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Vol. 19, No. 20 Week of May 18, 2014
Providing coverage of Bakken oil and gas

Bakken Explorers 2014: Oxy on its way out but checking out the Pronghorn

Texas, California get star billing; but continues to reduce Bakken drilling costs, improve well performance

Steve Sutherlin

For Petroleum News Bakken

Oxy USA Inc. held the number 18 spot on the top Bakken producers list derived from the preliminary January 2014 Oil & Gas Production Report published by Petroleum News Bakken and based on data for operated, non-confidential wells.compiled by the North Dakota Department of Mineral Resources Oil and Gas Division.

But Oxy isn’t aggressively seeking to move up on the list because its acreage effectively has a for sale sign planted in it.

Oxy is “pursuing strategic alternatives for select Midcontinent assets, including the trade and/or sale of its oil and gas interests in the Williston Basin, Hugoton Field, Piceance Basin and other Rocky Mountain assets,” the company said in a recent Form 8-K filing with the Securities and Exchange Commission.

Oxy hasn’t abandoned all curiosity about the subsurface of its Williston Basin acreage - it recently made an exploration foray into the Bakken’s Pronghorn* member- but the company has otherwise dialed down its pace in the Bakken petroleum system in favor of accelerating production in Texas.

Occidental Petroleum Corp. President and Chief Executive Officer Stephen Chazen said the company, which operates as Oxy USA domestically, has made progress on its streamlining plan which Oxy announced in October 2013, involving domestic oil and gas interests including those in the Williston Basin.

“We do expect the company to look significantly different by the end of the year,” Chazen said in a Jan. 30 conference call. “We have made good progress in our pursuit of strategic alternatives to the select Midcon assets. We expect to provide further information on any transactions as they conclude, some around the end of the second quarter, and we’ll announce material developments as they occur.”

While 16,618 barrels of Bakken oil production per day is nothing to sneeze at, it is but a tiny morsel on the plate of $76 billion Occidental.

When Oxy’s California assets - representing 154,000 boepd - are rolled into a separate publicly traded company under a plan announced in February, the remaining Oxy will generate about 600,000 boepd, mostly from the Permian Basin of Texas.

Oxy is bullish on Texas.

Along with its Middle Eastern and North African assets and its oil trading division, Oxy is looking to shed its Bakken assets in order to focus on Texas.

On the Bakken

Oxy has approximately 341,000 net acres of oil producing and prospective unconventional properties in the Williston Basin where its teams based in Dickinson and Kenmare, N.D., are developing the Bakken petroleum system, including the Bakken, Three Forks and Pronghorn members.

The company has two core areas in the Williston Basin, the largest being in south-central and west-central Dunn County and the other in southeast Burke County.

According to early April 2014 Oil and Gas Division records, Oxy has 191 active wells, 22 on confidential status, 29 being drilled and another 43 with permitted locations.

In Dunn County, Oxy’ assets are spread over 13 contiguous fields, most in the Murphy Creek, Fayette Willmen, Manning and Cabernet fields. In southeast Burke County, Oxy has 28 active wells with another six permitted in the Dimond field. Oxy has two active wells in the neighboring Vanville field and one well permitted in the Thompson Lake field. The three Burke County fields are contiguous.

Oxy’s position in the Williston Basin offers “exposure to over 500,000 gross acres in the prolific Bakken resource play, Pronghorn and Three Forks upside potential,” and “potential for oil-driven rate and reserve growth,” the company said in its Form 8-K filing.

Occidental has pegged its overall 2014 capital expenditure, capex, at $10.2 billion, with 50 percent or $5.1 billion going into domestic operations, $510 million of which is earmarked for the Williston, down from 2013 Williston Basin expenditures of $528 million.

Seeds of revolution

In 2012, Occidental Petroleum Corp. said it was reducing its exposure in the Bakken because of stubborn operating costs, but the company insisted it still had long-term plans for the Williston Basin.

Because the cost of drilling for oil in North Dakota has “still not come down to the level that’s appropriate” the Los Angeles, Calif.-based company has “a lot better places to put money right now than the Bakken,” Chazen told analysts in April 2012.

Chazen said although Occidental was reducing its rig count in the Bakken, “we don’t plan to exit it,” adding that the company would “add to the position and build it out as a long-term resource.”

But Chazen’s further remarks forebode the design of the company’s future streamlining plan: Chazen said Occidental would turn its focus domestically to California and the Permian Basin of West Texas and New Mexico.

The pace of drilling activity in the Bakken had overwhelmed the place and made it hard to find workers, he said.

Given that Occidental’s service costs had been “essentially flat” in both Texas and California, Chazen said it didn’t make sense for the company to rush to develop the Bakken until costs come down.

“It might be effective for somebody else to compete for capital, but it’s not effective for us to compete for capital,” he said.

Optimism in early ’13

One year later, in April 2013, Occidental sounded more optimistic about its Bakken assets, saying that the company was continually increasing production, while focusing on improving capital efficiency and driving down operational costs.

In an April 2013 conference call, Oxy Oil and Gas USA President William Albrecht said the company reduced rig downtimes by an average of 20 percent, which drove down mobilization costs. “For example,” Albrecht said, “in the Williston, our optimized drilling schedule designed to minimize rig mobilizations has reduced move cost by 33 percent.”

Albrecht said Occidental was making “numerous incremental changes” to its daily activities, resulting in significant improvements in the company’s Williston Basin and Permian operations.

“In both areas,” Albrecht said, “we’re optimizing our use of water in completion operations by using flow back-end or produced water in stimulations, which is generating substantial savings this year. In the Williston, more of the wells we’re drilling have been trouble free, particularly due to improved directional tool reliability.”

Occidental also made a strategic decision to rely less on contractors and outside consultants, and more on its own personnel, Albrecht said, resulting in efficiencies and also providing more growth opportunities for Occidental’s people.

Occidental’s contracting strategies also led to cost reductions.

“In this regard, principally in the Permian, Williston and at Elk Hills,” Albrecht said, “we’ve reduced our stimulation contract pricing. We’ve also reduced our fluid hauling costs by implementing a trucking cluster concept, whereby certain trucking fleets are dedicated to specific core areas.”

Dramatic changes

Changes were dramatic. Albrecht said Occidental slashed its completed well costs in the Williston from an average $10 million per well to $8.2 million per well in a span of just four months.

But Albrecht said Occidental was not satisfied with an average cost of $8.5 million per well. “We believe that we’re now top quartile in well costs in the play and our current goal is to bring average Williston well cost down to $7.5 million.”

Occidental also took steps to reduce its operating costs, especially in the areas of downhole maintenance and workovers, which together, according to Albrecht, made up the bulk of Occidental operating costs.

Occidental’s efforts in driving capital efficiency and lowering operations costs paid off, he said, and the company saw a significant drop in overall costs in 2013 compared to 2012.

As compared to 2012 levels, Albrecht said, downhole maintenance and workover costs dropped 36 percent and overall surface operations costs dropped by 16 percent, contributing to a 19 percent reduction in operating costs on a boe basis across all of the company’s domestic assets.

Despite the progress the company had made, six months later in October 2013, Oxy’s Bakken assets were on the block.

Occidental was once bullish on the Bakken.

As one of the five largest U.S. oil companies, Occidental made headlines in late 2010 when it sold its Argentinean oil interests to a subsidiary of China Petrochemical Corp. and spent $3.2 billion on unconventional acreage in North Dakota and South Texas.

In 2011, Occidental increased its holdings in the Williston Basin to 277,000 acres.

At the time, the company said it expected to grow Williston Basin production to at least 30,000 barrels of oil equivalent per day (from 6,000 boe per day) within five years.

Perhaps that goal could still be met, if a nimbler, Bakken-focused acquirer stepped in.

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