Hess recently released their 2Q 2012 earnings and operational results. This time marks a period of important change for Hess. The company has shifted exploration and production growth strategy from one based primarily on high impact exploration to one combining lower risk unconventional development opportunities such as the Bakken. The shift in E&P has required a substantial upfront increase in capital spending, primarily in the Bakken. Approximately 35% of this year’s capital and exploratory expenditures are devoted to the Bakken compared to 11% in 2009.
2012 capital budget for the Bakken increased from $2 billion to $3 billion. This is attributed to:
-Drilling higher working interest areas. This reflects an average WI of 80% versus the budgeted 62%. An increase of about $500 million.
-Increase in drilling and completion costs, which are expected to average $11 MM versus original estimate of $8.5 MM. This is due to the need for ceramic proppant instead of white sand caused by market shortages. Along with slower than expected transition to full sliding sleeves, this comes out to an increase of about $300 million.
-Increased infrastructure spending associated with design changes and labor costs on gas plant and gathering systems, which add up to about $150 million.
-The last cause is a higher than budgeted non-operated drilling spend from additional wells and higher non-operated wells costs, adding up to around $100 million.
In the second quarter, Hess’ net production out of the Bakken averaged 55,000 boepd compared to 25,000 boepd a year ago, an increase of 120%.
-Production increase is due to working off completions backlog and drilling higher working interest wells.
Transitioning from higher cost 38-stage hybrid completions in HBP drilling to lower cost 34-stage sliding sleeve in-fill drilling.
-70% of wells drilled in first quarter were hybrid wells at an average cost of $13.4 MM
-40% of wells drilled in second quarter were hybrids at an average cost of $11.6 MM
-By the fourth quarter all wells will be sliding sleeve at an estimated cost of under $10 MM with no difference in EURs.
Hess is building a long term business plan in the Bakken. While expenditures are high this year, the company is counting on these investments to attain capital efficiency with advantageous infrastructure (Tioga Gas Plant 2013), well cost reductions, and transition from HBP to pad drilling.
Using Drilling Info, I’ve taken a snapshot of Hess’ 2nd quarter producing wells.
Check out Hess and all other Bakken Shale operator activity in Drilling Info DNA.
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