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Big trouble is brewing in the mighty North Dakota Bakken Oil Field. While
oil production in the Bakken has reversed since it bottomed in 2016 and
increased over the past few years, so has the amount of by-product
wastewater. Now, it’s not an issue if water production increases along
with oil. However, it’s a serious RED FLAG if by-product wastewater
rises a great deal more than oil.
And… unfortunately, that is exactly what has taken place in the Bakken
over the past two years. In the oil industry, they call it, the rising
“Water Cut.” Furthermore, the rapid increase in the amount of
water to oil from a well or field suggests that peak production is at hand.
So, now the shale companies will have an up-hill battle to try to increase or
hold production flat as the water cut rises.
According to the North Dakota Department of Mineral Resources, the Bakken
produced 201 million barrels of oil in the first six months of 2018.
However, it also produced a stunning 268 million barrels of wastewater:
Thus, the companies producing shale oil in the Bakken had to
dispose of 268 million barrels of by-product wastewater in just the first
half of the year. I have spoken to a few people in the
industry, and the estimate is that it cost approximately $4 a barrel to
gather, transport and dispose of this wastewater. Which
means, the shale companies will have to pay an estimated $2.2 billion just to
get rid of their wastewater this year.
Now, some companies may be recycling their wastewater, but this isn’t
free. Actually, I have seen estimates that it cost more money to
recycle wastewater than it does to simply dispose of it. So, as the
volume of wastewater increases while the percentage of oil production
declines, then the shale companies are hit with a double-whammy… less oil
revenue and rising wastewater disposal costs.
To give you an idea just how much more water is being produced versus oil
in the Bakken, I went back to the North Dakota Department of Mineral
Resources and looked at their data back to 2015. Unfortunately, the
data published in excel only goes back to 2015, even though they have figures
published in PDF form starting in 2003.
Regardless, four years is plenty of time to show just how bad the
situation is becoming in the Bakken. In June 2015, the North
Dakota Bakken produced 16% more water than oil. However June this year,
the Bakken field produced 38% more water than oil:
You will notice that overall oil and water production declined in 2016,
due to the falling oil price, but as production grew in 2017 and 2018, the
percentage increase of by-product wastewater surged to 32% and 38%
respectively. Here is an interesting comparison:
Bakken Oil & Water Production:
June 2015 Oil = 34.4 million barrels
June 2015 Water = 39.8 million barrels (16% more water)
June 2018 Oil = 33.8 million barrels
June 2018 Water = 46.8 million barrels (38% more water)
As we can see, while overall Bakken oil production in June 2018 was less
than it was in June 2015, the volume of waster water increased by an
additional 7 million barrels.
I believe there are two negative forces at work in the Bakken as it
pertains to the rising volume of wastewater.
- As the wells and field age, more water is produced than
oil
- Larger Frac Stages, which require more water and sand,
are now being utilized to keep production growing or to keep it from
falling
While a rising water cut isn’t a surprise to the industry as it is a
natural progression of an aging oil well or field, the use of Larger Frac
Stage wells should be a WAKE-UP CALL to investors. Why? Because
Larger Frac Stage wells consume a great deal more water and sand to produce
more oil initially, but the decline rates are even more severe than regular
shale wells.
So, when the Investor Relations are bragging how the companies are using
newer technology of more complex Large Frac Stage wells, this isn’t a good
sign. This means that the company is now desperate to try and grow
production, or at worst, to keep it from falling.
Unfortunately, the U.S. Shale Industry is in serious trouble. Most
of the shale fields have reached a peak and when production starts to decline,
especially during a collapsing oil price, I forecast a rapid disintegration
of the industry. We must remember, as the oil price and oil production
falls, then company stock and asset values will plummet while the high debt
levels remain. Thus, the shale industry will have increasing difficulty
in servicing its debt.
I will continue to monitor the production of oil and wastewater in the
Bakken. Please check back for updates.
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