BLINKING RED LIGHT: Big Trouble Ahead For Bakken Oil Production

The glory days of the Great Bakken Oil Field are soon coming to an end.  With the collapse of the price of West Texas Intermediate Crude, shale oil production from the Bakken is in big trouble.  How much trouble?  Well, if we understand how much of its production growth came in 2014, the situation is dire indeed.

Ironically, Americans have been lulled into believing that the United States is heading towards energy independence, while the opposite is the case.  Not only has the Bakken given us a false sense of energy security, when it finally peaks… it will decline in stunning rapid fashion.  This is what the media, oil industry and public fail to realize.

The rate of Bakken oil production growth over the past six years was quite impressive.  However, it did so based on certain requirements:

1) High oil prices

2) Low interest financing

3) Massive drilling program

Without these three conditions, the majority of oil in the Bakken would have remained in the ground.  According to the EIA’s January Drilling Productivity Report, the Bakken is estimated to produce a record 1.28 million barrels a day (mbd) in January.  That’s a lot of oil, but actually not that much in the whole scheme of things.

According to an interesting statistic from Bakkenboomorbust.com, what North Dakota produces in one day, 1,187,206 barrels of oil (Nov. 2014), the U.S. burns in 81 minutes, and the world in 20 minutes.  So, while the Bakken has provided a much needed domestic supply of oil, it’s still a drop in the bucket.

(Note:  the 1,187,206 barrels of oil per day is for the entire state of North Dakota including conventional and unconventional oil outside the Bakken)

Furthermore, the Bakken oil supply is not sustainable… especially at the current low oil price.  This is especially true if we look at the following chart.  Rune Likvern of FrationalFlow, posted this chart in his most recent article:

bakken-production-rune-likvern-1

This chart shows the increase of North Dakota (ND) Bakken oil production from 2008 to October 2014.  I took his chart and added some annotations below:

bakken-production-srsrocco-annotations

Each color in the chart represents new production in a given year.  As you can see, 50% of ND Bakken oil production growth came in 2014 (actually, from Jan-Oct 2014).  Which means, if no new wells were drilled in 2014, total oil production from the ND Bakken would be half or 550,000 barrels per day.

Also, two important additional factors to notice from the chart is the “INCREASED” rate of production growth and slope of decline in later years.  In 2008, 2009 and 2010, the increase of oil production and level of decline were relatively shallow.  However, in 2011 this picked up considerably and by 2014, it’s experiencing the sharpest angles ever.

If you look at the production in 2014 (Grey color), you will see the overall production line and decline curves are steeper than ever.  Basically, the companies drilling in the Bakken are drilling faster and faster just to keep production growing.  This drilling frenzy may have continued for a period longer if oil prices remained high, but with the collapse of West Texas Intermediate below $50 a barrel (and possibly lower to $30), production at the Bakken is in real trouble.

bakken-oil-price-collapse

Moreover, the companies producing oil in the Bakken pay between $10-$15 per barrel for transportation, which cuts the market price even further.

Rune also put together this chart showing the estimated FREE CASH FLOW from the companies drilling and producing oil in the Bakken.  The BLACK BARS represent estimated monthly increases or decreases in total free cash flow in the Bakken, while the RED AREA shows the estimated cumulative free cash flow.

Bakken Cash flow Rune Likvern

Cumulative free cash flow continued to decline in the RED from 2009 to 2012, then it bottomed and started to reverse in 2014.  This was due to large monthly positive free cash flows at the end of 2013 and beginning of 2014.  Unfortunately, this was during the time when the price of oil was north of $90-100 a barrel.

I would imagine the cumulative free cash flow will continue to head into record negative territory if the price of oil remains low.  This will considerably impact oil production in the Bakken this year… and we are already seeing signs of trouble.

According to the most recent data put out by the North Dakota Department of Natural Resources, Bakken oil production has leveled off substantially in the past several months:

North Dakota Bakken Oil Production (barrels per day = bd)

JUN 2013 = 759,226 bd

NOV 2013 = 912,946 bd

INCREASE = +153,720 bd

JUN 2014 = 1,027,841 bd

NOV 2014 = 1,123,305 bd

INCREASE = +95,464 bd

The increase in ND Bakken oil production from JUN-NOV 2014 was only 95,464 bd, compared to the 153,720 bd from JUN-NOV 2013.  And it’s even worse than that if we compare the past three months.

ND Bakken oil production from SEP-NOV 2014 increased a lousy 3,698 bd in two months, while production during the same period last year jumped 43,591 bd… more than ten times the rate.  Folks, the Bakken may be showing signs of peaking already.

We must remember, the Bakken has over 500 wells waiting to be fracked, so the day of reckoning will be postponed a bit as the industry works through this backlog.  Although, the Bakken Bust may already be underway as the once great influx of people into North Dakota has peaked and in decline.

According to the United Van Lines 2014 National Movers Survey, North Dakota has the 5th highest outbound migration rate– 61 percent — in the country.

ND United Van Lines Movers Study

I believe the peak and decline of U.S. Shale Oil Production will be the final straw that breaks the back of the U.S. economy.  Of course there are over a dozen black swans flying around the world currently that could push the entire global financial and economic system over the cliff, but the end of the Shale Oil Miracle will certainly destroy the value of paper assets much greater than American realize.

This is why I highly recommend investors purchase physical gold and silver.  When the collapse finally arrives, these two precious metals will be some of the safest assets to own and their values may rise to levels most thought unimaginable.

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25 Comments on "BLINKING RED LIGHT: Big Trouble Ahead For Bakken Oil Production"

  1. Steve, thanks. As it is highly improbable, that no new wells will go into operation in 2015, a halving of production is a practical impossibility. Is there an estimate from you or a consensus view over at peakoilbarrel by which amount LTO will be reduced this year ? (Being not an oilman I only understand 30 to 50 pc of what these folks are talking about 🙂 Andreas

    • Andreas,

      Yeah, I never assumed that there would be NO NEW WELLS in 2015, but just wanted to show how BIG the ANNUAL DECLINE RATES are in the Bakken.

      How much of Bakken LTO will be reduced is a good question. I gather that will depend on where the price of oil goes in 2015. If we get a quick recovery and back above $75-$80, I believe peak in the Bakken will not occur until the latter part of 2015. However, there is a chance we could see peak in 2016.

      We must remember, many of the energy analysts forecasting peak in the Bakken & Eagle Ford believe the Bakken would peak in 2015-2016 even with high oil prices. This is due to the amount of wells that could be drilled as well as the remaining SWEET SPOTS.

      If the price of oil remains in the $40-$50 range for most of the year (due to the Saudis & Middle East not cutting production), then we may see a decline in overall Bakken production by Q2 2015…. could be sooner, maybe FEB or MAR. Why? Because there are over 500 wells drilled awaiting fracking. Just working through this number can postpone a decline for several months.

      As you can see, the companies drilling in the Bakken must add something like 130-140 new wells each month just to keep production from falling. If the price of oil remains low, I highly doubt we will see anywhere near 130 new wells a month, maybe 50-75.

      This would not allow GROWTH in the BAKKEN. It will be quite interesting to see how things unfold this year.

      Lastly, there is a slim chance that things could get that bad in the BAKKEN that we could see a big drop in January. Just have to wait and see.

      steve

      • Steve,
        it will be interesting, how all of this will pan out, internationally as well. There is a lot at stake and in a sense it’s a repeat of 1985. If the peak oil view holds any water, today’s outcome must be completely different than 30 years ago, methinks.
        It must be something like shortages, a spike in oil prices or depression/demand destruction on a worldwide scale (or a mixture thereof). When the outcome is what the mainstream expects – a successful cranking of the growth engine – then I personally will have to put to the test a lot of my convictions and ideas (not that it would matter in the bigger scheme of things…) Andreas BTW: I cannot imagine that your feds will let the US shale industry go the way of the dodo… 🙂

  2. Steve, your blogs are consistently of the highest and clearest quality of any (of many ‘goldbug’) financial sites that I read. Thanks for the outstanding effort and presentation.

  3. Our next documentary in our new series “Oil Wars” will focus on the collapse of U.S. shale and how it will wreck the american false economy.

    Signup free: http://FutureMoneyTrends.com/oil

    • This is all wrong, frankly. Not about the Shale Bust. Because that is what it is and will be. But the real oil production is going to come for the offshore drillers over the next decade—an increase of 15 million barrels per day over the next decade. So we consume around 90 million a day now, worldwide–20 million depletes and needs to be replaced over the next decade, plus assume a 10 million increase in demand. So offshore drilling with the most amazing tech ever and drill ships from companies like Atwood that is going to make offshore drilling the next “miracle” over the next decade, plus some from tight rock and onshore, and the the incremental 30 million per day that we’ll need of NEW oil will literally be ZERO problem.

      you see, it’s not about the Shale. It’s about Offshore drilling. Nowwhere near PEAK! But the Fed will have to print a lot of money to keep interest rates low (like Japan) and boost the price of OIl. And so that is the game that will be played, and will go on until it doesn’t

      Gold and silver are going up. But hardly because the Shale is going to bust.

      Frank

      • frank,

        I highly doubt OFFSHORE is going to grow 15 mbd over the next 10 years. Even if it did, the Global Annual Decline rate of the world’s oil fields is now north of 5%. Which means, the world is losing 4-5 mbd of oil production each year that has to be supplemented.

        I believe you are quite wrong on this issue.

        steve

        • Steve,

          I don’t believe I’m wrong on offshore drilling. There is amazing new technology there and I have studied it…..offshore will indeed grow to 15 mpd of production. Shell has a lot to say on this and iive listened to execs at Halliburton, Atwood Oceanic’s, Diamond Offshore, and Apache and 15 mpd looks to me like the new production that will come online in the next decade—IF oil prices go higher.

          Out of the roughly 92 mpd produced worldwide today, I’ve heard the overall decline rate over the next decade of existing productions is closer to 20 mpd. Where did you come up with 4.5 mpd that will need to be supplemented?

          Thanks,
          Frank

          • Frank,

            You may be being too conservative on your decline rate estimates (20mpd/10years). Global decline rates of typically 4-6% are assumed by many pundits (and these % values assume a reasonable amount of active ongoing field development – without which decline rates would be higher).

            Assuming a figure of 5% decline per year on 90mbpd will give the 4.5 mbpd figure that needs to be replaced each year.

          • Frank,

            The 5% annual decline rate comes from the IEA – International Energy Agency. However, that was several years ago. Offshore, shale and other types of unconventional decline much faster, thus the overall decline rate increases.

            For example, the decline rate for the U.S. Oil Industry prior to Shale coming on the picture was about 5% in 2005. Now, with Shale Oil production constituting a large percentage, the U.S. annual decline rate is north of 10%.

            Which means, the U.S. Oil Industry now has to add 900,000 barrels per day each year just to keep up with the 10% decline rate.

            For the world, its probably closer to 6-7%. Actual Global Conventional Crude and Condensate production is more like 76 mbd. The 92-93 mbd is total liquids. So, 6-7% of 76 = 4.94 mbd lost each year due to the annual decline rate.

            Peak Oil is here… just a little more time and it will be perfectly obvious.

            steve

          • @Steve and OFT,

            Okay, thanks for the information. We’re basically screwed even IF I’m right about offshore production ramping with new drill ships (Atwood), etc.

            F@$K!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

            One last question though, wouldn’t the price of oil then skyrocket once the small glut works its way off?

            Thanks again,
            Frank

  4. Always “felt” the shale oil industry wasn’t as it was fracked up to be.

  5. I think the first part, that shale oil is an overblown hoax on energy independence, will be unbelievable enough to over 95% of Americans.

    The second part will even harder.

    “I believe the peak and decline of U.S. Shale Oil Production will be the final straw that breaks the back of the U.S. economy. Of course there are over a dozen black swans flying around the world currently that could push the entire global financial and economic system over the cliff, but the end of the Shale Oil Miracle will certainly destroy the value of paper assets much greater than American realize.”

  6. Steve,

    Does this mean that companies like Continental, especially after dumping it’s oil hedges, are likely to go bust? What would be the result of a default?

    Is the situation the same in Texas in the Eagle Ford formation in South Texas and from the Permian Basin in West Texas? Or, because they produce three times as much as the North Dakota/Montana fields and are much closer to the refineries, are they going to be able to ride out the storm?

    Thanks,

    SteveW

    • SteveW,

      From what I understand, the Eagle Ford average break-even is a bit lower than the BAKKEN. However, the Eagle Ford is slated to peak by 2016-2017, even at high oil prices. This was forecasted by several good energy analysts that I follow. If we continue to see lower oil prices, it will impact the Eagle Ford negatively as well.

      If oil prices remain low (SUB $50) this year, I believe we could see a real mess in the Shale Oil Industry. The Shale Oil Industry is like a huge freight train… which is now hitting its brakes, but it will take a while before it stops.

      steve

  7. Just a few thoughts. The Saudi’s keep pumping with western approval, because the world economy is in the shitter and central banks are running out of tools to prop things up. Deflationary powers are looming and they needed to crush crude to extend things a little bit more. The world economy cannot survive on expensive oil. There’s panic everywhere, killing the paper price and futures market is just another desparate move to extend & pretend.

    Peak cheap energy is a bitch.

    • BTW, the Fed is looking for ‘stuff’ to monetize, and they run out of treasuries because they can’t buy 100% like Japan. So the Fed will buy oil company bonds and loans imho. Let’s wait and see….

  8. Tune in tonight for the state of the union address…and lies about the state of U.S. energy.

  9. Steve,

    “So, 6-7% of 76 = 4.94 mbd lost each year due to the annual decline rate. Peak Oil is here… just a little more time and it will be perfectly obvious.”

    Quite ! But IEA decline estimates are already somewhat dated – four, five years, I am too lazy to research it. So this thing has been going on already for a while. So where did all this replacement oil come from ? Is it all NGL and biofuels ?

    • Andreas,

      Replacement of lost oil due to the annual decline rate came from two sources:

      1) New Projects
      2) EOR – Enhanced Oil Recovery technology

      Each year, the world adds new projects. Unfortunately, the new projects are higher cost and the annual decline rates are higher than in the past. For example, we are seeing more OFFSHORE oil production coming online, but average decline rates are much greater than Oil Fields on Land.

      The EOR – Enhanced Oil Recovery technology such as the one used in a big way in Saudi Arabia lowers the annual decline rate, but increases the DEPLETION RATE of the field.

      ANNUAL DECLINE RATE = Percentage lost each year due to the aging of the oil field
      DEPLETION RATE = Percentage lost of the total amount of recoverable oil in the field.

      So, by the Saudi’s using EOR technology to get more oil out of their fields TODAY, it speeds up the overall DEPLETION of the Field. Basically, they ROB PETER to PAY PAUL.

      Thus, EOR technology will actually turn out to be disastrous for the world as the downside of the peak oil graph will be what is known as THE SENECA CLIFF… a shark fin sort of decline.

      steve

      • Steve, thank you very much for your answer. Seneca Cliff… sounds eerie 🙂

        • Here is the URL from Chris Srkebowskis consulting firm. http://www.peakoilconsulting.com/ and this is his Wiki page:
          http://en.wikipedia.org/wiki/Chris_Skrebowski

          Skrebowski used to keep track of new international development projects, at least the most important ones (“Global oil megaprojects database”). Looks somewhat abandoned, the last publicly available report is from 2008. I wonder if he is still around.

          • Andreas,

            Yeah, I followed Skrebowski’s work. However, with the price of oil down, most of the Major Oil Industry is cutting CAPEX. I don’t believe we see real high prices of oil again. Sure, maybe a spike, but Fed & Central Bank hyper money printing allowed the price of oil to go so high, which also allowed expensive crap oil such as Tar Sands & Shale to be drilled.

            steve

  10. Harryflashmanhigson | January 22, 2015 at 4:38 am | Reply

    I don’t think this is going to happen,but just to play devil’s advocate for a moment(afterall I think we were all blindsided by the ramp in tight oil production,I certainly was!) what’s the possibility of another rabbit from the hat of the magnitude of tight oil? Do they have something up their sleeves? Green river formation working extraction method?Actually giving back some free energy?

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