November 18, 2014

Drilling activity slows

By Kate Ruggles
Farmer Staff Writer

This month’s oil report brings the September production numbers for the state of North Dakota. Despite the fact that oil prices and rig counts are still dropping, September showed one of the highest increases in production that the state has seen, with a more than 52,000 barrel per day increase over the previous month.
“September brought three new all-time high records for the state - oil production, natural gas production and well counts,” states Lynn Helms, director of Mineral Resources for the North Dakota Industrial Commission. “But rig counts, on the other hand, and oil prices, not so much.”
The rig count is down dramatically for the state of North Dakota with Friday, Nov. 14, showing a total of 186 rigs.
“We are back in territory we have not seen since the second quarter of this year,” states Helms.
What is interesting, however, is that in the core area of oil and natural gas production, which is southeastern Williams County, southwest Mountrail County, northwest Dunn County and northeastern McKenzie County, the rig count is 165.
“The best explanation for what is going on in terms of rig count is that there is a focus on drilling rigs and completions in the highest productivity areas,” states Helms. “Several forces are coming together – gas capture, economics and crude oil transportation – which are pushing the drilling rigs into northeastern McKenzie County, where the wells are so much more productive.”
“Here the state sits with over 600 wells waiting on completion, but because a lot more high productivity wells were drilled, we saw a record production increase,” states Helms.
As far as the numbers go, the state of North Dakota produced 1,184,635 barrels of oil per day and 1,403,448 MCF of natural gas per day during the month of September. There was also a total of 11,741 producing wells in September, which is almost 200 more than the previous month.
McKenzie County totals were equally staggering. The county is not only the highest producing county with a total of 11,996,875 barrels of oil and 18,001,836 MCF of natural gas being produced in September, but the county is also the only county whose production numbers totaled more than 10 million for both oil and natural gas. McKenzie County led oil production in September by more than three million barrels and natural gas production by more than 10 million MCF.
Helms states that the reason production has been able to increase, while rig counts and oil prices fall, is due to a number of efforts on the part of producers in western North Dakota. Those efforts mainly include the aforementioned consolidation of rigs into the core production area and letting go of rigs that are less efficient.
“I have been talking with many oil and gas operators, and many of them are scaling back their plans at this point. They had intentions of increasing rig counts going into next year, and almost all of them had budgeted to do so. But they seem to have dropped those plans for now,” states Helms. “Some rig contracts are expiring, so it is a good time to not renew some of the less efficient rig contracts.”
Helms states that a company can cancel a rig contract, but they will be forced to pay standby time for that rig through the end of the final term of its contract. Though standby time is cheaper than operating time, if a company can keep a rig until the end of their term, they can then release the rig at no cost.
“At this oil price, that is the more likely scenario,” states Helms.
One of the biggest concerns for North Dakotans is the fact that this is all happening just before the start of a new biennium. And Helms is certain that the falling oil prices and rig counts will have an impact on lawmakers going forward as they look at the 2015-17 budget.
According to Helms, oil prices have hit a modern low, and the posted price for North Dakota sweet crude is $58.75 per barrel.
“What you want to keep in mind is that the realized price for North Dakota producers actually runs five to 10 percent above that posted price,” states Helms. “That is because there are a significant amount of barrels that leave the state and get closer to a Brent price or WTI. So, when it all averages together, the actual realized price for state and operator revenues runs five to 10 percent above that posted North Dakota sweet crude price.”
Also with falling oil prices, there is a concern that the tax exemptions will be triggered, though Helms still feels that it is an unlikely occurrence.
“Usually, a sharp, rapid drop in oil prices is followed by a quick rebound,” states Helms. “The last time we saw these kind of price drops was during the 2008-09 economic collapse.”
However, to date, there is a $25 gap between the tax exemption trigger price and today’s WTI price. That, in consideration with the state’s current production level, is why Helms does not yet feel that the trigger price is a concern.