The price war coincides with the sharp, swift plunge in global oil demand caused by the spreading coronavirus pandemic, which is causing travel and economic activity to drop significantly as people around the world are told to isolate to prevent spread of the contagious disease.
"It's just impossible to predict at this point how long this price war is going to go on," Lynn Helms, director of the North Dakota Department of Mineral Resources, said in his monthly briefing on oil production and outlook on Tuesday, March 17.
The expected drop in production will have an impact on oil revenues for the state of North Dakota — which derives more than half of its revenues from petroleum — in a slowdown that could last from one to 2 1/2 years, he said.
January's average daily crude oil production was 1.4 million barrels per day. Natural gas also dipped by 1.5%. The slowed production, however, enabled gas capture to edge up to 85%, closing in on the state's 88% goal.
The price of West Texas Intermediate crude oil on Tuesday closed at $28.62 per barrel, down 6.5% from the day before — likely a level below the break-even point for all but the most productive wells in the core of the Bakken Formation.
As a result, Helms said, producers will pull back on many activities including drilling and, if the slowdown persists, might even shut down marginal wells that require higher prices to operate profitably.
"We're probably at or very near the bottom," Helms said, referring to the decline in oil prices.
The precipitous drop in prices is reminiscent of the price collapse in 2015, which caused the state to impose steep budget cuts, Helms said. It's too early to predict the effect on state revenues; the state's economic consultant recommends waiting four to six weeks for "the dust to settle" before revising the revenue forecast, Helms said.
"These prices clearly are much below the revenue forecast," he said, adding that prices are about $20 per barrel below the forecast used to set the current state budget. "One would think there's going to have to be adjustments," but officials need more time to assess to get an accurate revised forecast.
The rig count in the Oil Patch, now at 56, could drop by up to half over the next three months or so, Helms said.
"It's not great news at all," he said. "You can already start to see it in January figures." Completed wells fell from 88 in December to 70 in January, while inactive wells jumped from 1,920 in December to 2,607 in January.
The North Dakota Industrial Commission, which oversees oil and gas, will have to consider easing regulations that could cause temporary well shutdowns to become abandoned wells, Helms said.
Fortunately, he said, many operators in the Oil Patch have hedged, enabling them to lock in prices around $50 to $55 per barrel for the rest of this year. "That's going to help cushion us through this year," he said.
Still, hiring related to many oil and gas activities has frozen, Helms said. "All the job offers are off the table." Drilling and well completion will fall sharply, but other activities, including gas processing and pipeline construction, should continue and possibly rise slightly, he said.
"We're going to look at 50 or 60% retraction" in oil producers' cash flow, Helms said. That looming cash crunch is the reason operators are cutting costs, including new hires, he said.
Despite the decline, Helms views it as "highly, highly unlikely" that North Dakota's daily production would fall below 1 million barrels.
The impact of the price collapse likely will hit the Permian Basin in Texas more severely than the Bakken Formation, because more oil from the Permian is exported. "Those are going to be the most vulnerable barrels," he said.
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March 18, 2020 at 07:00AM
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North Dakota oil producers' cash flow could drop 50-60% due to price war, coronavirus - The Dickinson Press
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