Posted 12/16/14 (Tue)
By Kate Ruggles
Farmer Staff Writer
For the first time in eight months, North Dakota did not set a new oil production record. At least that is what the October production numbers revealed. Production in the month of October yielded around 4,000 less barrels of oil than the previous month’s production. But according to Lynn Helms, director of Mineral Resources for the North Dakota Industrial Commission, dropping oil prices and curtailing flaring can lead to that.
Natural gas production, on the other hand, is still setting records in the state. In October, North Dakota produced 1,182,174 barrels of oil per day, nearly 4,000 less than in September, and 1,429,593 MCF per day of natural gas, which is roughly 15,000 more than was produced in September, and a new natural gas production record. Also in October, the state had a record number of producing wells at 11,892.
Though the state’s oil production plateaued, both oil and natural gas production in McKenzie County is still setting records. In October, the county’s production reached a new all-time high of 13,062,964 barrels of oil and 19,803,330 MCF of natural gas. That is one million barrels of oil over September’s numbers and 1.7 million MCF over September’s natural gas production. Also, McKenzie County had the highest number of producing wells at 2,865.
Helms states that, concerning the state’s oil production plateau, there are three forces at play and all are working to restrict production or hold it flat. Those conditions are the continuing oil price decline, which is working to restrict the capital investment in the state’s oil play, gas capture and oil conditioning.
“Oil conditioning is not likely having an impact yet though, because the compliance date for oil conditioning is April 1, 2015. So there is plenty of time for producers to get their wells in compliance,” states Helms.
That leaves oil prices and gas capture; As far as oil pricing goes, the November oil price was $60.61 per barrel, but as of Friday, Dec. 12, the price was $41.75 per barrel, the lowest it has been since March 2009. According to Helms, the state’s general emotion regarding this market is concern, but not fear or panic.
Helms states that the state has tried to build a revenue structure that does not depend on oil production taxes or extraction taxes for general fund dollars. But the general fund is indirectly affected through income taxes and sales taxes.
“This is the second major slow-down since the Bakken and Three Forks oil play began. In November 2008, we had 93 drilling rigs operating and by May 2009, after the financial crisis hit and oil prices dropped to $27 per barrel, the rig count dropped to 34 and didn’t recover until February of 2010,” states Helms. “It took about nine months to recover, and everyone is hoping that this price collapse is of the same nature - that it is very sharp and hard and that it bounces back quite quickly.”
Helms feels that the impact of today’s oil price will not be felt right away because of the large inventory of wells the state has waiting on completion.
“An average year in North Dakota is expected to yield 2,000 completed wells. But we are going into 2015 with an inventory of 600 plus wells waiting on completion,” states Helms. “That is a major cushion.”
Another reason Helms believes the impact from the collapsing oil prices will be felt slowly has to do with the low break-even points for the four core oil and natural gas producing counties.
“We expect activity to continue in the four core oil and natural gas producing counties - McKenzie, Mountrail, Williams and Dunn counties,” states Helms. “In fact, the current market may actually serve to concentrate activity there and the people living in those counties may wind up seeing more activity than if the oil prices were higher.”
Because oil prices are swiftly declining, many oil companies have already advised Helms that they expect to ladder their rig count down by 30 or so rigs.
“Many companies have structured their rig tracks to where a few rig contracts are expiring every two to three months. As their contracts expire, they will let those rigs go rather than renewing their contracts,” states Helms. “We will not see a drastic, sudden drop, but we will see all major companies laddering their rigs down if oil prices continue to stay down.”
As of Friday, Dec. 12, the state’s rig count was 183. The statewide rig count is now down 16 percent from the high, which was 218 on May 29, 2012.
The four most active rig counts are down as follows: Dunn County is down 26 percent from its high, Mountrail County is down 20 percent, Williams County is down 16 percent, and McKenzie County is down 15 percent. To date, McKenzie County leads in oil and natural gas production, producing wells, and rig counts.
With regard to gas capture, the statewide percentage and in the Bakken was 78 percent. This is a great achievement, since the statewide goal for October was 74 percent and the goal for Jan. 1, 2015, is 77 percent. So, in terms of flaring, the state is ahead of the game, which is good, because it has allowed some cushion for January’s mandate. But this achievement is also contributing to the state’s oil production plateau.
“Many companies have reported that they are leaving wells uncompleted to accommodate the gathering capacity of the gas gatherers,” states Helms.
So, until the gas gathering capacity catches up with the state’s production capacity, production will be slowed. Especially, in the current oil market.
“There is not a lot of incentive for a company to spend another $5 million, just to produce that high initial production rate at $41 per barrel,” states Helms. “Uncompleted wells can be left uncompleted for up to a year, and in some instances, it probably will happen.”
As for the coming year, Helms believes the big impact of gas capture has already been felt, since the target gas capture goal for 2015, 77 percent, has already been reached. In fact, in this low oil price environment, Helms believes producers have found the push for gas capture to actually be quite profitable.
“We went from a situation where crude was worth 30 times on a BTU basis what natural gas was worth. But now crude is 10 times the price of natural gas, so gas capture has become an opportunity for profit,” states Helms. “We couldn’t be happier. Companies have gotten on board and gotten proactive about capturing their gas, but they have also seen tremendous profit in doing so. This is exactly what we wanted to happen.”
Helms states that 2015 will be a difficult year. The soft oil prices will have a significant impact and the Industrial Commission expects to see 40 to 50 less rigs, which means there will be a month-to-month struggle to see production increases - if they come at all.
“But here we sit with 8,400 Bakken and Three Forks wells in this play, which leaves us with only 54,000 to 64,000 wells to drill,” states Helms. “The resources haven’t gone away. The profitability in the near term is bad, but the long-term profitability is tremendous. This is a blip in the long-term scheme of things.”