differentials challenging

Price map shows differentials are challenging right now for light sweet crude flowing to the Gulf Coast.

North Dakota started the year at 55 rigs and, in a few short weeks, with twin blows from the COVID-19 outbreak and the Russia-OPEC price war, has shed around 40 percent of them. The industry is now sitting at about 33 rigs.

Well waivers, meanwhile, have been sought to shut in uneconomical production. So far, based on that, the industry appears to have shut in something like 260,000 barrels per day of production, according to the state’s top oil and gas regulator, Department of Mineral Resources Director Lynn Helms.

The state’s most recent monthly oil and gas production report, released April 14, of course shows none of that. It is all based on February numbers.

In February, North Dakota’s crude oil production was still a healthy 1.451 million barrels per day, an increase of roughly 20,000 barrels per day over January numbers.

Gas production, meanwhile, was 3.1 billion cubic feet per day, a new high, up from January’s 3.02 billion per day.

Gas captured rose to 87 percent. That was in part due to new infrastructure that came online in December, January and February, but also due to some wells being shut in.

That’s a much rosier picture than what’s happened since those numbers were recorded. Coronavirus has destroyed more than a quarter of the world’s oil demand, and a Russia-OPEC price war has flooded the market with a tidal wave of oil.

Capacity in the state is nearly full at every storage facility, at the head of every pipeline, and at almost every rail facility, Helms said.

“Downstream capacity is nearly full,” Helms said. “It looks like it could be full by the month of June.”

Companies are asking about building tank farms that could store 300,000 to 500,000 barrels of oil, Helms added, and those companies are estimating they could have the storage ready in as little as six weeks, if everything goes well with permitting.

Helms has meanwhile been discussing the situation with drilling companies, who are projecting rigs could drop by as much as 75 percent overall.

That would put their numbers into the teens — similar to the 2015 downturn. Oil and gas operators, however, are projecting more like a 50 percent drop, which would land North Dakota rigs in the 20s.

“I think drilling companies are looking at it more pessimistically than operators are,” Helms said. “Operators are doing all they can to retain a core group of highly experienced drilling hands so that when prices recover, as they will in 2021 and more forward into 2022, they will have experienced drilling hands and be able to capture the efficiencies they’ve built into the drilling systems the past four, five years.”

Hydraulic fracturing crews have dropped by about 25 percent so far, to nine or so teams. Helms is hearing that an overall drop of 50 percent is likely, which would put the Bakken around five or six crews.

“It could go deeper than that,” Helms said. “We will see how long the price collapse lasts.”

If rigs are in the teens and 20s, and frac crews only number five or six, that will result in many more non-completed wells, Helms predicted.

“One thing all this translates to is job losses,” Helms added. He estimated that so far the energy sector has laid off about 2,200 for the month of March.

“If we see the kind of reduction for drilling and hydraulic fracturing activity that the service companies are projecting, that could extend that by another 6,000 jobs.”

That would put job losses in the neighborhood of 8,000 to 8,500, Helms estimated.

The new agreement by OPEC helps put a floor on prices, but it’s not an immediate solution. COVID-19 has destroyed 35 percent or so of world demand for oil, and the bottom to that has not yet been reached. Estimates Helms has seen don’t show demand catching up to or exceeding crude oil production until the fourth quarter of 2020.

Helms said he is aware that Texas and Oklahoma regulators are considering proration of oil production as a potential solution.

“North Dakota hasn’t looked seriously at that yet,” he said. “We think the market and the regulatory relief we offered and the business model and market decisions being made are accomplishing the same thing, but in a much better way.”

As far as the effect on state budgets, Helms said Moody’s is running analytics for several scenarios that will be used to help inform state agencies about the effects of the downturn on state revenues. The models will include sales taxes and income taxes, as well as GPT and Extraction taxes.

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