The path of production in the Bakken Shale formation over the past year has been dramatically pressured by everything from the OPEC supply cut agreement to delays in building the Dakota Access pipeline, resulting in output swings of hundreds of thousands of barrels per day, North Dakota's top oil regulator told S&P Global Platts Tuesday.
In an interview, Lynn Helms, director of the state's Department of Mineral Resources, said statewide oil output is likely to remain above 1 million b/d, but below 1.1 million b/d, its range since February, for several months into next year.
"We should see oil production in a growth mode, 10-15,000 b/d month on month is where we expect to be," he said.
But a number of scenarios, particularly an unexpected end to the OPEC supply cut agreement and increased competition from the Permian, could cause output to severely decline.
ABOVE 1 MILLION B/D
North Dakota oil output has appeared to remain steady for months, averaging between nearly 1.03 million b/d and 1.08 million b/d since February. Statewide production last fell below 1 million b/d in January, averaging below 984,000 b/d that month, about 246,000 b/d below the state's peak output of nearly 1.23 million b/d in December 2014.
Helms said he expects that the state's September production numbers, to be released next week, will be up slightly from the August output of 1.08 million b/d and he expects a "slight uptick" in production in coming months.
"We're certainly going maintain above 1 million b/d and we should see production increasing on the order of 30 to 50,000 b/d each year as we add some frack crews," he said. "We should be back pushing that 1.2 million b/d level by end of fiscal 2019."
Helms said he expects statewide production to peak as soon as late 2019 at about 1.6 million b/d, but said reaching 2 million b/d is "certainly achievable," but depends on a number of factors, particularly oil prices.
Helms said with WTI spot prices at $50/b, North Dakota output will be maintained at between 1 million and 1.1 million b/d, but $60/b is need to grow rig counts and frack crews.
"That's really the magic number that really begins to push us to 1.6 or 2 mil b/d," Helms said.
The US Energy Information Administration on Tuesday forecast WTI to average $49.70/b in 2017 and $51.04/b in 2018.
PERMIAN COMPETITION
Helms said that the increasing interest from producers in the Permian play in Texas, where EIA projects output will near 2.7 million b/d this month, has hurt efforts to grow output in the Bakken.
"There's no question," Helms said.
Acreage in the Permian, and to a lesser extent the Anadarko Basin, with "Held By Production" lease provisions, is taking capital away from the Bakken, Helms said.
"The Permian is at about the stage that the Bakken was in in 2010-2011 where there is still a lot of unproven acreage and a lot of first wells to get drilled," he said.
Helms estimated that without competition from the Permian, North Dakota oil output would be growing at a rate of 100,000 b/d, while the rig count, which was 54 Tuesday, would be in the low 60s.
"We'd be building production pretty rapidly towards 2 million b/d," he said.
North Dakota extraction taxes are roughly 50 to 70% more than those taxes in Texas and Oklahoma, Helms said. In addition, a relatively large portion of the unconventional assets in North Dakota are on federal and Indian lands, and subject to potentially stricter regulations and lengthier permitting times, compared with what operators in other states may face, he said.
"The delays are very, very real in North Dakota," he said.
DAPL DELAYS
Since the 550,000 b/d Dakota Access Pipeline entered commercial service on June 1, oil transportation costs out of North Dakota have dropped from an average of about $8/b to $6/b, Helms said.
But protests, court battles and delays, which plagued the pipeline's construction for months, hindered production this year, he said.
"I think people delayed drilling investments and I think they also delayed, probably more significantly, completion investments," Helms said.
There are currently about 900 uncompleted wells statewide, Helms said, adding that if Dakota Access was on schedule, likely 300 of those 900 wells would have been completed this year and then 300 more wells completed next year. Helms said this would have resulted in about 30,000 to 50,000 b/d in additional production over the course of a year.
"That's a pretty significant number," he said.
CREWS AND BREAKEVENS
North Dakota operators claim that it has been a "struggle" to hire experienced frack crews, largely since most workers left North Dakota for jobs in Texas following the price collapse.
"At the time the easy decision to make was to not frack a well and not bring on that high initial production at $26/b oil," Helms said. "The thought was that it might be a short term price drop so you could keep drilling and delay the completions and you'd be OK."
There are currently 25 crews working in North Dakota, which is just enough to maintain about 50 to 55 drilling rigs and keep output relatively flat. But in order to begin to work down the current inventory of 900 drilled but uncompleted wells, at least five more crews must be added. At its peak, the state had 50 frack crews working.
At the same time, Helms said that well costs have been "creeping up," particularly in larger slickwater fracks with more sand content, and breakeven costs appear to be leveling off.
"We continue to see improvements in drilling efficiencies but the service companies have taken all of the costs out that they can," Helms said. "I think breakeven prices have probably hit their bottom and they're going to creep up slowly as demand exceeds supply for services."
In August, Helms reported that statewide breakeven prices at the wellhead averaged $22/b in Q2.
OPEC SUPPLY CUT
The deal by OPEC and 10 non-OPEC producers to cut a combined 1.8 million b/d has been "very beneficial" to North Dakota producers, Helms said.
Since the deal was reached in December, Helms said it has resulted in an additional 10 to 12 drilling rigs in his state, the addition of five to six frack crews and growth of an estimated 100,000 b/d.
"Those cuts have really helped North Dakota," he said.
But that growth could quickly decline if OPEC and non-OPEC producers do not agree to extend the agreement at their meeting at the end of the month, Helms said.
"We're anxious to see what happens," he said, adding that the market already expects an extension.
Without an extension, prices could dip into the low $40s/b, the state's rig count would likely fall to 45 rigs and frack crews would fall from about 25 to as low as 15, he said.
OPEC Secretary General Mohammed Barkindo said Tuesday that no members of the 24-country OPEC/non-OPEC coalition are opposed to continuing their production cut agreement past its March expiry.
