Bakken development fuels rapid rise in North Dakota production, leads to myriad of growing pains

Advances in upstream production technologies are driving a rebound in US oil production, unlocking new oil plays and ultimately helping to fuel a reduction in the country's volumes of imported oil.

One area where the unconventional oil revolution is being felt most keenly is in North Dakota, home to the booming Bakken tight oil play. In recent years, technological advances in hydraulic fracturing and horizontal drilling, combined with efficiency advances like pad drilling -- which involves drilling multiple wells from a single location -- have caused the state's oil production to rise dramatically.

North Dakota output on the rise Data from the Energy Information Administration shows that North Dakota output has risen nearly seven-fold over the last seven years, jumping from just under 100,000 b/d in January 2005 to average over 700,000 b/d in August 2012. In March of this year, North Dakota overtook Alaska to become the second largest oil producing state in the US, second only to Texas. Production appears poised to rise even further, with one estimate by the North Dakota Pipeline Authority figuring the state could be producing over 1.5 million b/d by 2018.

The bulk of North Dakota's production growth comes from the Bakken play. The tight oil play now accounts for 90 percent of the state's total oil production, compared to virtually nothing in 2005. The rapid pace of Bakken development in recent years is evident in the state's rising rig count. Baker Hughes shows that the weekly rig count in North Dakota has averaged 190 rigs so-far in 2012, up from an average of 168 rigs in 2011, and 114 rigs in 2010.

Large and small exploration and production companies alike are ramping up development in the play. Small and mid-sized independents producers like Continental Resources, Whiting Petroleum, EOG Resources and Kodiak Oil & Gas are all active in the Bakken, as well as majors like Hess Corp, Occidental Petroleum, ExxonMobil and Statoil.

Growth through acquisition With most prospective acreage already leased, companies in recent years have turned to acquisitions as a way to establish and grow their leasehold positions -- creating a healthy merger and acquisition market in the play. The largest deals have been forged by QEP Resources, Occidental Petroleum and Norwegian major Statoil.

In August, QEP Resources fleshed out its leasehold position in the play by acquiring Bakken assets from several parties, including Helis Oil & Gas, for $1.4 billion. Occidental Petroleum made a similar move to grow its Bakken position in late 2010, paying $1.4 billion for assets from Anschutz Exploration, and Statoil established its presence in the play by acquiring of one of the companies that pioneered its development -- purchasing Brigham Resources for $4.8 billion in late 2011.

IHS analyst Brian Ferguson shed light on Bakken deal activity trends in a recent upstream M&A alert. "Deal activity in the Bakken in the past three years has included a mix of next-phase acreage gathering, as well as large reserve/resource transactions, as prospect development has accelerated," Ferguson said.

Expansion not without challenges Robust development activity is expected to continue in the Bakken for the foreseeable future, and forecasters predict output from the region will continue to rise. But the rapid expansion of the play is also exacerbating certain growing pains. For starters, the region lacks sufficient pipeline capacity and processing facilities to handle the growing volumes of associated natural gas production, leading to high levels of flaring -- or the burning of excess natural gas. EIA figures indicate that roughly one-third of North Dakota gas production was flared in 2011. Data from the North Dakota Department of Mineral Resources shows that the state produced nearly 430 million cu ft of gas per day in 2011, and was averaging just over 500 million cu ft of gas per day through September 2012 -- the latest month for which figures are available.

The increased exploration and production activity is also putting stress on other infrastructure in the rural state. There are complaints of noise and dust pollution, road damage from heavy truck traffic, and a lack of housing to handle an influx of workers.

In an upcoming blog post, Chad Woodworth will examine how growing oil production is overwhelming pipeline takeaway capacity, leading Bakken crude to trade at a steep discount to other crude grades, and prompting producers to transport growing volumes by rail and truck to circumvent bottlenecks.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.