AS I SEE IT
By Neal A. Shipman
It has been a terrible past three months for North Dakota’s oil and gas production as the state as well as the rest of the United States’ oil producing states have seen their production numbers plummet. And the reason for the drop in oil production is well understood.
The first big hit occurred in early May when Saudi Arabia and Russia disagreed on how much oil production they would continue to restrict in order to stabilize oil prices. When neither of these two counties would come to an agreement on production restrictions, they chose instead to flood the market with oil and lower their cost to other countries to increase their market share. The result was an instant free fall in oil prices.
While Saudi Arabia and Russia were willing to use low oil prices to cripple the United States oil industry, especially the shale play, what they weren’t expecting was the arrival of the coronavirus.
And that virus, which spread across the world like a wild fire, quite literally shut down the world’s economy. And when the economies of big energy consumers like China, India, Japan, Germany, England and the United States went silent, so did the demand for oil.
Oil supplies skyrocketed as cars, trucks, ships and airlines sat idle due to the coronavirus. And once booming factories across the world became empty shells as they were shut down to help control the spread of the virus.
In a matter of months, America’s and North Dakota’s once booming oil and gas industry was hit squarely between the eyes as it was forced to quickly scale back its workforce and begin shutting in wells amid the oversupply of oil and the low prices it was bringing on the world market.
While state officials believe that the worst impacts of the low oil prices and oversupply may soon be over in North Dakota, the effects of the past three months have had a major impact.
Consider, if you will, in just the past three months, North Dakota’s rig count has fallen from 52 in March to just over 10 last week. At the same time, over 6,800 producing wells were shut in that resulted in between 450,000 and 475,000 fewer barrels of oil being produced each day. And because of the slowdown, over 9,000 oilfield workers in the state have lost their jobs.
Is there a silver lining in all of this bad news? The answer is yes.
While state officials expect to see May production numbers to be even worse than those that were reported in April, they anticipate that the bottom was reached in mid-May as many of the shut in wells have already come back online as oil prices have been improving.
It is highly unrealistic to think that North Dakota’s oil and gas activity is going to rebound quickly to the levels that existed prior to COVID-19 and the Saudi Arabia and Russia spat. But they will rebound in time because the Bakken is one of the most highly prized oil and natural gas fields in the United States based on the quality of the oil and the low break-even price of drilling and producing oil here.
How soon it will happen is totally dependent on how fast the world economy rebounds and the demand for oil returns to prior levels.