October 21, 2014

Falling oil prices could hurt state’s drilling activity

By Kate Ruggles
Farmer Staff Writer

August production totals yet again reveal an increase in production for the state of North Dakota and for McKenzie County, according to the North Dakota Industrial Commission.
In August, the state saw a new all-time production high having produced 1,132,331 barrels of oil per day and 1,340,380 MCF of natural gas per day. In similar fashion, McKenzie County saw an all-time high in production, producing a total of 11,988,169 barrels of oil and 17,936,159 MCF of natural gas.
However, the percentage increases from July to August were half of what the state experienced last August, revealing two growing concerns for industry operators in the state – worldwide oil prices and natural gas capture.
According to Lynn Helms, director of Mineral Resources for the North Dakota Industrial Commission, oil prices continue to drop significantly, creating pressure for oil markets all over the world.
“We don’t really know where oil prices are heading, or how this will affect our chief competitors, OPEC and Texas, but we are in this together,” states Helms. “Not only is North Dakota under a lot of pressure, the OPEC counties are as well.”
Helms reports that today’s world oil price is $66.25 per barrel.
“Saudi Arabia needs $94 per barrel, and Iraq $116, to satisfy their current government budget,” states Helms. “So they are below break-even in terms of world oil prices.”
The only oil-producing country that is still faring well is Kuwait, which requires $59 per barrel.
The good news is that, as far as North Dakota and McKenzie County are concerned, McKenzie County’s break-even point is $28 per barrel, which is the lowest break-even point of all the oil-producing counties in North Dakota.
McKenzie County also has the highest number of drilling rigs at 66 out of 190.
All this boils down to the fact that with world oil prices wavering, McKenzie County is still a viable production ground for the oil industry.
“The main differences in break-even points for the different counties has to do with initial production and water production,” states Helms. “When you look at Burke, Divide and Bowman counties, which have break-even points in the $75 to $85 range, their initial production rates are roughly one-third that of the four core oil-producing counties.”
Another big factor, according to Helms, has to do with water disposal costs.
“Water disposal costs are an enormous part of operating costs, which affects Burke and Divide more than the four core oil-producing counties,” states Helms. “So those two factors, initial production rates and high operating costs due to salt water disposal rates, are working against certain oil-producing counties, causing them to have higher break-even points.”
Should world oil prices continue to fall, Helms states that North Dakota operators will likely look at reducing operating costs first, before making any other moves.
Outside of break-even points, another concern for falling oil prices has to do with a built-in production incentive for North Dakota oil and natural gas producers.
If the West Texas Intermediate oil price falls below $52.06 per barrel for five consecutive months, Helms states that a two-year exemption or reduction from the state’s oil extraction tax for new horizontal wells would come into effect.
“This is a big deal because the big production and payout period is in the first one to two years of a well,” states Helms. “So if the tax incentive triggers, then the first two years of production from new Bakken and Three Forks wells would be taxed at two percent instead of 6.5 percent.”
Helms states that there are several other tax incentive triggers associated with oil prices. But that is the most significant one in terms of the oil industry’s incentive to continue drilling and producing. It also holds an inherently enormous impact on state revenue.
The other factor impacting slow production increases has to do with gas capture. On Oct. 1, 2014, the state of North Dakota started requiring that oil and natural gas producers reduce their flaring rate to 26 percent.
Normal production growth for the state in the month of August is four percent, but in August 2014, the state saw only two percent growth.
“The information I am getting from the industry is gas capture plans,” states Helms. “I talked with two operators last week, and both of them have postponed 20 to 40 completions because they wanted to be at that 74 percent gas capture number.”
It is an effect that the state expected when they issued the mandate in July. However, when combined with the current world oil market, it is contributing to the pressure the North Dakota oil industry is under.
In fact, some of the fringe production counties are already seeing a slowdown associated with the current pressure on the North Dakota oil industry.
Should a slowdown be on its way, Helms states that it will first be noticed in the hotel and food service industries.
“The only places where hotel costs have started to decrease in is Minot,” states Helms. “So if Dickinson and Williston start seeing hotel vacancies and a drop in hotel prices, as well as a drop in food service and housing rates, that would be the first place they would notice a slowdown.”
According to Helms, the world’s oil market appears to be highly affected by Europe and China currently, and there is not much that can be done about that.
“It appears that Europe is slipping back into a recession and economic growth in China has slowed considerably,” states Helms. “Those factors are completely out of our control.”
Another interesting fact is that last year Russia hit record production levels, as did OPEC and Saudi Arabia. Though this may seem negative to the North Dakota oil industry, Helms states that North Dakota’s Shale production became very visible to the world in the past two years as a significant competitor. And Helms believes this will put pressure on some of the other world oil competitors.