The Bakken From an Economist’s Perspective

The first item on the Farm Financial Standards Council annual meeting agenda was a discussion on the Bakken Oil Field by Scott Rickard, an economist with Montana State University – Billings.  Here are some of the key points from the presentation:

• Geography – The Bakken oil field essentially covers the Western Half of North Dakota and goes north into Canada.
• Horizontal Drilling and Fracking – The primary reason for dramatic increase in oil production in the Bakken is the use of horizontal drilling and fracking.  The drill will go down vertically for a mile or more and then turn horizontal for two miles or more.  They then pump sand and other chemicals into the pipe and “frack” the surrounding material.  They continue to experiment with the chemicals, etc. to determine the best method.  To frack one well takes 100s of tanker loads of chemicals and water.  These trucks can cause major damage to rural roads.
• The growth in oil production has only been in the “tight” oil segment.  The normal methods of oil production have actually decreased, whereas, the methods to get “tight” oil out of the ground have led to the increased oil production in the US.
• It costs about $8 million to drill a horizontal/fracking well.
• Bakken oil depletion rates are about 75-80% in the first two years of production.  High production in first two years, then much lower production from years 3 forward.
• The Energy EROI ratios have decreased since the 1930s.  During the 1930s, you got a 100 return for each unit energy put into the project.  The Bakken energy is now about 5 to 1 and Oil Sands in Canada are about 2.4 to 1.
• North Dakota’s population in 2003 was about 640,000.  As of 2013, the population has increased about 84,000 people to 724,000.  Most of this growth has incurred in the Bakken region to meet the demand for oil production.  How will the demand for services affect the state’s resources, especially if and when the oil production demand decreases.
• Getting new pipelines built takes a long time.  This means that rail shipments of oil out of the Bakken will continue to push out grain shipments.  This will continue to increase the negative basis for grain out of the Dakotas.
• The Bakken discount used to be as high as $28 to West Texas Intermediate (WTI).  The discount has now dropped to less than $3 and in some cases, there is a premium to WTI in certain months.  Much of this is due to the ability of railroads to get the oil to the ports that would normally import oil for other counties.
• By 2020 or sooner, the Bakken oil field will most likely hit peak production and then start to decline rapidly.

Paul Neiffer, CPA