Bakken producers, depending on location and other factors, must receive from $40 to as much as $60 per barrel of oil to stay in business, according to industry representatives.
These kinds of oil prices may not seem all that threatening to producers when considering oil sells for $120 per barrel and even more on some world markets. In North Dakota, life is good and the unprecedented oil boom continues unabated.
But a darker side to this Cinderella story was expressed earlier this month at the 2nd Annual Bakken Investor Conference in Minot, North Dakota.
For one, Bakken’s hefty discount to other benchmark crudes, such as North Sea Brent and West Texas Intermediate, or WTI, exasperated by a major downturn in world oil prices (it’s happened before), could put a real hurt on producers. Moreover, add to the mix North Dakota’s high production tax, plus possible heavy-handed U.S. Environmental Protection Agency, or EPA, regulations, and industry could be headed for big trouble.
John Zimmerman, founder and managing member of Intervention Energy, a small E&P independent based in Minot, pointed out during his conference presentation that many Bakken producers were hurt by the 2008 economic recession and collapsing oil prices. Since then producers have learned the wisdom of hedging their production to guard against sudden, steep declines in prices, he added.
“We’ve got to make sure we are protected because, if we keep on drilling and oil falls to 50 bucks, our economics would be severely hampered,” Zimmerman said. “That’s one price risk that we do manage.”
However, he said, one risk that can’t currently be managed is the actual price of Bakken oil, which because of transportation limitations and other bottlenecks, trades at a big discount to WTI and a huge discount to Brent. The monthly average for Bakken crude through April 11 was $81 per barrel versus $97.60 for WTI. At PN’s deadline, Brent was steady at around $120 per barrel.
The oil blowoutDuring the so-called oil price blowout earlier this year, thought to be spurred by President Obama’s decision not to permit the U.S. portion of the Canadian Keystone pipeline, Bakken oil fell in to the $70-$80 per barrel range and came dangerously close to the upper end of the $40-$60 price threshold thought to be required to do business in the Bakken play.
“The main thing for us is that if you look at what’s happening in the world, you’ve got Brent crude about $20 above WTI,” Zimmerman said. “And you’ve got Bakken crude $25-to-$30 below that. So, you’ve got, say, a $40 spread in there and it cost me $10 to get the oil down (by rail) to St. James” refinery in Louisiana.
He added: “We’re confident that over time this might be a short-term hit. The infrastructure’s going to come; the pipelines are going to get built. You’ve seen how rail has been a bit of a savior and in a big way; because it is the outlet we would not have had if we just had a pipeline.”
Industry: production tax too highFor the most part, industry seems to be well satisfied with the current business climate in North Dakota, except when it comes to the state’s production tax, believed to be among the highest in the country.
“We’re at 11.5 percent tax right now on production,” Zimmerman noted. “So if you throw in 20 percent royalty and an 11.5 percent tax in there, you’re already 30 percent off the top line before you get anything else.”
GeoResources Inc. Chief Operating Officer Robert J. Anderson, in his conference presentation, called on attendees to urge the state of North Dakota to reduce the production tax, or at least provide oil companies with more incentives.
“If the tax structure got out of whack or got too high, I guarantee that companies would probably find somewhere else to go,” he said. “I’m not saying that (North Dakota) is the most difficult environment tax wise to operate in, and there are some advantages we got early on. But I wish they would keep those for a few more years.”
GeoResources, in addition to the Bakken, is also heavily invested in other regions, including the Eagle Ford shale play in Texas, where the company’s returns are slightly better than in North Dakota.
“First, it’s a little easier and cheaper to operate in Texas, mostly because of weather,” Anderson said. “But there is a little better take-away capacity, so you get access to market a little bit better. And lastly, what a lot of people don’t recognize is the state of Texas does have a lower production tax than the state of North Dakota.”
He added: “There are some companies that are tied to the Bakken. They are going to stay here regardless because they don’t have other assets. But companies that have a portfolio of opportunities … they could take their dollar to somewhere else.”
EPA’s fracking studyBut perhaps industry’s biggest concern these days has to do with possible stiff EPA regulations dealing the effects, if any, of hydraulic fracturing on drinking water resources, which at the extreme could shut down the entire Bakken oil patch.
“It would certainly kill this play, or be detrimental to this play,” said Laura Erickson, an industry consultant and head of Williston, North Dakota-based Plains Energy Technical Resources, LLC.