Lynn Helms gives insight on North Dakota oil patch

Lynn Helms, Director of North Dakota DMR Photo Credit: Prairie Biz

Lynn Helms, Director of North Dakota DMR
Photo Credit: Prairie Biz

During a conference call yesterday, Lynn Helms, director of North Dakota’s Department of Mineral Resources, told reporters that production in the state will likely fall below the 1 MMBOPD mark by the end of this year. Assuming crude oil prices remain relatively the same next year, North Dakota production could go to 900 MBOPD by the end of 2017, as well.

The North Dakota Director’s Cut, released every month to give a picture of the state’s oil and gas industry, showed production was down 2.5% month-over-month in December 2015 to 1.15 MMBOPD, based on preliminary numbers. The rig count in North Dakota held steady from November to December, but has since fallen to 40, the lowest level since July 2009, with the expectation that more rigs will be laid down if crude oil prices do not improve.

“We’re seeing the effect of lower rig counts and lower completions,” Helms said during the conference call. “Unless the price picture changes significantly, there’s another 10-11 rigs that could be released.”

DUCs continue to grow as many operators put off completions until prices rise. According to the Director’s Cut, approximately 945 wells are awaiting completion in North Dakota, although it’s difficult to say with any accuracy how many DUCs there are since no agency keeps official figures.

The number of inactive wells, or those that need recompletion, is also well above average said Helms. “The breakeven on those wells is likely in the $35-$40 range, so we will likely continue seeing the number of inactive wells grow until [prices] hit the $40 range.”

Two counties remain economical: Dunn and McLean

Because North Dakota production trades at a discount to WTI due to transportation arbitrage, crude oil pumped in most counties in December remained below the breakeven price estimated by the North Dakota Department of Mineral Resources. The two exceptions were Dunn and McLean counties, which continue to produce oil at, or below, $25 per barrel.

North Dakota sweet crude oil typically trades about 15% lower than WTI to make up for the transportation costs associated with getting it to market. It was trading lower at the time of the release, just $16.50 per barrel, according to the Director’s Cut, pushing crude production state-wide below the breakeven prices provided by the Department of Mineral Resources.

North Dakota breakevens by county

Source: North Dakota Department of Mineral Resources

Capitalizing the Bakken like a world-class asset

One of the themes repeated throughout the conference call with Helms was the familiar “lower for longer,” a sentiment being acutely felt throughout the industry. “I heard this over and over this week while talking to companies,” said Helms. “It’s lower for longer.”

The picture the director painted was far from rosy, with Helms expecting 5 or 6 bankruptcies to be announced with debt redeterminations in June. “We’re going to see bankruptcy for our smaller, more leveraged Bakken operators,” said Helms. “The reason we haven’t seen that already is because of the timing of redeterminations.”

“There’s a chance that these companies can hang on for a few more weeks or months. If prices turn around, they might be alright, but if not, they’ll likely go bankrupt.”

Despite the expectation that several more companies could go bankrupt in the first half of the year, Helms said a lot of mid- and long-term optimism remains in the Bakken. “People are not sitting still,” he said.

Relating a conversation he had previously, Helms told reporters that an analyst had looked at fewer operators in the Bakken as a potential positive. “The analyst told me, ‘the Bakken is a world-asset, it needs to be capitalized like one,’” Helm said, while discussing the possibility of fewer operators in North Dakota’s fields. Helms did not expect fewer operators to translate into a long-term drop in production, as the more financially-secure operators will pick up distressed assets.

Well costs could go even lower

Well costs could go lower as well, with better well performances in Dunn and McKenzie counties lowering the cost month-to-month. Although Helms did not mention the companies by name, he did say an impending merger of two large service companies – likely Halliburton (ticker: HAL, Halliburton.com) and Baker Hughes (ticker BHI, BakerHughes.com) – could potentially lower service costs another 10%-15% in the future.

When asked what levels prices would need to reach in order to stimulate production of over 1 MMBOPD moving forward, Helms said WTI would likely need to sit somewhere in the $40-$50 range.


Legal Notice