For months, analysts have said that reports of the death of the Bakken oil boom have been greatly exaggerated.
Despite the historic collapse in oil prices and North Dakota’s rig count falling to levels not seen since 2009, producers have largely maintained steady supply levels as they employed better technology in the most promising geology.
While production wasn’t nearing 2 million b/d as some statewide officials had dreamed of a year earlier, it was holding stable in a range of about 1.16 million b/d to 1.21 million b/d throughout much of last year and even increased from one month to the next five times throughout the year.
When monthly production did fall off, it was incremental and often blamed on secondary factors, like flaring reduction targets or oil conditioning rules.
But the long-awaited drop in Bakken production may have officially begun, as data released by North Dakota’s Department of Mineral Resources this week shows.
Daily oil production averaged just over 1.15 million b/d in December, down 29,506 b/d, or 2.5%, from the previous month. It marks the lowest daily production level in the state since August 2014 and the first real downturn in statewide oil supply caused by the persistent dip in prices.
“This looks like it’s a real number, based on real activity,” said Lynn Helms, the state’s top oil and gas regulator.
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The mantra for North Dakota oil producers has become “lower for longer” as operators brace for oil prices which may make drilling uneconomic in nearly every part of the Bakken play, Helms said.
Helms this week released quarterly breakeven numbers which show that only two North Dakota counties, Dunn and McLean, remain economic to drill amid current prices. Dunn, where the state estimates breakeven prices average $22/b, had seven active rigs Wednesday, while McLean, where breakevens average $25/b, had just one.
McKenzie County, which leads the state with 20 active rigs, has an average breakeven of $31/b. The statewide breakeven average is $40/b. (We considered the question of how low prices can go in the Bakken last summer in an episode of Capitol Crude: The US Oil Policy Podcast.)
While Helms said that while he expects statewide production to remain above 1 million b/d throughout early 2017, maintaining that level will require WTI spot prices to average about $45/b. This is possible, according to US Energy Information Administration projections, which show WTI averaging about $37.59/b this year, but climbing to an average of $50/b next year.
But there’s much uncertainty in those projections, according to Howard Gruenspecht, EIA’s deputy administrator.
The EIA actually forecasts a range of prices, between $20/b to over $100/b by the end of 2017, due to a variety of uncertain factors such as social unrest in oil dependent countries, a dramatic OPEC move, a rise in unplanned outages or Iran exceeding export expectations.
“There’s a lot of reasons that prices could be higher, there’s some reasons prices could be lower,” Gruenspecht said during a Center for Strategic and International Studies event this week.
Still, the EIA’s production forecast echoes those in North Dakota.
The EIA expects US crude production to fall from an average of 9.43 million b/d in 2015 to 8.69 million b/d this year and fall further to an average of 8.46 million b/d in 2017, according to the agency’s most recent Short-Term Energy Outlook.
While the yearly average will be lower next year, the EIA sees production bottoming out in September 2016 at 8.31 million b/d, falling from 9.04 million b/d this month and representing a steep 730,000 b/d drop over seven months.
The forecast shows that the EIA believes that the US oil renaissance clearly peaked in April of 2015 when production averaged 9.69 million b/d, but also that producers may be nearing a steady, long-term supply level.
In North Dakota, where the number of drilling permits continues to fall and the number of inactive wells continues to grow substantially, producers remain pessimistic in the near term.
But there is some more long-term optimism, Helms said, as venture capitalists and hedge funds have begun to buy up Bakken assets. Nearly 700 wells were in the process of being transferred from one operator to another, Helms said.
“They think this is a fantastic purchasing opportunity,” he said.
Helms said only time will tell if that translates into a supply rebound or “lower for longer” for even longer.