When North Dakota oil production broke above 1 million b/d for the first time in April 2014, many expected that the 2 million b/d threshold would be breached in relatively short order.
With WTI spot prices averaging over $100/b in the months that followed, some even speculated that 2 million b/d may be too modest of a goal for a state in the throes of a shale oil renaissance.
But prices, and those expectations, have come crashing down.
Now, rather than striving for 2 million b/d, state officials are hoping to maintain production above 1 million b/d.
And there are indications that a significant drop in Bakken supply may already be underway.
In November, less than 1.18 million b/d was produced, the state’s Department of Mineral Resources reported last week. Since December 2014, when North Dakota set an all-time production record of nearly 1.23 million b/d, statewide oil production has averaged just below 1.19 million b/d and has risen for two months in a row despite stagnant demand and plunging prices.
While Lynn Helms, the state’s top oil regulator, called recent production numbers “quite a surprise” amidst market shifts largely unsupportive of domestic production, he indicated the relative success would be short lived.
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While North Dakota supply has remained steady amid falling prices, it’s unclear what has happened since the end of November as prices began their steady dip below $40/b and, eventually, $30/b, a pricing environment where Helms believes the majority of Bakken producers cannot survive.
“We cannot sustain production at sub-$30/b prices,” Helms told reporters following the release of the latest state supply data.
Helms believes that WTI spot prices will need to average roughly $50/b in order for current production to be maintained. If prices return to the $30-$40/b range, production will likely stay above 1 million b/d, but will likely stay just above that level and will fall steadily, by about 10,000 b/d each month, if prices do not climb above $40/b in the near term, Helms said.
There are indications that production may have already fallen off dramatically.
The rig count, long seen as a supply bellwether, fell to 47 on Monday, its lowest level since August 2009, when it was 45 and clearly on the rise. A year ago, North Dakota had 157 active rigs and four years ago it had 204.
Permitting has also declined substantially, dropping from 152 drilling permits in October to 125 in November and to 95 in December. The all-time high was 370 in October 2012.
Helms, who pointed out that permitting was last below 100 in May 2010, pinned the decline on “decreasing optimism” in short-term oil prices.
Prices have also impacted flows out of the Bakken.
According to data released by the North Dakota Pipeline Authority last week, about 52% of Williston Basin oil, or roughly 645,000 b/d, was exported by pipeline in November while 41% was exported by rail. The data marks the first time since June 2012 that a higher percentage of oil was moved out of North Dakota by pipeline than rail.
According to the data, 6% of Williston crude was refined at the state’s two refineries and about 1% of the crude was sent to Canadian pipelines by truck, both percentages that have held steady for years.
Since 2012, the last time pipeline and rail traffic reached parity, the percentage of Williston crude shipped out by pipeline fell as low as 17% in April 2013, when total pipeline capacity was about 515,000 b/d, and 75% of oil was shipped by rail, when rail capacity was 1.15 million b/d. Pipeline’s share of total Williston transportation averaged about 23% in 2013, 31% in 2014 and 39% in 2015.
The trend towards pipeline and away from rail is likely to continue amid current market fundamentals, according to Justin Kringstad, director of the North Dakota Pipeline Authority.
“It will shift more and we will see even more barrels moving on pipelines,” Kringstad said Wednesday.
The share has increased mainly due to the shrinking WTI-Brent spread, which has caused waterborne imports to become cheaper than railed Bakken crude for East Coast refiners.
How dramatic and sustained that shift will be remains to be seen.
And while it’s unclear where prices and, in turn, North Dakota production will ultimately wind up, the shift in fundamentals has altered the conversation.
Now, instead of breaking through the 2 million b/d threshold, many are waiting for the 1 million b/d level to be fallen through.