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Oil production falls with lower oil prices

Posted 3/17/15 (Tue)

By Kate Ruggles
Farmer Staff Writer

While December’s oil production figures were encouraging in the face of falling oil prices, January’s numbers were not so much. North Dakota saw its oil production drop by 37,000 barrels per day, which is roughly a 2.5 percent decrease.
In addition to dropping oil prices and production, North Dakota is also seeing a rapid decline in the number of rigs operating in the state according to Lynn Helms, director of Mineral Resources for the North Dakota Industrial Commission. January’s rig count was down 21 from December’s number of 160. And February’s rig count dropped another 27.
As of March 12, the rig count was at 111 in the state.
“It’s mostly about oil prices,” states Helms. “The price of North Dakota Sweet Crude is $32 per barrel. That is the lowest it has been since February of 2009.”
Helms also reports a jump in the state’s inventory of uncompleted wells to 825, up about 75 from December.
“Companies are making the $4 million investment to drill the wells, but are holding off on the $4 to $5 million investment to complete the wells drilled,” states Helms. “And they appear to be holding off more and more.”
As far as actual numbers, the state produced 1,190,490 barrels of oil per day and 1,472,904 MCF of natural gas per day in the month of January.
McKenzie County contributed 35 percent to the state’s oil production total and 44 percent of the state’s natural gas production total - the highest percentage in the state. In January, McKenzie County produced 12,960,243 barrels of oil and 20,067,376 MCF of natural gas.
The last time the state saw a drop in production was in October of 2014. And with the uncertainty surrounding the oil prices and the potential for the state’s large tax trigger to kick in, Helms believes that production over the next several months will very likely be an up and down roller coaster ride.
“At the current rig count, we will see some months of declining production,” states Helms. “Then our anticipation is that, probably in June, particularly if the large tax trigger kicks in, we will see a big surge in completions.”
“At 111 drilling rigs, we cannot produce the number of completions necessary to maintain 1.2 million barrels per day of oil production,” states Helms. “We will see declining production, but then we will have periods where they will dip into the inventory of uncompleted wells to maintain cash flow, to maintain production, or simply to be in compliance with the state’s rules regarding well completions. Then we will see some big peaks in production.”
Overall, Helms and the North Dakota State Tax Commissioner expect the state to maintain around 1.2 million barrels per day of oil production, or slightly below that. With all that in mind, the state revenue forecasting group met last week and decided to use 1.1 million barrels of oil per day as the base number for their revenue forecast for the next biennium.
“Even the industry is saying that they have to complete a certain number of wells in the first part of this year to maintain cash flow and keep their stockholders happy,” states Helms. “So 1.1 million barrels per day looks to be about right.”
Another reason for the large cutback in the state’s revenue forecast has to do with the tax triggers and what it will mean for the state’s revenues, if or when they kick on.
According to Ryan Rauschenberger, the North Dakota State Tax Commissioner, there are two tax incentives, a small incentive that triggers on after the average listed Nimex WTI price falls below $57.50 for one month, and a large tax incentive that triggers on after the Nimex listed WTI average price falls below $55.09 for five consecutive months.
Since the Nimex listed WTI price for the month of January was an average of $47.98, the small trigger has already kicked on. It applies to all new wells drilled, and Rauschenberger believes it could help relieve the financial burden associated with completing the mounting inventory of unfracked wells.
“However, the small trigger is only somewhat of a fiscally-limited incentive, hence the name small trigger,” states Rauschenberger. “The large trigger, however, when it kicks on, basically trumps the small trigger.”
According to Rauschenberger, the large trigger kicks on after the Nimex listed WTI average price falls below $55.09 for five consecutive months, and it applies to the first 24 months of all wells in production.
“When the large tax trigger kicks on, the first 24 months of all production taxes of an individual well are 0, then after a well has been in production for 24 months, the rate increases to four percent,” states Rauschenberger. “And around 70 percent of all wells in production are less than 24 months old, so the fiscal impact of this trigger will be quite large.”
Rauschenberger states the impact will be in the billions, not to mention the loss of lower sales tax, income tax and corporate income tax collections associated with fewer drilling rigs operating and fewer wells being drilled.
“When the January reforecast came out taking some of these factors into account, the entire oil tax, not just extraction tax, based on the lower oil prices and the trigger kicking in for 10 months, the total oil tax collections would go from $8.3 billion to about $4 billion,” states Rauschenberger. “Royalty checks will be impacted too, which has an impact on income tax.”
That is why Rauschenberger states that the state’s revenue forecast group has factored in a considerable loss in revenues. The small trigger has already kicked in and both Helms and Rauschenberger feel it is inevitable that the large trigger will kick in. And it will likely happen in June.
One thing in the state’s favor is the fact that they require all wells to be completed within a year of being drilled.
“There are 125 wells in the state that have to be completed, just because of compliance, by the end of June,” states Helms. “Which is why we anticipate June to be a really high month for production, somewhere in the neighborhood of a 75,000 to 100,000 bpd production increase, depending on the availability of frac crews and weather conditions, load restrictions, etc.”