Just how close is the U.S. price of oil from entering the danger zone, or the low point at which nerves unravel and the rig count plummets?
Well, if price estimates by two of America’s largest oilfield service companies are to be believed, there’s no reason for producers to panic just yet, but plenty of reason to be on the watch.
Baker Hughes places the danger zone at a sustained price under $80 per barrel, depending on the company and quality of the property. That equates to roughly $65-$70 per barrel for Bakken oil when accounting for the huge price differential separating North Dakota Sweet and West Texas Intermediate (WTI), the U.S. crude benchmark.
Moreover, higher costs associated with developing technology-driven shale plays tend to make unconventional formations such as the Bakken petroleum system even more price-sensitive.
Producers okay with $85/bbl
“Probably as long as it’s 85-plus … we’re fine,” Martin S. Craighead, Baker Hughes’ chief executive officer, told investors during a conference call. “I think if it gets close to 80, people start getting a bit nervous. And if it goes below 80, you could start to see — for a sustained time — you could start to see some rigs coming off.”
Paal Kibsgaard, chief executive office for service company powerhouse Schlumberger, also told investors during a conference call that continued “macro” or global economic uncertainty coupled with price volatility “could make customers more cautious in terms of future activity plans.”
“In North America, liquids-based activity continues to grow, offsetting the drop in natural gas activity and keeping the overall U.S. land rig count more or less flat so far this year,” Kibsgaard noted. “However, a WTI oil price in the low 80s with continued market uncertainty could impact the rate of growth in liquids activity in the second half of the year, although we have not seen any signs of this so far.”
Oil prices fell because new supplies came online just as a slowdown in the global economy reduced demand, according to market observers. Moreover, U.S. production is the highest since 1998. At the same time, the financial crisis in Europe and weaker economic growth in the United States and China helped reduce demand for oil as drivers, shippers and travelers used less gasoline, diesel and jet fuel.
EIA projecting $88/bbl
The U.S. Energy Information Administration (EIA) projects WTI crude oil spot price will average about $88 per barrel over the second half of 2012. That’s a half-dozen steps or so from the danger zone, but is hardly in the comfort zone, either, given the volatility of oil prices during the first six months of the year.
WTI crude began the year with an average January price of $100.32 per barrel, increasing to $102.27 in February and to $106.21 in March, before sliding to an average $103.35 in April, to $94.72 in May, and to a scary $82.41 in June. Prices overall began to improve in July, with a posting of $88.06 on the final day of the month, or about the same average price EIA projects for the balance of the year.
Baker Hughes expects the average annual rig count in North America to grow about 3 percent year-over-year from an average of 2,296 rigs in 2011 to an average of 2,371 rigs in 2012. The company also expects to exit this year with 488 natural gas rigs in the United States, which is a decline of 321 rigs compared to last year. For oil, however, the company sees industry ending the year with 1,430 rigs in the United States, which is an increase of 300 rigs compared to last year.
Rig count leveling off
Meanwhile, North Dakota’s rig count appears to have leveled off in the low 200s, after reaching a record high of just under 220 rigs in late May. But hardly anyone is blaming oil prices for the decline. State officials said fluctuations in the rig count were to be expected and that, overall, the count should continue to rise.
“What we expect is a bit of a saw-tooth pattern in our rig count as new-built rigs are brought in. Once they’re up and operating then older, inefficient rigs will be moved out. It’s not going to be a steady build,” Lynn Helms, director of the state department of Mineral Resources, told Reuters.
Rather, Helms said the pause in the number of working rigs is actually a good thing, telling Associated Press that this “will allow infrastructure and various other things to catch up.”
And despite volatility of oil prices over the past six months, production continues to rise in North Dakota, with companies producing a record average of almost 640,000 barrels a day in May, as the number of producing wells grew to around 7,000.
Whiting, MDU, Hess, Occidental
However, lower oil prices during the second quarter took a big bite out of company profits, but thus far no major reductions in capital spending have been announced. Instead, many producers answered the bell with substantially increased production, which helped offset the slide in prices, and plans to boost spending.
For example, Whiting Petroleum Co., a major player in he Bakken, saw its adjusted net income dive 28 percent to $86.8 million from $120.3 million in last year’s second quarter. But the company managed to boost second-quarter liquids output by a hefty 26 percent to an average 80,700 barrels of oil equivalent per day from 60,120 barrels per day for the same period last year. Whiting also increased its capital spending from $1.8 billion to $1.9 billion, and was able to maintain comfortable discretionary cash flow of $310.5 million.
MDU Resources Group, another major Bakken operator, saw its exploration and production income drop 15 percent to $18 million in the second quarter compared to $21.3 million in last year’s second quarter. But during the same period, oil production increase 32 percent compared to the year-ago quarter and 13 percent from this year’s first quarter, with three-fourths of the growth coming from the company’s Bakken acreage.
“We have moved up the low end of our projected oil production growth (for 2012) and now expect a 25 percent to 30 percent increase over 2011,” Terry Hildestad, MDU’s chief executive officer, said, acknowledging that “lower oil prices and continuing low natural gas impacted earnings,” along with a shift away from natural gas production until prices increase.
Hess Corp.’s income fell from $607 million in the second quarter of 2011 to $549 million in the second quarter of 2011, while the companies oil and gas production increased to 429,000 barrels of oil equivalent per day in the 2012 second quarter, up from 372,000 barrels in last year’s second quarter. Production from the Bakken alone increased to 55,000 barrels of oil equivalent per day, up from 25,000 in the second quarter of 2011. The company recently said it was increasing capital spending in the Bakken by $1 billion in 2012, to a total of $3 billion.
Occidental Petroleum Corp., the largest onshore crude producer in the continental United States, said second-quarter profit fell 27 percent to $1.33 billion as new output in California and Texas failed to make up for declining oil prices. Still, the company plans to boost its U.S. capital spending 27 percent to $5.5 billion in 2012 by developing oil and gas prospects, and by raising domestic output as much as 7 percent.
