Bakken drillers poised to curb exploratory spending on oil slump

October 13, 2014

Bakken drillers poised to curb exploratory spending on oil slump

JOE CARROLL

CHICAGO (Bloomberg) -- Bakken shale-oil producers are under pressure from tumbling prices to scale back their 2015 drilling plans in a region that accounts for one of every eight U.S. barrels of crude.

Bakken oil fell 1% to $79.40/bbl on Oct. 13, the first time it’s dropped below $80 in 11 months, according to data compiled by Bloomberg. Crude prices have been declining worldwide as ample North American supplies tempered the U.S. appetite for imports and Persian Gulf producers signaled they’re prepared to keep output high to protect their market shares in Asia.

Companies drilling expensive, experimental wells in frontier regions such as the Tuscaloosa Marine Shale beneath Louisiana and Mississippi will be first to feel pinched by the drop-off in prices, said Gabriele Sorbara, an analyst at Topeka Capital Markets in New York. Bakken producers will soon feel the pain as well as their returns dwindle.

“There is going to be a quick response” among explorers to lower prices, Sorbara said in a telephone interview. “The body language from the companies I follow is that capital expenditures next year will be flattish or slightly up, when the expectation had been for increases in the 5 to 10% range.” Bakken producers need oil prices between $70 and $80/bbl to earn a 15% to 25% return, a typical profit target for shale drillers, Sorbara said.

High-Pressure Wells

Companies drilling parts of the Bakken where very high underground pressure forces more oil to the surface in each well -- such as the Nesson Anticline or the western Williston -- are best-positioned to withstand the slump in prices, Sorbara said. Conversely, the northernmost areas of the region where geological conditions are less favorable will be hardest hit, he said.

During the past six months, Bakken has lost 21% of its value, making it the second-worst performing domestic crude. Only Kern River crude, a thick, sulfury oil produced in southern California, fell more with a 24% decline during the period.

Bakken wells produced a record 1.047 MMbbl of crude in July, accounting for 12% of total U.S. output, according to data compiled by Bloomberg.

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