REPORT
Bakken 3.0 By Bette Grande
At current prices and with the sharp drop in demand caused by the COVID-19 pandemic, the daily production of oil in the United States will drop significantly.
Where do we go from here? The challenges facing the oil and gas industry in North Dakota are far greater than those faced five years ago. Flint Hills Resources priced North Dakota Light Sweet at $13.75 on April 9, 2020. A report published by RBN Energy on April 7, 2020 analyzed the cost structure of 30 shale E&Ps, and not surprisingly found that current prices cannot cover the cost of operation. Five years ago, when OPEC forced oil prices lower, E&Ps quickly responded by cutting costs and improving efficiencies, techniques and tools. Further cost cutting and improvements in operations will be needed, but observers say that these steps will not be as effective this time. Consumers, at least those who are still driving around, benefit from today’s low gas prices. But, producers, state government, and certainly mineral owners do not benefit from oil production at these prices. Managing cash flow requirements with the prudent 24
BAKKEN OIL REPORT – Spring/Summer 2020
management of the resource will require creativity from the private sector and the cooperation of state regulators. Challenging times to be sure. A reset.
Production cuts At current prices and with the sharp drop in demand caused by the COVID-19 pandemic, the daily production of oil in the United States will drop significantly. But, slowing production raises regulatory, contractual and resource issues for producers. The North Dakota Industrial Commission, which regulates oil and gas activity, acted quickly to give some flexibility to shale operators. The commission directed the Department of Mineral Resources to reinstate Well Waivers, expanding the time limits for non-completed wells (DUCS) and inactive wells. This action will give operators some additional flexibility going forward and also benefit the mineral owners over the long-term by preventing waste of the
resource. With that being said, producers are still bound by the contractual terms of their oil and gas leases, and placing wells on inactive status can in some circumstances trigger a termination of the lease. Producers and mineral owners both want to avoid producing and selling oil at current prices, but these contractual obligations must be addressed. Finally, with regard to curtailing production, the impact underground must be considered. Reservoir engineers across our domestic shale plays are studying the impacts of taking a well offline and from periodically restarting a well from time to time. No one knows how long we will be in this low-price low-demand situation and the impacts of manipulating wells over months (years?) are vital. The risk is that pressure and other factors for a shut-in well can crush the sand over time and stop the flow of oil. There is some good news here for the Bakken. Based on discussions with