The Organization for the Petroleum Exporting Countries may be in the driver’s seat of the oil price market, but the Bakken has done its part to put in some speed bumps.
Due in large part to the world-class resource of the Bakken, the plans of OPEC’s most productive member - Saudi Arabia - are poised to curb U.S. production but it won’t bring it to a halt.
“There’s gloom, but no doom,” North Dakota Department of Mineral Resources Director Lynn Helms told members of the state’s House Appropriations Committee on Jan. 8. The 64th Legislative Assembly kicked off two days prior and the state capitol has been buzzing with talk about the effects of oil prices on the budget forecast. Concerns about layoffs, tax incentive triggers and declining rig counts due to low oil prices have legislators seeking a crystal ball as they attempt to set up state funding for the next two years. Helms said the overarching struggle is that the U.S. has entered a price war with Saudi Arabia, Iran and Russia and now it’s a contest to see who can sustain production at low prices the longest. He explained that on Nov. 26, the day before OPEC decided to maintain its production of 30 million barrels a day, Saudi Arabia’s oil minister met with Russian and Iranian leaders to agree to production cuts. Russia and Iran refused, creating a battle for Asia’s market share.
“Saudi Arabia has faced up to the fact that … they are no longer the dominant supplier for the western hemisphere,” Helms said. “It’s really all about who’s going to sell oil to China.”
Foreseeing a huge price drop following OPEC’s decision, Russia and Iran immediately maximized production and both countries experienced record production in December. However, the oversupply around the globe is only a million barrels of oil, or 1 percent of all production, which Helms said is “not a huge overhang.”
He also noted that the state has been down this road before and while the price shocks in the 1980s and 1990s took many years to rebound, it only took about nine months to recover in 2009 and he’s hopeful that will be the case again.
“That is pretty much the Saudi minister’s game plan,” Helms said. “That it is not a long-term thing, but that they put out this severe shock for a short period of time and permanently alter market share around the world for a much longer period of time.”
No healthy oil prices in 2015
The three oil powerhouses cannot sustain low prices for long though, as Iran is currently spending at a deficit of about $7 billion a month, Saudi Arabia at some $15 billion per month, and Russia at about $18 billion per month. Based on Saudi Arabia’s $800 billion of reserves, Helms said at the current oil price, the country would be broke in four and a half years.
“That’s not the path that their oil minister has laid out,” he said.
Instead, Helms said the minister’s plan has Brent oil at $50 until mid-2015 when it will recover to $60 a barrel and then rise to $70 a barrel by year end. But after factoring in the price differentials for Bakken crude which cuts that price by as much as $15, Helms has determined the state will not see healthy oil prices in 2015.
“So far it has played out according to Saudi Arabia’s playbook,” Helms said. “But that’s their playbook - to suffer through this deficit spending through this year and then get back to oil prices that will sustain their budget in 2016.”
Helms projects that at a Brent price of $50 a barrel, North Dakota would experience a decline in production, but $60 Brent would keep production where it is today.
“Fifty dollar oil and 130 drilling rigs - that’s the breakpoint where we actually can’t sustain our 1.1 million barrels a day,” Helms said. “If these oil prices continue past the first half of the year, and we actually see that rig count drop to 125 we begin to decline in production.
“If it plays out according to the Saudi minister’s game plan, we’ll be okay. We’ll be able to sustain production and a healthy amount of activity but nowhere near 2014 activity,” Helms continued. “But if he’s wrong and it takes a lot longer, then we’ve got some problems.”
Retaining a workforce
One of those problems is keeping workers employed. Helms advised the committee to be careful about the state’s tax and regulatory policies so that infrastructure, housing and secondary development like fertilizer and plastic plants “have a chance to catch up.” With every rig that lays down, 120 jobs are lost, with another 120 to 250 indirect jobs also impacted, he said.
“The concern I have with that is we send the workers home and low oil prices stimulate the economy back home and we can’t get them back,” Helms said. “There is no place for the rigs to go - there’s no competing shale plays - but there may be jobs for those people elsewhere that will put us in a real crisis in terms of workforce again as we come back on.”
The good news is that midstream companies haven’t backed away from their investments in the state and some of the tax incentive bills being introduced to the Legislature could help sustain activity and keep employees in the state paying income tax and sales tax.
“So there are some benefits to absorbing a little pain in terms of total revenue, but long term we’re not losing those best of the best in terms of oil and gas employees or harming the long-term planners,” he said.
Operators tighten drilling plans
Helms said applications for permits slowed considerably in December with the oil price drop. The state has seen record permit numbers every year since 2009 and between the third and fourth quarters of 2013, the state recorded an increase of 80 permits. The same time period in 2014 saw permits drop by 60, marking a stark change in focus. “Permitting hasn’t crashed yet when you look at quarterly results, but it is seriously slowing.”
Helms said the state could maintain and possibly even slightly grow production as operators shift rigs to the core of the Bakken where the resource provides breakeven prices well below $50 a barrel. He said he’s already seen “an enormous amount of retraction into the safe zone,” and after polling the top 20 oil operators in the state, Helms said if current prices are sustained, the state can expect to lose another 40 rigs, putting it in the 125-rig range (see map).
“There are no other shale plays except the very heart of the Eagle Ford that can compete with what’s in that circle (on the map),” Helms said.
And since the tax incentive trigger is likely to be hit on Feb. 1 (see related story, page 1), he said production could stabilize a bit.
“That’s why I don’t see us going below 100 drilling rigs because we have that tax trigger - the first which I’m almost certain we’re going to hit,” he said.
Determining oil and gas tax revenues will be tricky since every operator has a different story to tell with some hedged to buffer themselves against the low prices and many finding drilling efficiencies that create higher economics. Many hope for a lift of the export ban - something that could dramatically change the market game (see related story, page 19).
FBIR considerations
Another key component to North Dakota’s coffers is that one-third of the state’s production is on the Fort Berthold Indian Reservation which rests in the sweet spot of the Bakken. In fact, 28 of the current rigs in the core circle of the Bakken are on the reservation. So if production becomes generally limited to the core area, the state will be splitting much of the revenue with the tribe based on a tax agreement put in place at the onset of the Bakken boom. At the same time, additional costs and delays commonly incurred on the reservation were “palatable at $80 oil, but not at $40 oil” Helms said.
“So we could see operators move some drilling rigs out of that reservation land to exploit other areas,” he added. “I think the overall shift … actually flatlines everything and sustains statewide production and keeps (the tribe’s) share at about one-third.”
Legislators acknowledge that despite the gloomy outlook, oil prices have the potential to shift at any moment with the slightest unrest in the Middle East or potential decisions in Washington, D.C. In the meantime, American consumers are grateful to North Dakota for “bringing OPEC to its knees,” Rep. Blair Thoreson quoted in a note he received from a friend in Georgia.
“In a nation that’s had a rough economy for a few years, we’ve done more to help than we know,” Thoreson said. “While we’re feeling a little bit like we’re down, the rest of the country is thanking us for what we’re doing, and we should remember that.”
