Ewart: Bakken boom comes at a cost

The wages are through the roof, housing is scarce and expensive, supplies cost a fortune and drilling is both technically challenging and pricey.

Add the lack of pipelines and oilfield infrastructure coupled with fast-rising production and it translates into oil that is expensive to produce and then sold at discounts to benchmark crudes.

A description of Canada's booming oilsands, perhaps? No, again. Try about 1,000 kilometres to the south, in North Dakota's booming Bakken light oil play.

Few industries have historically delivered convulsive boom-bust cycles like the oil and gas business.

Today, the boom times and boom towns in the Bakken and the oilsands are revolutionizing the oil industry and changing the dynamics of crude oil supply globally.

The International Energy Agency cited unconventional resources - the Bakken, the Eagle Ford shale in Texas and Alberta's oilsands - in a report that concluded oil supplies from outside OPEC could increase by 700,000 barrels per day in 2013 as horizontal drilling and hydraulic fracturing revolutionize the industry.

The U.S. Geological Survey estimates the Bakken contains 4.3-billion barrels of oil and its development - along with other tight oil reservoirs - has reversed decades of declines in U.S. crude production and even prompted talk of American energy self-sufficiency.

At the best of times, tight oil is capital intensive and initial production rates can decline rapidly.

The oilsands story is well documented in Canada but there was an interesting glimpse into the equally overheated Bakken in the second quarter Management Discussion and Analysis filed with regulators Friday by Calgary-based Enerplus Corp.

"We continued to pursue measures to control our costs in the Fort Berthold region. Operated spending continues to be ahead of budget as we have not been able to see a meaningful reduction in well costs year to date," said the MD&A signed by chief executive Gord Kerr.

A typical Bakken well can cost $10 million to drill, according to investment firm Bernstein Research.

Even though Enerplus committed another $50 million to fund its Bakken operations, it cut its "two least efficient operated drilling rigs" and will run just two for the remainder of the year. It also raised its production forecast for the second time in three months on growing volumes from Fort Berthold and expects to average 83,500 barrels of oil equivalent a day in 2012.

The $2.8-billion TSX-listed company acknowledged it's managing spending in the rest of its operations in North America to offset higher Bakken spending. It is not as if all the spending in the Bakken is even its idea.

Enerplus said its "non-operated activity has also increased significantly as our partners are drilling more than we originally anticipated."

As producers climb over each other to get a piece of the windfall more than 3,000 wells will be drilled in North Dakota this year. The state passed California and Alaska and is now second to only Texas in U.S. oil production.

North Dakota pumped almost 640,000 barrels of oil a day in May and the regulator confirmed that crude production is growing by 15,000 to 20,000 barrels a month as more than 200 drilling rigs operate in the state.

In recent months, CEOs from service companies like Baker Hughes and Schlumberger and big producers like Occidental have bemoaned the costs in the Bakken and lamented the economics of operating in an overheated basin.

The North Dakota Petroleum Council, for example, notes the average wage in the oil and gas industry was $89,020 in 2011 compared to a state average of $40,914. The challenges of high-cost basins has been exacerbated by the decline in crude prices as WTI averaged $106.21 US a barrel in March before sliding to $82.41 in June.

The IEA has said North Dakota's oil production should increase by about 130,000 barrels a day in 2012, but level off next year as "geography and bottlenecks will crimp producer netbacks."

Enerplus, which cut its monthly dividend in half to 9 cents in June, said second quarter earnings fell more than half from a year ago to $100 million. It noted that one-third of its North Dakota oil isn't connected to pipelines. Infrastructure construction "continues at a brisk pace," Enerplus said.

The lack of pipeline capacity - including TransCanada's delayed Keystone XL - has been cited for pushing down prices for increasing volumes of Bakken crude versus WTI and depressing producer netbacks.

Much like the oilsands, warnings about costs and profits are hardly discouraging companies from the Bakken. Even as Enerplus acknowledged the challenges, oilfield services company Calfrac said it is moving another pressure pumping crew to North Dakota because it has so much work. The resource may be unconventional but the boom is entirely predictable.

.I wonder if any bright corporate guy is thinking about the possibility of building a refinery in ND??

There is a lot more to economics of refiner than nearby crude oil. Refineries have to have the product pipelines coming out of them as well as crude and natural gas going into them.

They also produce more products than just transportation fuels. Residual Oil, Petroleum Coke, Sulfur, Chemical feedstocks, etc all need to move to their market place. Most of those are in the Gulf Coast area or transported to overseas markets. Today we have a surplus of refinery capacity. The economics of building a new one likely mean closing down another that already has the infrastructure in place. In the Houston area for example is also a hydrogen pipeline delivering to many refineries for a better price than they can build their own hydrogen generators. Modern refineries use a lot of hydrogen in their processing.

These are the reasons there is about a 40% pricing advantage to expanding an existing refinery over building a new one. Some exception exist but that is a typical pricing differences. Also building in an area that sees temperatures down to -50°F creates additional expenses.

.I wonder if any bright corporate guy is thinking about the possibility of building a refinery in ND??

There is a lot more to economics of refiner than nearby crude oil. Refineries have to have the product pipelines coming out of them as well as crude and natural gas going into them.

I have worked in a few different refineries for the design and construction of expansions and upgrades. I don't consider myself an expert in them but certainly knowledgeable. As for the temperatures:

Lowest temperatures on record have been recorded in the north and central areas of the state (Figure 18). Several areas stand out that are colder than their surroundings. These areas usually reflect the topography. The coldest area in the state so far as record low temperatures are concerned is centered in the northwest in McLean and Mountrail counties and encompasses the area where the extreme low temperature of -60° F was recorded. Other areas not quite so cold but where temperatures have dropped to about -54° F are located near the Canadian border and in the central portion of the state.

http://www.npwrc.usgs.gov/resource/habitat/climate/temp.htm

I've done pipeline facility design in North Dakota. We were required by Northern Border Pipeline company to use -50°F. It may not happen every year, but when it happens, they like things to keep running and not break down.

"Today we have a surplus of refinery capacity. The economics of building a new one likely mean closing down another that already has the infrastructure in place. In the Houston area for example is also a hydrogen pipeline delivering to many refineries for a better price than they can build their own hydrogen generators."

I'm very well aware of all these factors (I worked in the chem industry in Louisiana for decades, and one of my sisters-in-law works at Exxon). That said, the notion that we have a surplus of refineries is a new one on me. In fact, you're the only person I've ever heard say that. Certainly "a shortage of refineries" and "no refineries have been built in the USA in "X" years" are two of the common statements made by the oil products companies whenever the price of gas goes up.

And I think you have the chicken and egg thing going on. The presence of many refineries was what drove companies like Air Products (and similar suppliers) to build pipeline-based infrastructure around Houston and in the Gulf Coast area. The refineries came first. I'm sure Air Products would be willing to build an "outside the refinery fence" hydrogen plant and run a short pipeline in at a ND refinery. They were certainly willing to do that when the company I worked for needed a large amount of pure oxygen.

But the potential synergies that existed due to the unique juxtaposition of factors in the Tx-La area exist nowhere else that I am aware of.

I'm just interested if anyone has actually "run the numbers" on a refinery in ND. Once upon a time, quite a few refineries were built here in Washington State to make use of Alaskan crude, and there is no significant pipeline infrastructure up here to handle transport of those refinery by-products. Those refineries are still up and going strong (along with the concomitant increase in gas prices whenever one of them has a shutdown).

Number and Capacity of Petroleum Refineries
http://www.eia.gov/dnav/pet/pet_pnp_cap1_dcu_nus_a.htm

Current Refinery Capacity in in US = 17,322,178 Barrels per Day

Petroleum Product Supplied (sold) in US
http://www.eia.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_m.htm

Current US consumption of refined products = 16,539,000 BPD

We haven't built any new refineries lately, but we have been expanding and upgrading the existing ones for decades. It is far cheaper to do so.

Combined with our fallen demand, it has lead the US to become a net exported of refined products. We import more crude than we use, refine it (keeping jobs and spare capacity in the US), then export some products to improve the trade balance.

U.S. Net Imports of Total Petroleum Products
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTPNTUS2&f=M

And I think you have the chicken and egg thing going on.

Please understand that the economic comparison needs to be based upon existing infrastructure already in place, only needing additional crude transportation capacity to the refineries. We don't need additional capacity, just replace the crude imported from overseas with more North American produced crude.

The Washington example was to meet a refinery shortage, not just a new supply of oil.

"Please understand that the economic comparison needs to be based upon existing infrastructure already in place, only needing additional crude transportation capacity to the refineries. We don't need additional capacity, just replace the crude imported from overseas with more North American produced crude."

Unfortunately, not all decisions end up being made solely on the basis of economic factors.....that YOU need to understand. If the eco-idiots politically prevent the construction of the necessary pipeline(s), then putting in a new refinery closer to the source of feedstock will be the only possible alternative to make use of that source of crude here in the US. I'm sure the Canadians will quite happily sell to the Chinese, Japanese, and/or anyone else that pulls up a tanker at the outlet of the proposed pipeline in British Columbia if we shoot ourselves in the foot.

"The Washington example was to meet a refinery shortage, not just a new supply of oil."

Any major plant construction is based on multiple factors. The key point is that none of the Washington refineries had access to the "pipeline infrastructure" that you say is absolutely needed to transport product, yet they were built and continue to operate, in spite of having to use "other than pipeline" means to get their products to market.

A ND refinery would undoubtedly ship mostly by rail, but there are plenty of gigantic customer bases within quite short rail distances, and a quite good rail infrastructure already in place.

Don't get me wrong...I'm all in favor of pipelining the oil to the Gulf Coast, but one needs to keep other possibilities in mind and not blindly focus on only one alternative.

If the eco-idiots politically prevent the construction of the necessary pipeline(s), then putting in a new refinery closer to the source of feedstock will be the only possible alternative to make use of that source of crude here in the US.

So if a pipeline construction is held up by the democrats, we should build new refineries AND new pipelines to deliver the product to market? Why do you the product pipelines would go through any easier?

will be the only possible alternative

I don't agree that caving into unreasonable demands by idiots is the only option.

he key point is that none of the Washington refineries had access to the "pipeline infrastructure" that you say is absolutely needed to transport product

The Washington Refineries serve rather local markets. And they built a small pipeline to economically serve that area.

You brought this up to serve the Midwest Market, much farther away.

A ND refinery would undoubtedly ship mostly by rail,

You still don't address the fact we already have surplus refining capacity. This refinery would need to economically compete with other refineries that already have the existing infrastructure in place to deliver via pipelines, a more cost effective delivery.

Also keep in mind we are no longer talking about a pipeline to the Gulf Coast. The Keystone XL pipeline expansion now stops in Steel City Nebraska. The existing Keystone pipeline already from this point also runs east through Missouri for deliveries into Wood River and Patoka, Illinois.

The TransCanada pipeline expansion from Cushing, Oklahoma to the Gulf Coast, along with several other pipeline projects is already moving forward.

US pipelines map
http://www.transcanada.com/docs/Key_Projects/pipelines_in_usa.pdf

"So if a pipeline construction is held up by the democrats, we should build new refineries AND new pipelines to deliver the product to market? Why do you the product pipelines would go through any easier?

No, actually I'm not saying that. I'm saying the shipment of products would happen largely by rail and existing pipeline infrastucture, which defuses the only argument the green weenies have, which is "new pipeline might contaminate groundwater reserves".

"I don't agree that caving into unreasonable demands by idiots is the only option."

Sometimes politics forces "non-optimum" choices. See California, which has all the oil, market, and infrastructure you might want, but can't meet their own needs due to the green weenies. I suspect I like that situation about as little as you do, but reality is reality.

"The Washington Refineries serve rather local markets. And they built a small pipeline to economically serve that area."

And what percentage of refinery output moves through those pipelines??

"You brought this up to serve the Midwest Market, much farther away.

And which already has more infrastructure in place than the Washington refineries ever did. Your own map shows a quite large number of pipelines heading directly across ND and into the Midwest mega-market cities. There is a similar map showing major rail lines with precisely the same pattern.

"You still don't address the fact we already have surplus refining capacity. This refinery would need to economically compete with other refineries that already have the existing infrastructure in place to deliver via pipelines, a more cost effective delivery."

Yes I did. I pointed out that sometimes pure economics are not the ultimate deciding factor. Your failure to acknowledge that reality isn't "my" problem.

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