SPEARFISH — While it may seem to the innocent bystander that the North Dakota oil boom is running rampant, the entire process is actually a very delicate dance, involving hundreds of companies, thousands of decisions and millions of dollars.
“It takes $3 per second, $18 per minute, $10,800 per hour and $259,000 a day to drill an onshore well,” said Kent Ellis, owner of Aurora Energy Solutions, LLC, an oil and gas brokerage firm with offices in Bismarck, N.D and Oklahoma City, Oklahoma, during his address to a crowd of more than 100 gathered for his presentation as part of the Black Hills Pioneer's Oil, Gas and Mineral Rights Workshop.
“It costs between $8 and $9 million to drill a well and oil companies are very risk averse. Unless they are 100 percent certain there is oil there, they don't begin drilling. They are very cautious … What used to be a six-week project, now averages a month. It takes 2,200 gallons-plus of diesel fuel a day, just to run the rig.”
And moving the rig is another story and another significant cost.
“To move a rig from Spearfish to Belle Fourche costs around $250,000,” Ellis said. “There are around 60 semi loads to move. The rig breaks down in semi-sized Lego parts. To rig up and rig down is an expensive venture. A complete start to finish well in the Bakken formation entails hauling between 1,200 and 2,000 truckloads of stuff and around $33,000 per acre to reclaim.”
Initial production on a well averages around 900 barrels a day.
“The biggest days are the early ones,” Ellis said. “Then they gradually drop off to produce an average of 350 per day, for example.”
Once the well is drilled, a surprisingly small amount of the oil is actually extracted.
“In the Bakken formation, around 5 percent of the oil comes out and 95 percent remains in there,” Ellis said. “In the Three Forks formation, around 7 percent of the oil comes out. Companies have decided it's profitable to take a risk at five percent for now and hope that technology catches up to extract more oil.”
One of the most unbelievable examples of geology at work is in regard to how closely a dry hole can be in proximity to a productive hole.
“Dry holes can be located next to oil producing ones,” Ellis said. “One company moved 160 feet from a dry hole to production on the Tioga-Madison Unit.”
One may erroneously think that oil companies, consisting of huge conglomerates populate the North Dakota formations. Not so, Ellis said.
“Eighty percent of oil companies employ fewer than 20 people,” Ellis said. “In North Dakota, there are 172 oil producers and 31 producing formations. There are a smattering of companies and an awful lot of consultants.”
On average, about 400 phone calls are made in order to get a rig up and running.
“Seisming, leasing, surveying to make the site, a rig and crew, trucks to move rigs, trucks to haul the diesel fuel, a crane company, geologists, economists. The oil companies don't own any of these types of equipment or services. They contract it out.”
So how does Ellis fit in to all of this?
“Brokerage firms. The vast majority of oil companies use them to call and get leases,” Ellis said. “Lease decisions fall into three main categories: bonus, term and royalty. The term is the length of time, typically a five-year term in North Dakota and depends heavily on rig availability. Royalties are usually around one-sixth of the oil — that's 16.6 percent of the oil off the top, or just under 17 percent profit. Oil companies need an 80 to 85 percent return on investment to make a project work, just because of the sheer cost of the investment.”
Ellis said that the bonus, or per acre lease payment for the term of the contract, again depends on risk tolerance, with the Perkins County baseline at $1,000 per acre.
Ellis's company's current activities include oil and gas projects in North Dakota, Montana, Colorado and Wyoming, with wind farm projects in Oklahoma, Kansas and Texas. He is a partner in The Restoration, a light commercial and residential construction company and White Butte Resources, an oil and gas development company.
This article is based on the issues presented at the Black Hills Pioneer's Oil, Gas and Mineral Rights Workshop held on Friday, Sept. 14. A video recording of the workshop is available for purchase. Call the Black Hills Pioneer at 642-2761.