Bakken Shale: August 2007

This will be a long post folks, so if you don’t like reading dry material, it’s best to skip this one.

This past week the issue of well density came to a head in a hearing of the Industrial Comm. when Marathon sought to create a few 1280 acre drilling units in Dunn Co. As background, the state regs allow a horizontal well to be drilled upon a unit only as large as 640 acres. Therefore, if a company plans a H well on a 640 acre unit, it only has to apply for a drilling permit, but a hearing is required to create a unit larger than 640 acres. Now until this hearing, there has been little opposition to any application for a 1280 acre unit that I can recall (outside of Murphy Creek field that will be discussed later). What caused the contention during this case was that in some of the proposed drilling units, Hunt owned a substantial, but less than majority interest. In one unit, however, Hunt owned 50% as it controlled the interest in one section, and Marathon controlled the other section.

Hunt objected to the 1280 acre unit(s) where it had an interest, and maintained that it wanted to develop its acreage on 640 acre units and cited that it expected to transfer its success with its completion techniques in the Parshall area to other areas in the play. Now it should be mentioned that the proper spacing for Bailey Field was also considered at this hearing. Marathon, the most active company in the field, maintains that it wanted flexibility in the field rules to allow for the possibility of a second and perhaps a third lateral in each 1280 acre unit. It proposed that it be allowed to place the initial lateral no closer than 1320 ft. from the east or west unit boundary (these are all standup units and the field rules required that the lateral more or less transverse the center of the two sections).

By placing its lateral close to one side of the unit, Marathon could then drill a second lateral on the other side of the unit, if it was shown that a second lateral was economic. The company said it may also drill a third lateral in some units and it has identified at least one unit where that would be economic. Marathon stated that it needed a number of months to evaluate the productive trend of a well to determine the permeability, and hence, whether a second lateral would be utilized. Marathon’s engineer originally didn’t place a precise length of time this evaluation would take, but after questioning by the commission, stated that a minimum of three months would be needed (if I recall correctly). Marathon presented a number of exhibits indicating how big an areal extend it believed a lateral was effectively draining.

The commission then questioned Marathon’s engineer regarding it’s prior application to drill two separate grassroot vertical wells, each with a lateral, by skidding the rig a few feet after drilling the first well. (See 7/16 post). After steadfastly maintaining that it needed time to evaluate whether a second lateral would be drilled, the commission finally got the Marathon engineer to admit that it would in fact skid the rig and drill some second wells immediately after finishing the first and would not require a evaluation phase in that case. The commission then asked the million dollar question that if you drill the initial lateral close to the west line of the 1280 acre unit, for example, and then decide not to drill a second lateral on the east half, how does that protect the correlative rights of the owners in either half of the unit, when it appears that all the production is coming from the west 640 acres in the unit.

The Marathon engineer then gave some rather unpersuasive testimony, in my opinion, that he believed that the east half would in fact have “some” contribution to the well’s production. (However, if the permeability was good enough for the east half to contribute “some” oil way over to the wellbore on the west half, wouldn’t that justify a second lateral on the east half?) Meanwhile, Marathon’s “area of mutual interest” partner, PDC, had developed a portion of the field on 640 acre units, but didn’t have an objection to Marathon’s proposed plan of development. Marathon stated that the wells on PDC’s 640 acre units were demonstrating half or less of the performance of Marathon’s wells on 1280 acre units. When questioned why they couldn’t wait with the units that involved Hunt and let Hunt develop its own lands and use its own drilling and completion methods on 640 acre units, which Hunt thought superior to Marathon’s, Marathon stated that they had five rigs active and a drilling schedule to follow.

In an area not far from the Marathon/Hunt issue, when Kerr-McGee (properties now operated by Encore) originally applied for drilling units in Murhpy Creek field, it asked for 1280 acre units with a dual co-planar placed on one side of the unit. The company stated, much like Marathon, that this initial well placement would allow a second well on the unit, if justified. There was some mineral owner opposition on one unit and the company then began developing the field by utilizing dual laterals from a single vertical well on 640 acre units. Encore has since switched to utilizing a single lateral diagonally across a 640 acre unit. Marathon made an application last month to expand the boundaries of the Murphy Creek field to create eighteen new 1280 acre spacing units, which was heard at the hearing last week. (See 7/30 post). In the meanwhile, before the hearing, Encore received about a half dozen drilling permits in the Murphy Creek area for wells on 640 acre spacing on lands that were contained in Marathon’s application. During the hearing, Marathon stated it had reached agreement with Encore, and Encore would develop a number of sections on 640 acre units, which Marathon dropped from its application, and Marathon would request that the remaining units be made into 1280 acre drilling units, instead of spacing units.

Now my personal opinion on some of these matters, for whatever it's worth. I don’t believe that a lateral run down the center of a unit drains the entire unit, absent some extensive natural fracturing. I’m not buying this proprietary completion techniques story that some companies are touting. There are some commonly know conditions that are believed to have “busted up” the Bakken in certain areas, which some companies have exploited. In my opinion, geology is the primary driver of the success of these wells. EOG has been telling Wall Street that it believes some (most?) of its success in Parshall Field is attributable to its completion techniques, but then admits that up until now its success has been confined to one small area, where it seems apparent that there is excellent natural fracturing. Hunt also makes somewhat similar claims. When Hunt comes down to the Bailey Field area and brings in wells like those in Parshall Field, I will amend my opinion.

For example, Ansbro has an excellent well on its Kadrmas lease that blew out and caught fire. The well has produced about 60k bbls from one 2,500 ft lateral that I believe was not initially fraced. Meanwhile, the company’s dual co-planar wells with about 9k ft of lateral open, on 1280 acre units immediately to the south and east, have produced a fraction of what the Kadrmas well has. Marathon’s Stohler well in Bailey field has been one of the best Bakken performers in the state outside of Parshall field, and Marathon presumably did not use completion techniques on this well any differently than its other wells, and it is surrounded by less than stellar wells. Without information that is available only to these companies, I believe what makes these two wells “flukes” appears to be some isolated favorable formation quality, rather than completion techniques.

I also think 640 acre units, with their shorter laterals, are more favorable in terms of getting a better frac job. Marathon stated that it doesn’t use “stage fracing,” on its nearly two mile long laterals, whereby individual sections of the lateral are isolated and fraced separately. Marathon said the risk and expense of the procedure were prohibitive. The company claimed that its review of data indicates it is getting a fairly uniform frac over the entire length of the lateral without the use of stage fracing (which I find hard to believe), but didn’t know how far the fracs extended in the formation.

Perhaps when the performance and economics of the Encore and Marathon wells in Murphy Creek field, on different sized units, are compared, some of these questions can be answered. I remember attending the multi-day hearing in ‘90 or ‘91 on spacing regarding the wells in the upper Bakken shale play, which everyone believed back then as being the new Prudoe Bay. There was differing ideas then regarding whether well density should be 320 acres or 640 acres, and for the life of me I can’t remember what came of it, because the play died out a few months after the hearing. Spacing generally must have been left at 320 acres because until only recently, that was the largest unit allowed by the regs for horizontal wells. Bottom line here is that I generally agree with a comment made on a previous post that 1280s will be used to tie up leases and 640s will be used to actually produce.

If anyone has any information as to details of Hunt’s testimony (or correct my recollection in general), feel free to elaborate as I missed most of it.

During the past week or so, over a dozen drilling permits were issued to primarily Marathon and Encore, and one to Tracker Res., and most within a few miles of the town of Killdeer in central Dunn Co. Just southwest of Killdeer in Murph

y Creek Field, Encore and Marathon have reached some sort of agreement whereby Encore is going to develop an number of sections on 640 acre spacing and Marathon will develop its portion of the field on 1280 spacing.

It appears that the time may have to come pretty soon for the state to set some sort of uniform spacing for these Bakken wells instead of leaving it up to the individual companies, which often leads to a hodge-podge of different sized units in the same field. Some companies like Marathon are beginning to place their lateral to one side of the unit which would allow another lateral on the other side of the unit, in the event a second lateral will be economic to drill. Meanwhile, other companies are drilling a lateral through the center of a 640 or 1280 acre unit, which does not allow for infill drilling within that unit. Me thinks its time for some uniform spacing rules.

Then there is this puzzle with the apparent shortage of drilling rigs, why the two rigs that Ansbro had been utilizing in its drilling program (both Nabors rigs, I believe) have been stacked out in Willmen Field since May or June. It appears that Ansbro has temporarily suspended or permanently canceled its drilling program, but that doesn't explain why these rigs aren't being used by another company. If anybody out there knows, let me know. Some rumors are going around that Ansbro and Continental may be joining forces in some manner regarding the development of the hundreds of thousands of acres that Ansbro has under lease primarily in southwestern Dunn Co. In certain areas, Continental is actively leasing whatever acreage Ansbro for whatever reason didn't get.