply Model
About the author
Nick Barry is a senior analyst with Energy Insights in McKinsey's Houston office.