Today, the state produces more than 1.3 million barrels of oil a day from more than 15,000 producing wells and and also produces more than 2.5 MCF a day of natural gas.

“In 1951 the first well was drilled and completed in the Tioga area – the Iverson No. 1,” said Joel Brown, a petroleum engineer from Watford City. Brown and another petroleum engineer, Jeff Kummer, started their own business, McKenzie Minerals Management.

“We have a long history of oil and gas in North Dakota – 70 years of oil and gas development in North Dakota – and we’ve experienced booms in the past,” Brown told members of the Minot Area Chamber of Commerce’s Energy Committee during a presentation in October 2018.

There is a long history of development of oil and gas in North Dakota but Brown said “it all pales in comparison to what has happened over the past 10 years,” referring to the development in the Bakken and Three Forks Formations. “Nothing has even scratched the surface of what we’ve experienced in western North Dakota since the year 2008 really,” he said.

Jeff Kummer, left, and Joel Brown, both petroleum engineers, started their own business, McKenzie Minerals Management, to help North Dakota mineral owners.

Brown said most people think the Bakken started in North Dakota. “It actually started in eastern Montana,” he said. He said in 2004 in the Elm Coulee area in eastern Montana the first horizontal Bakken well was being drilled in the Williston Basin.

“As we continue up until the year 2006, we can see that there is a mini oil boom going on in this area,” he said, indicating a map showing the progress of oil development in the North Dakota oil patch.

“At this point and time our fracking technology that we’re using to develop these wells – the horizontal drilling and really the completion technology being used to make these wells productive – is very rudimentary. It’s not anywhere close to really what we’re doing today,” he said.

But in 2006, he said something really interesting happened. He said oil prices were climbing and development began in some other areas in North Dakota. One area in particular was in the Parshall area.

“As we go from 2006 to 2007 and 2008, what you’ll notice is the development has almost completely shifted from Elm Coulee out in Montana to what is known as the Parshall and Sanish Fields out on the eastern reach of the Bakken. The geology in this area is substantially different than the geology out here,” he said, referring to the eastern Montana area.

“We’re still using very rudimentary fracking techniques at this point and time to complete these wells but because the formation is naturally fractured in this area, the wells that are drilled out here are prolific. They make the wells that are drilled in eastern Montana look absolutely tiny,” Brown said. “This is really the beginning of the oil boom in North Dakota.”

He said it was thought the western portion of the Bakken in Elm Coulee and the eastern portion of the Bakken in Parshall in Mountrail County would be the oil boom areas “and everything in between was no man’s land.”

“But as we go from 2009 to 2010 we begin to see companies testing out McKenzie and Williams County areas,” Brown said. “As we continue up to 2013 (also when Brown graduated from the University of North Dakota) at this point and time we were fracking about 30 stages per well compared to the one stage per well that was happening back in 2008,” he said.

By now, Brown said McKenzie and Williams County had become core Bakken acreage. He said they were as good as the wells in Elm Coulee and substantially better than wells in Mountrail County. “McKenzie and Williams Counties are actually making some of the very best wells in the Bakken, an area at one point and time was thought to be impossible,” he said.

Starting at 2011, the oil price stayed at over $100 per barrel for about four years. “That was our average price from 2011 to 2014,” he said.

But in 2015, he said that number dropped dramatically and by 2016 the price of oil reached as low as $26 a barrel.

“We were having some really tough conversations at this point and time about what we were going to do after we can’t work in the oil field anymore,” he said.

Not only did the price of oil drop, but the number of rigs working in the oil field dropped. In 2014, 190 rigs were actively working in the oil field. That number dropped to 91 and then to 35 in 2016, he said.

In 2014, he said North Dakota produced 400 million barrels of oil, then 432 million barrels in 2015 and in 2016 that number dropped to 380 million barrels.

“Ultimately, the point is that even though we are running fewer rigs, even though we are investing less, somehow we are keeping the amount of oil produced in the year in the state high or relatively the same for what it had been when we were running 190 rigs. The point is that during this time, especially 2016 and now we’ll get into 2017, we’ve seen some recovery – a little more development, rig count is up but another fundamental shift in fracking technology took place over that period of time,” he said.

Brown said he believes the main reason companies actually began to develop in McKenzie and Williams Counties ahead of them being productive was the companies had leases in those areas.

“We figured out that we could actually make some really good wells in those places,” he said.

“Since the year 2001, we drilled 12,000 wells,” Brown said. Adding that number to the 3,300 wells drilled earlier, “we’ve got 15,000-some wells in the state of North Dakota right now,” Brown said.

The estimate of how much the industry has spent just to drill and complete those 12,000 wells, not counting pipelines or operating costs, is about $90 billion since the year 2001, Brown said.

At one time in McKenzie County, he said, oil companies were spending a billion dollars every six weeks to drill and complete wells. “And to think about that coming from a kid who graduated with a class of 50 students in a town of 1,200 where the primary industry was still farming and ranching. To think about a billion dollars every six weeks being spent in McKenzie County was unheard of but it’s the reality of where we’re at right now,” he said.

“In that amount of time we’ve produced 3 billion barrels of oil and if we calculate out what that gross revenue has been, looking at historical oil prices, we have $210 billion of revenue just in this portion of North Dakota since the year 2001,” he said.

For mineral owners who live in the state, acknowledging some live out of the state as well, he said that equates to approximately $28 billion having been paid to largely farmers and ranchers living in western North Dakota.

“We are living now in the No. 2 producing state and the No. 1 oil-producing country in the world,” Brown said. He said oil development in North Dakota not only impacts western North Dakota and the entire state of North Dakota “but ultimately, it’s relevent and impactful to the entire country. On a global level on what we do here impacts the global market for oil,” he said.

Brown said two fundamental shifts took place during the 2015-2016 period when lower oil prices were being experienced and people were asking, “Is it dead out there? Is anything even happening out there anymore?”

“Things did slow down but what happened were two things. First, we became a much leaner industry. Before it used to cost $9 1/2 million on average to drill and complete a well in 2013 at the height of the boom. Today we’re doing it for usually $6 1/2 million and in some areas of the basin as low as $5 million to drill and complete a well. It used to take a month or more to drill a well. Today a rig can drill a well in two weeks or less,” Brown said.

He said the second fundamental change is how wells are completed. “We went from what had become the standard of 30 stages per well, most being above 50 and the highest I’ve heard is 86,” he said.

“The fundamental change we’ve seen in fracking during this period of time has led to better wells,” he added.

EUR stands for Estimated Ultimate Recovery, basically meaning how much a well will produce over its entire lifetime.

“A well that produces a million barrels EUR, that’s a really good well and there’s a lot of them in the Basin right now,” Brown said. He said a well producing only 200,000 barrels of oil over its entire life is not a very good well.

He said what they really want to measure is how much are these wells going to produce.

“From 2008 up until 2014 or even 2015 that number stayed relatively consistent – around 350,000 barrels of oil – but as fracking technology very quickly changed, as we were refining our techniques in that kind of down time of lower oil prices, we’ve seen that number now jump up to the average well in 2017 drilled had an EUR of 660,000 barrels,” Brown said. “That is an 83 percent jump in how good the average well in North Dakota is from the year 2014 to the year 2017, which is a pretty incredible change.”

Impact from economic standpoint

“It’s great to know that we’re making better wells, it’s great to know that we’re doing it for less money but ultimately what is going to be the driver of development in the basin, it is going to be what is the economic return on these wells,” Brown said.

He explained the economic return on two hypothetical wells. The first one was drilled in 2013 with the average EUR of 360,000 barrels with $9 1/2 million spent to complete the well during the $100 per barrel oil at the time. He compared it to a well being drilled today with higher EUR and costs less money but oil is $70 a barrel.

“So how does $70 per barrel compare to $100 per barrel back in the height of the boom when we were running 100 rigs?” he asked.

He said the 2013 well is a good investment. “We can expect that well to pay out in about 2 1/2 years and ultimately, a 2.4 times return on our investment I believe over a 10-year period. But if you compare that now to the 2018 well we see the opportunity for investment in 2018 for operators in the Williston Basin is substantially better. We can expect that well to pay for itself in amount of money to drill and complete it in one year and we can expect over a 10-year period of four times return of investment,” he said. He said his calculations were based on information released recent months.

“What does this mean for us? It means that really development of the Bakken Formation and Three Forks Formation in western North Dakota right now is even more justified than it was at the height of the boom in 2013 when we were running over 200 rigs. Today we’re running about 60 rigs,” he said at the October 2018 presentation.

“My belief is that companies would like to shift some rigs from the Permian to the Bakken, but we just don’t have the workforce to meet the need. Wells being drilled in North Dakota today are by far the best wells that have ever been drilled here but without people to support accelerated development, we will remain flat at 60 rigs for the foreseeable future,” Brown said.

The Permian Basin is the premier basin in Texas right now. “They’re running over 400 rigs right now and they’re running into a lot of issues,” he said.

Challenges

But Brown said there are two challenges being faced right now in North Dakota that are unique and need to be overcome in order for development to happen at the natural rate at which oil companies would like it.

The first one is labor shortages.

“In 2008 through 2013, North Dakota was a great option for people who didn’t live in this state to come here and actually make money because the rest of the economy was pretty depressed at the time. Today unemployment across the entire country is so low that we’re having a really hard time getting people to come up to North Dakota to work in the oil field for six-figure jobs which is an issue that we hadn’t run into (before). One of the primary issues with that being the availability of housing, and especially single-family housing which is a challenge for McKenzie County right now in particular and that we’re trying to address and how we can overcome that issue.”

He said the second issue is a regulation on flaring that was not in place at the height of the boom.

“Right now many of you may know when we produce oil from the Bakken we also produce with that natural gas. We produce about one unit of natural gas for every one unit of oil on average throughout the basin or approximately that. But that unit of oil is worth approximately $70 barrels of oil today or $60-some and that unit of gas is worth about $2.

“But now we have a regulation in the state that says you are not allowed to flare that gas. We are only allowed to flare up to 15 percent changing to 12 percent of the gas in November (2018) and we’re already as an industry running into issues meeting those goals. The amount of infrastructure that needs to be put in place to take care of that gas, move it, process it, first off is very expensive. It’s actually not very economical really to build based on the price of gas and secondly, it takes a long time to get it there,” Brown said.

As fast as the oil industry may want to ramp up development, he said they can only move as fast as their pipeliners will allow them. “We’re already beginning to see drill schedules now being dictated by the availability of gas take away in western North Dakota,” he said.

“Ultimately, as an industry, as a resident, we want to come to a solution where we are able to make use of this gas. We don’t want to go back to flaring, we want to make use of it but it’s going to take some creative minds to figure out a way to actually have this as a win and not slow down development,” Brown said.

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