Crude prices main topic of Oct Director's Cut

By Emily Aasand | October 15, 2014

How crude prices will impact the Bakken was the main topic of discussion in this month’s Director’s Cut. Lynn Helms, director of North Dakota’s Department of Mineral Resources Oil and Gas Division, gave his monthly director’s cut assessment of the Bakken and Three Forks formation, emphasizing the impact crude prices could have on the Bakken.

There are many facets that need to be considered when we look for such an answer, Helms said. Brent crude prices have been dropping all summer, reaching a two-year low this week at roughly $84 per barrel. West Texas Intermediate, which trades lower than Brent, is closest in price to Bakken crude. During the webinar, Helms noted that North Dakota sweet crude was being sold for less than $70 per barrel to the Flint Hills Resources Refinery in Minnesota. To the question of when oil prices will rise, he seemed to answer honestly “We don’t really know where the oil prices are heading.”

With the decrease in crude prices, Helms said that a reduction in the state’s rig count at a pace of roughly 10 percent  could be in the future. There are three counties—Bowman, Slope and parts of Divide—that aren’t economic with current oil prices, he said.

“The drop in prices puts eight to ten rigs in those counties at risk,” said Helms.

Helms mentioned that Saudi Arabia needs $92 per barrel to satisfy their government needs, which in turn puts them under a lot of pressure as well to change their oil production plans. “We’re in this together,” said Helms. “Not only is North Dakota under a lot of pressure, but so are all of the Organization of the Petroleum Exporting Countries. But, we are watching it [crude prices] and there are serious concerns out there regarding it.”

Helms also talked about a tax trigger that could impact the state’s revenue from oil production. The tax trigger, a two-year exemption from oil extraction tax for new horizontal wells, would go into effect when the price of West Texas Intermediate falls below $52.06 per barrel for five consecutive months. According to Helms, if it triggers, then the first two years of production for Bakken and Three Forks wells would be taxed at two percent instead of six and a half percent.

“That would be the most significant tax trigger in terms of incentive for the oil and gas industry to continue drilling and producing but an enormous impact on state revenue.”

 “If it triggers, then it’s in place of a minimum of five months and it would be the biggest impact on state revenue and oil company budgets,” said Helms. “But we’re not that close to that number right now. We’re about $30 above that trigger price.”

With the drop in crude prices, there’s a lot of pressure on the oil and gas industry to lower operating costs in order to stay profitable. From testimonies, Helms has been hearing that operating costs are up 36 percent from last year.

According to Helms, the two main factors for oil producers to break even are the initial production rates and water production. Operators need to have higher initial production rates and lower operating costs. In the areas with lower IP rate wells and higher water cuts, Helms specifically to some elements of operations that will change at current oil prices. “There are a lot of diesel fuel generators out there, those are going to be shut down, and they’re going to try to find something cheaper. That’s one way to cut operating costs,” said Helms.

Although the October 1 gas capture deadline results won’t be available until December, flaring was still a topic of interest. August saw a month of slow production, which according to Helms was expected as a result of gas capture regulations.

“We’ve been anticipating it since our July flaring announcement,” said Helms. “It’s a little slower than we thought, which could’ve had something to do with oil prices. They’ve been sliding all summer long.”

Helms also discussed new concerns being raised regarding the EPA and its USACOE rule redefining “Waters of the United States.” Helms and his team think, “That it’s an overreach and could cause problems going ahead in the future. In terms of water supply and issues surrounding the clean water act, there could be significant issues.” November 14 is the last day to comment on the proposed rules.

Production by the numbers

Overall, August produced 35,102,258 barrels of oil, which averaged an all-time high of 1,132,331 barrels of oil per day. North Dakota had 11,563 producing wells and had an average sweet crude price of $78.46 per barrel.

The August rig count was at 193, which is 25 rigs shy of the record high of 218 rigs in May of 2012, and the number of well completions increase from 197 in July to 270 in August due to summer weather.

Fort Berthold update

In November, the Fort Berthold Indian Reservation will be getting a new tribal chairman as well as two new council members. Both tribal chairman candidates have been less friendly to the idea of rapid development than the current administration is on the reservation, Helms noted, which has the oil industry concerned and keeping a close eye on the upcoming elections.

“Oil producers are deeply concerned about what the future holds for them. Both of the candidates indicate that slowing down is in the works so the industry players are very concerned about how we’re going to work out all the intergovernmental jurisdictional issues and where that’s going to lead them in terms of being able to develop their leases,” said Helms. “It [Fort Berthold] happens to be some of the best geology in the Bakken so they’re hanging in there and sticking with it so, they’re really watching that close.”

The reservation, which has 27 active drilling rigs, produced 333,119 bopd, and has 1,310 active wells and 134 wells waiting on completion.