January 20, 2015

Lower oil prices pushing drilling into the Bakken core

By Kate Ruggles
Farmer Staff Writer

After the state’s October production numbers revealed a drop in oil and natural gas production, the North Dakota Industrial Commission (NDIC) says that November’s numbers actually turned out pretty well. And even showed a new all-time high for oil production.
“There was record oil production in November, but just barely,” states Lynn Helms, director of Mineral Resources for the North Dakota Industrial Commission.
According to the NDIC, the state produced a total of 1,187,206 barrels of oil per day and 1,425,323 MCF of natural gas per day. And in November, the state set a new all-time high record of 11,942 producing wells.
McKenzie County accounted for the bulk of the state’s production as the county produced 12,659,410 barrels of oil and 18,455,860 MCF of natural gas in November. During November the county led the state with 2,870 producing wells.
In most circumstances, production all-time highs occur as a result of a large number of well completions and a high rig count. But, that was not the case for November. Helms states that in November there were only 39 new well completions, leaving a record 775 wells waiting on completion.
“A year and a half ago, we estimated that it would take 90 completions a month to maintain production,” states Helms. “But as technology has improved, and some companies have focused their drilling into the core area, we were amazingly able to maintain production with only 39 new well completions.”
The state is also seeing a decrease in drilling rig numbers as oil prices drop worldwide.
In November, they were 188 rigs operating in North Dakota. But as of Wednesday, Jan. 14, the number of rigs operating in the state had fallen into the upper 150s.
It is the NDIC’s belief that declining rig counts and well completions reflect not only falling oil prices, but the fact that the Bakken core is being targeted now more than ever.
“I was listening to someone on the radio talking about doing a tour of the core area of the Bakken,” states Helms. “He said that it was as busy as ever. But get outside the core area and things are starting to get pretty quiet.”
The Bakken core area, which is located in the state’s four highest producing areas of McKenzie, Mountrail, Dunn and Williams counties, is two to three times as productive as much of the Bakken in general.
 But the main concentration of the Bakken core is in McKenzie County, which is why McKenzie County continues to outpace the other counties in oil and natural gas production.
Additionally, in terms of oil prices, today’s price for Flint Hill Sweet North Dakota Crude was $29.25, the lowest it has been since November, 2008. But the price that really matters is the West Texas Intermediate posted price.
If the West Texas Intermediate posted price falls below an average of $57.50, a small state tax exemption triggers. However, if the West Texas Intermediate (WTI) posted price falls below an average of $55.09 for five consecutive months, a large tax exemption triggers on, both of which mean big revenue losses for the state of North Dakota.
According to Ryan Rauschenberger, North Dakota State Tax commissioner, there are two different oil taxes - an extraction tax and the gross production tax. If the small tax exemption triggers on, it means that any well drilled after that trigger is in place, starting the first day of the following month the trigger is enacted, will have a drop in the extraction tax rate from 6.5 percent to two percent.
The trigger is limited to the first 75,000 barrels of oil produced from that well and the first $4.5 million of the gross value of oil produced from that well. Also, the duration of the trigger is a max of 18 months. But the trigger can come off after only one month of the WTI posted price being over an average of $72.50.
“What that equates to is an incentive of around $170,000 per new well drilled,” states Rauschenberger. “So, if 650 of the 775 unfracked wells were to be completed during the trigger period, that would be an approximate fiscal impact of $120 million.”
While that is a lot of lost revenue for the state, the second trigger would have an even bigger fiscal impact for North Dakota.
“The WTI posted price would have to be an average of $55.09 for five consecutive months to trigger on,” states Rauschenberger. “That is a high standard to meet.”
If the five-month larger trigger is enacted, Rauschenberger states that it would apply to all wells, not just the new wells drilled. It would give a full exemption of the 6.5 percent extraction tax for the first 24 months of all wells in production.
“If a well was drilled say three months before the trigger kicked in, then there would still be 21 months left of the full exemption of the extraction tax.”
If a well was in production for longer than 24 months, then it would be subject to a top extraction tax rate of four percent for the duration of the trigger period.
“Price is a big concern for the state right now, because we are all trying to figure out where the bottom is for state revenues,” states Helms.
Likewise, operators are trying to figure out whether it is more profitable to drill and complete their wells or wait and see what the oil price does.
“The larger trigger has a bigger fiscal impact because it is applicable to all the wells in production,” states Rauschenberger. “However, should both triggers kick in, and if we are producing 1.3 million barrels of oil per day at an average of $50 per barrel, that would be a loss in revenue of $100 million per month.”
In order for the larger tax exemption to trigger off, the WTI posted price would have to be above an average of $55.09 for five consecutive months.
Finally, with the way January WTI prices are going, Rauschenberger states that it looks as if January will fall below both trigger prices, and therefore, the small tax exemption will be triggered. This makes the next four months of prices very significant for the state and state oil producers.
“It only takes one month of the WTI price being at $55.10, to make the cycle start all over again,” states Rauschenberger.
Another contributing factor for operators to consider is that North Dakota law mandates that an operator can only wait one year to complete a well. After that Helms states that there are regulatory paradigms that kick in.
Helms believes oil prices will rebound in the summer, and operators will be very busy. Until then, everyone has a lot to think about and try to prepare for.