This Oil Producer Will Benefit the Most From Downspacing

"Big fields get bigger." For the horizontal drilling industry, this saying rings true now more than ever. As the country's most successful shale oil field, the Bakken, reaches the sixth or seventh year of its development, the field has unmistakably matured. Days of wildcatters and land rushes have given way to methodical optimization, refined practices, and discovery through technology. 

As was the case with the larger oil fields of yesteryear, the winners in this stage of the Bakken's development are the largest acreage holders in the core areas. These are companies like Statoil , Whiting Petroleum , and most of all Continental Resources .

With its 1.2 million acre position in the heart of the Bakken, no company will benefit from optimization more than Continental. While I believe the Bakken is very early in this second stage of its development, we have so far seen the following big trends: Multi-pad drilling, enhanced well completion, and downspacing. This article will look at all three of these technical aspects, and will show just how much Continental benefits from each of them. 

Rig in the Bakken, at night. Continental is the largest acreage holder in the Bakken. Source: Wikipedia

Multi-pad drilling
Multi-pad drilling benefits all producers in an area, not just Continental. This practice involves drilling multiple wells from one single location. Before multi-pad drilling, rigs would drill one single well, disassemble, and move to another location to drill the next well. Multi-pad has saved Continental both time and money, and has contributed to a decline in well costs to between $7.5 million and $8 million. At $90 West Texas Intermediate oil, average returns have settled to between 40% and 50%.

Enhanced well completion 
Enhanced well completion actually means a couple of things: Increased proppant per well, the use of slickwater for hydraulic fracturing, and hybrid stimulation. Instead of focusing on the technicals, take a look at the below chart to see the per-well recovery result: 

CLR Investor relations

So far, we see the "enhanced" Madison well producing 37% more barrels equivalent than the average, 603,000 barrel-recovering well from Continental. These techniques come at an additional cost of between $1.5-$2.0 million per well, however. Management believes the cost will be well worth it in the end. 

Downspacing is the movement of wells closer to one another. It's not quite as simple as it sounds, but producers are finding that in most horizontal drilling plays, reducing the space between wells from 80 acres to 40 acres has not had a negative effect on production per well. Imagine for a moment what this might mean for a company like Continental, which holds 1.2 million acres in just one shale play. Downspacing could result in a doubling of probable drilling locations.

Continental has already pilot-tested 1,320 ft. spacing and 660 ft. spacing in a few areas. This has already resulted in 65 new well locations. Of course, there is a lot more work to do in this regard.

Bottom line
There's a certain economy of scale with each of these three improvements. With multi-pad drilling, for example, the more contiguous acreage a producer has, the more freedom that driller will have to "web out" drilling locations from a single rig without encroaching on another company's leasehold.

As the biggest acreage holder in the biggest shale play, Continental should therefore benefit from well downspacing the most. With the most economical, highest-producing "core" acreage in this play, Continental will also most benefit from "upgrading" wells by employing enhanced completion techniques. Those wells which already produce the most will benefit the most from an upward shift in the type-curve. No matter how you slice it, Continental Resources is the biggest benefactor of "stage two" in the Bakken.

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Casey Hoerth has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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