There are two interviews over the past four years that stand out when thinking about the big picture in oil and gas trends. Signs and indicators, if you will, to determine whether Big Oil will stick around or whether they are going to pack up and move to another shale play.
The first memorable interview is from North Dakota native Ed Schafer. The former governor and current board member of Continental Resources says understanding oil activity is just like hunting ducks.
“Oil companies work three to five years out, they’re securing mineral rights, moving rigs, getting capital. They’re planning where they are going to be punching holes, not today, not tomorrow, but three years from now, five years from now,” Schafer said. “Let’s be aware of the competitive situation out there and understand that, you know, it’s kinda like shooting ducks. You shoot ahead of them, you don’t shoot at them. You shoot ahead.”
The one thing about hunting is how variables often come into play: Weather, unexpected noises and a sprained ankle, are just a few variables that could change a hunter’s strategy on a moment’s notice. These unforeseen variables create shifts and create the need for audibles and changes to logistical plans. Much like the weather and oil prices, speaking about energy futures can be dicey.
Schafer’s use of colorful and colloquial language to illustrate oil companies planning years out quickly transitioned into discussing a multitude of variables that can just appear.
“The reality is the oil companies are going to extract our minerals resources where they can the most efficiently for the least amount of cost.” Schafer said. “And we need to be aware of that in North Dakota.”
Interviews like that generally leave a person feeling good about everything today, with a sense of preparing for future unknowns.
The other conversation I’ve often revisited is with Montana resident Tyson Olsen, rig manager of Houston-based Nabors Drilling during a tour of a well pad site and a 197-foot derrick. On that particular day, he said their next job was about 17 miles southeast of the current location, which was about 20 miles east of Watford City. The brevity of the timeline for moving a rig continues to stand out in my mind.
“A good rig move, assuming all the trucks and everything moves in a perfect world, will take about four days.” Olsen said. “We contract out the trucks and crane, but our crews do pretty much everything else.”
In addition to the giant metal walking structure and it’s pieces, there are the numerous drill pieces that reach 10,700-feet straight down and 7,000-feet horizontally. Plus there are steam boilers, salt water storage tanks, fuel tanks, generators and electrical units galore.
Once again, that’s two crews of five guys, in fours days, that take care of the lion’s share of the rig disassemble and reassembly work.
That is what makes this Bakken shale play different. The overall energy cycle is much more controlled than any of the previous plays. Consider the investment, planning and execution required to tear down, transport and erect a drill pad site in four days. That’s efficiency, teamwork and foresight. On paper, like reality, it is logistical precision.
In the world of media mixology, sometimes journalistic hypotheses emerge when mixing two similar contexts together. This particular interview alchemy produced a curious and valid question. If oil companies are beholden to shareholders and can move a rig 17 miles in four days, would they add a couple days to the travel time and set up shop in a competing play?
To answer that question, it is best to start with the land and landowners. North Dakota is once again unique to the energy industry with private mineral rights. Many countries and states have natural resources under government-owned land, North Dakota does not. This creates an environment where individual mineral owners negotiate and do business with an energy company. This is one of the main reasons the state of Alaska is known for dispersing oil checks to their residents. In Alaska, generally speaking, all the people own the oil. Conversely, in North Dakota the individual person owns the oil.
With that said, private mineral rights could be the key to this ensuring oil companies will be extracting oil in North Dakota for years to come. In the beginning of this current energy cycle, there was a mineral right bonanza to secure the mineral rights and leases. According to Schafer, the majority of the mineral rights, by most of the companies, were secured for up to 25 years.
Understanding that energy company’s interests are in place for the next 25 years, one can see how there is room to roam for energy extraction in the state. Given that oil prices have collapsed recently, will oil companies drill in the Bakken today, tomorrow or wait 15 years while roaming other plays?
Here is another journalistic hypothesis with substance. Starting on one side of the spectrum, theoretically speaking, the new efficient well pads of the Bakken could be operational in Colorado within a week after the site’s last drop of oil is extracted. Again, that is just an extreme side of a theory, not reality. There are layers of variables within variables to prevent and deter any knee jerk reactions. That scenario just plays out what could happen if all the planets, prices and laws were aligned.
Lynn Helms, director of the North Dakota Department of Mineral Resources, has a direct line to energy companies and their future drilling aspirations. Rather than continue mixing contexts to produce narratives or leading editorials, Helms is able to speak on the reality of rig activity, both in and out of the state.
“All the information we have is the rigs that have left the rig count are still in North Dakota. They have not found a home somewhere else,” Helms said. “The emerging shale plays that would be competition for those rigs have even a higher break-even oil price than the Bakken. So on the positive side the hardware, the equipment is still in North Dakota. It’s just been parked and is waiting for prices to come back and activity to come back.”
According to Helms, the overall rig count is smaller and some appear to be gone or have moved. However, the reality is they are just being put out to pasture. Literally.
“They are not allowed to store it on the well site and so the money that would be charged to construct that well site doesn’t cover parking the rigs,” Helms said. “So they are going to have to go out and rent storage space for those rigs.”
Knowing the rigs are still in the state is a good sign and indication of an oil company’s intentions. With mineral rights in place, hardware located in the state, a price advantage and major investments into infrastructure, the Bakken should be poised to rebound with oil prices. Or is it? And if it does rebound, how soon?
Hypothetically speaking, once again, Helms was asked what Bakken life would look like if oil prices came back to 90-dollars-a-barrel by August 2015. What kind of lag time are we talking about with the energy activity?
“It’s in the neighborhood of 11-12 months. So even if oil was back at $90 in August we’d be looking at July or August of 2016 before rig count really responded significantly for that,” Helms said. “That’s because oil companies have to raise the capital, put together their budgets, put together their drilling plans, their contracts and then go out and do the work. So it takes 11-12 months even with a quick rebound so that to work itself through the system and translate into a rig count.”
Thinking back to former governor Schafer’s words about shooting ahead of the ducks when hunting, that logic only works when analyzing corporations or publicly-owned companies which tend to work 3-5 years out. What about the private companies who do not disclose their future intentions? Helms said the majority of the oil companies in the Bakken are traded on Wall Street.
“Most of them are. Most of the drilling we are seeing now are publicly-owned companies – Oasis, Whiting, Hess, Continental Resources and EOG, all of them are stock companies,” Helms said. “Some of the smaller ones are privately-owned – the Emeralds, the Triangles and that, but most are public.”
Public money-making machines. Oil and gas has never hid from the fact they make money for their shareholders and will go where the money is. Lucky for Bakken players their future dollars and rigs appear to still be in North Dakota.
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