North Dakota light sweet crude is trading around $55 per barrel, down significantly from the start of the year but up a few dollars from the April lows. Natural gas prices are up about 15% over the same period. This is notable, as natural gas accounted for as much as 16% of the total value of many non-Hess royalty owners’ checks in February.

Three-mile Laterals Gain Momentum

Three-mile laterals began gaining traction in 2019, but since 2023 they’ve been widely adopted across the Williston Basin. The combination of longer laterals and improved completion technology has made previously marginal areas of the Bakken and Three Forks formations competitive with historically Tier 1 acreage.

While these developments have proven beneficial for operators, employees, and the broader industry, there’s a key question for royalty owners: How does the expanded unit size affect returns?

Royalty owners would reasonably expect at least 50% more oil recovery compared to a two-mile lateral, as spacing units are 50% larger. From a net income perspective, that would be a break-even outcome. In an analysis of “apples to apples” comparisons—same operator, same field, similar timing—three-mile laterals produced about 40% more oil than two-mile laterals over the first 12 months, slightly below expectations. However, by 16 months, three-mile laterals produced 65% more oil on a month-over-month basis, and after five years (the oldest available data), monthly production was 150% higher in the three-mile wells.

The real value for royalty owners appears to be in shallower decline curves. This results in more sustainable production, greater recovery per foot, less oil left in the ground, and ultimately stronger financial returns.

Beyond the Williston Basin

U.S. shale is entering what some analysts call its “twilight era,” as production growth is no longer being the industry's north star. Much of the Tier 1 acreage across major U.S. shale plays has already been drilled, and operators are shifting focus toward efficiency, profitability, and sustaining rather than growing shale production.

Meanwhile, production is rising in Kazakhstan, Canada, and Brazil. OPEC holds about 4 million barrels of spare capacity, and Guyana will likely be the big story from 2027 on into the next decade.

There are a lot of headwinds to higher prices and growing production in the US onshore, but there are some recent tailwinds as well:

• Newly established sanctions on Iranian oil shippers, coupled with the enforcement of existing Treasury sanctions, could pull a million barrels of Iranian oil off the global market.

• The Trump administration recently revoked Chevron’s export license and authority to operate in the country, Venezuela could also shed a couple hundred thousand barrels of daily production. 

• The Biden administration previously instituted a 60-day exemption on the enforcement of sanctions against Russian energy companies which Treasury allowed to expire in March. If those sanctions continue, at least another 1 million barrels of crude could foreseeably come off the global market.

In short, the energy market appears to be discounting prospects for global growth given a recent focus on tariffs and persistently high interest rates, but, recognizing the current administration’s mercurial nature, tariff fears and concerns around global growth could well be overdone. If nothing else, decreased supplies from Iran, Venezuela and Russia constitute a wild card which, if manifested, have the potential to create a supply-driven price increase. For now, we’re expecting oil prices to be rangebound between $60 and $75 per barrel. Below $60, U.S. shale operators (the global swing producer) are very unlikely to drill acreage they don’t have to, while prices higher than $75 would attract additional supplies to market.

OPEC doesn’t want to see commodity prices this low either and are almost certain to wait for sustainably better economic weather before increasing members’ production quotas. 

 

Article written by Blake Holman, CTFA and Bravera Wealth Advisor