Chevron-Hess deal may lift Bakken oil output, but no return to boom days

Chevron’s (CVX.N) deal announced last week to buy Hess (HES.N), one of the largest operators in the Bakken shale play in North Dakota, could raise oil output there marginally but analysts do not expect a return to its peak pre-pandemic boom days.

New drilling technologies during the so-called Bakken Boom turned North Dakota into the nation’s second-largest crude oil-producing state from 2012 to 2020. That No. 2 spot was taken over by New Mexico after the COVID-19 pandemic crushed oil demand and drilling activity.

The Bakken formation, located along the Canadian border, is a long way from export terminals and refineries, which means producers have higher transport fees and typically smaller profits than their competitors in the giant Texan and New Mexican shale area that are closer to the main refining and export hubs on the Gulf Coast.

Production in the higher-cost Bakken region is around 1.27 million barrels per day (bpd), nearly 18 per cent below the late 2019 peak, according to US government data.

Hess produced 190,000 barrels of oil equivalent per day (boepd) there during the third quarter this year, the company said on Wednesday in its earnings statement.

Chevron’s acquisition gives it that production and 465,000 net acres (1,882 sq km) in the region, which Chevron described as “long-duration inventory” when it announced the deal.

Chevron is expected to largely adhere to Hess’s plans for the Bakken, which included growing its net production there to about 200,000 boepd in 2025, analysts said.

Drilling with the same number of rigs that Hess has used would give Chevron around 15 years of inventory in the region, Chevron CEO Mike Wirth said when the deal was announced.

“This is a very attractive asset that can deliver kind of plateau production, strong cash flow for many, many years to come,” Wirth said.

Chevron hopes that new technology it is pioneering in the other shale regions where it operates would help squeeze more from the Bakken in the future, he added.

“This sale is a big deal in North Dakota,” said Ron Ness, head of the North Dakota Petroleum Council, an industry trade group.

“Bringing Chevron’s expertise to the state is most welcome.”

Chevron’s entry also marks a cultural change in the state’s energy industry. Hess has been part of the energy industry in North Dakota since 1951, and helped establish the state as a top shale oil and gas producer.

“There’s a sentimentality to this sale,” said Kathy Neset, who runs a prominent North Dakota oil industry consulting firm and counts Hess as one of her largest clients.

UPSIDE?

Chevron could take Bakken production higher than the output targeted by Hess in the future, said Matthew Bernstein, a senior analyst at Rystad Energy.

Given the breadth of their operations, larger integrated companies such as Chevron are under less pressure than shale producers to stick to modest target increases in every region they operate – so long as they keep providing shareholders with returns, Bernstein said.

The Bakken is more consolidated and mature than regions such as the top US oilfield – the Permian – and much smaller, so there is less scope to increase activity, Energy Aspects’ Jessie Jones said.

Break-even prices in the Bakken have been on average higher than other shale regions since 2019.

Bakken half-cycle break-even prices, which include costs for transportation, income taxes and price differentials, on average are expected to be $58.86 per barrel in 2023, much lower than the $50.69 per barrel in the Permian basin’s Midland region, according to Rystad Energy data.

The Permian basin in Texas and New Mexico has surpassed its previous peaks and hit a record high this year of nearly 6 million bpd, Energy Information Administration data showed.

Jones expects Bakken output to hit 1.3 million bpd this year, still a long way from the 1.54 million bpd pre-pandemic peak.

It remains to be seen if renewed investment or a breakthrough in technology can prevent a longer-term decline in Bakken output.

Bakken oil production could drop to 1.15 million bpd from 2026 and be flat through 2030, before entering gradual decline as inventory exhaustion sets in, said Nathan Nemeth, a principal analyst at Wood Mackenzie.