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Page added on January 4, 2015
Oil price drop expected to hurt fringe areas in Bakken the most
OGA, N.D. – Ben Chorn had a good vacation in Minnesota last month, making it to a Vikings game, a hockey game in Duluth and getting engaged. But while he was gone, the price of oil hit him personally.
“While on vacation, I got a call from someone who’s covering for me and said, ‘Hey your rig’s being laid down,’” said Chorn, who does geology work on rigs for Sunburst Consulting.
He’s had a slow six weeks since then.
The oil price drop will impact fringe regions in the Bakken the most, experts said, because the oil there costs more to extract.
“I think those areas will slow down, but we’ll come back and we’ll get them again,” said Kathy Neset, a geologist with Neset Consulting in Tioga.
Chorn said the rig he was meant to work on was pulled by a smaller operator and was on the fringe of the Bakken in northern Divide County. There and in other fringe areas of the Bakken, the “break-even point,” or the wellhead price point at which new drilling stops, is higher. North Dakota Department of Mineral Resources data show the break-even point is at $73 in Divide County.
“We don’t even have enough natural gas to have a gas flare, there’s just not as much up there,” Chorn said.
The far north and east are the “first areas that start to go when prices drop,” Chorn said.
But in McKenzie County, prices can get lower and operations won’t change as much “because they can keep drilling and making money,” he said.
With the Bakken shaped like a bowl, McKenzie County is the middle with the thickest part of the formation. Oil in counties on the outside edges of the formation is harder to get, so costs are higher, and that’s where the oil price drop is hitting hardest.
“Companies have to invest more to discover oil in those areas and they will continue to work on them; they’ll just hold off on those areas for the lower prices and come back when the price returns,” Neset said.
For already active wells to slow down or stop production, oil would have to drop all the way to $15 a barrel at the wellhead, North Dakota Department of Mineral Resources spokeswoman Alison Ritter said,
Ritter noted 156 of the 172 rigs operating as of Tuesday are already in the four core oil counties – Williams, Mountrail, McKenzie and Dunn – with low break-even points, which is likely to continue to be the case. The break-even points range from $29 to $41 in the four core counties, with Dunn County at the lowest. The DMR develops its break-even prices based on economic data from operators each month.
The DMR expects a total drop of 30 to 40 rigs in the beginning of 2015 if the price of oil stays low, Ritter said.
Smaller operators with less money are more likely to pull rigs from the oilfield, but the Bakken’s biggest players are feeling the price drop, too.
Continental Resources, a leading Bakken producer, plans to decrease its rigs in the region from the originally planned 19 to 11, according to a revised capital budget announced Monday. CEO Harold Hamm said in a statement that the change “prudently aligns” spending with the lower prices of oil.
Whiting Petroleum CEO James Volker told investors Monday that the company wouldn’t release its 2015 guidance until February in an effort to wait out the unstable prices. Marathon Oil announced last week that its 2015 budget would be about 20 percent lower than this year’s.
The scale of the Bakken and Three Forks formations will insulate North Dakota somewhat from the downturn, Neset said.
“For the most part, you know, the oil companies, the operators, are trimming but they’re not pulling out,” she said. “They’re just slowing things down to make good decisions with the markets.”
And an end to the downturn may be in sight as an unexpectedly strong report on U.S. economic growth raised oil prices Tuesday by supporting expectations of a greater demand for crude, Reuters reported.
Also on Tuesday, Chorn got an email saying he’d be back at work soon.
He had started dipping into his savings, and looking for ways to cut expenses. He had saved money in the past, knowing that price fluctuation was a part of the oil industry. He added that’s the way to weather it – not by living paycheck-to-paycheck.
“You can never be certain of what the market’s gonna do,” he said, “so you have to plan on this stuff.”
12 Comments on "Oil price drop expected to hurt fringe areas in Bakken the most"
Northwest Resident on Sun, 4th Jan 2015 1:48 pm
“unexpectedly strong report on U.S. economic growth”
Not unexpectedly strong economic growth, please note, just another “strong” report consisting of fudged numbers, exactly what we have come to expect.
I like the way this article puts “the blame” on those oil workers who failed to “plan on this stuff”, and who are now faced with the prospect of living paycheck-to-paycheck, or more likely, living on unemployment benefits until those too run out.
Because no matter how hard articles like this try to paint a rosy picture of shale oil extraction remaining an ongoing business and an important contributor to worldwide energy needs, it just isn’t true. Yes, the fringe operators will be the first to go. But once those sweet spots in the center go into inevitable rapid decline, there won’t be any new fracked wells — or certainly not enough — to keep even the biggest players going. Unless they get more financing, that is, and good luck with that. Maybe the U.S. Government will print up some new digi-dollars to bankroll them for a while, and why not? But that is a very short term plan that will also almost certainly see a very near term end.
shortonoil on Sun, 4th Jan 2015 2:32 pm
But in McKenzie County, prices can get lower and operations won’t change as much “because they can keep drilling and making money,” he said.
Of the 4598 wells that we looked at ending in May, 2012 the average cost of drilling a well in the Bakken was $53/barrel. These fields will end drilling when the investors realize that they are not going to see their money returned. We expect a slight uptick in prices later this year which is likely to bring some investors back into the market. Those will be false hopes as prices will start to decline again in 2016.
http://www.thehillsgroup.org/depletion2_022.htm
The shale industry has now accumulated over $1 trillion in debt. At present prices, the industry is producing $65 billion per year in product. With prices on a long term downward trend that is money that will never be repaid. The only goal of the industry for now is to keep investors interested for as long as possible. Because of the very high decline rates experienced by these wells, it now takes 180 to 200 new wells per month to keep production in the region level. That is an investment of $1.5 to $1.7 billion per month. Wishful thinking, and strong PR campaigns will not keep that kind of cashing flowing into the industry for long. Once the investors pull out, the drilling rigs will be right behind them.
http://www.thehillsgroup.org/
oilystuff on Sun, 4th Jan 2015 3:51 pm
Again, where do you get that the shale oil industry is in debt to the tune of 1 trillion dollars? Prove it, please.
oilystuff on Sun, 4th Jan 2015 4:50 pm
Mr. Short, I hope you are paying Peakoil.com for advertising because the links and the same messages, over and over again, remind me of those shrinking garden hose commercials on TV. You, nor anyone in your “group” can predict the price of crude oil, period.
The shale oil industry is in big trouble, you at least have that right. It is not, however, in debt to the tune of 1 trillion dollars. The entire world wide oil industry might be,
http://investmentwatchblog.com/2-trillion-high-yield-debt-market-on-the-verge-of-default-goldman-sachs-says-1-trillion-in-investments-just-went-poof-due-to-the-collapse-of-oil-debt-defaults-have-already-begun-to-hit-in-the-north/
not the shale oil industry. In fact I think you will find the top 5 shale oil producers in the Bakken are in debt to the tune of something south of 25 billion total, including all of EOG’s debt, even in the Eagle Ford where it is by far the single biggest shale oil producer.
I don’t like the BS the shale oil industry spews forth constantly. Its ridiculous, for the most part. I see no reason, however, to be making up more BS about it’s plight to help sell a report on precisely what you think the price of oil is going to be on September 19th, 2017 at 2:30 in the afternoon.
Makati1 on Sun, 4th Jan 2015 5:53 pm
Bring it on! Crash the fraking disease and reset the economy to a level where the US can survive. Until it collapse’, we are just making it worse for when it does happen.
Westexasfanclub on Sun, 4th Jan 2015 6:11 pm
This is an excerpt from http://www.nakedcapitalism.com
I don’t know if this article is precise, but it looks plausible to me. Shortonoil maybe is not that far off with his 1 trillion debt claim:
It always starts with a toxic mix. Now even the Energy Department’s EIA has checked into it and after crunching some numbers found:
Based on data compiled from quarterly reports, for the year ending March 31, 2014, cash from operations for 127 major oil and natural gas companies totaled $568 billion, and major uses of cash totaled $677 billion, a difference of almost $110 billion.
To fill this $110 billion hole that they’d dug in just one year, these 127 oil and gas companies went out and increased their net debt by $106 billion. But that wasn’t enough. To raise more cash, they also sold $73 billion in assets. It left them with more cash (borrowed cash, that is) on the balance sheet than before, which pleased analysts, and it left them with a pile of additional debt and fewer assets to generate revenues with in order to service this debt.
It has been going on for years. In 2010, the hole left behind by fracking was only $18 billion. During each of the last three years, the gap was over $100 billion.
Northwest Resident on Sun, 4th Jan 2015 6:51 pm
I recall reading an article on the shale oil industry that claimed the entire industry was around $560 billion or so in debt. Then I read that same general figure again in another article or two and assumed it was close to accurate. The $18 billion seems far too low based on everything I’ve read. Whatever it is, it is wayyyy too much and will never be repaid.
oilystuff on Sun, 4th Jan 2015 7:32 pm
“Based on data compiled from quarterly reports, for the year ending March 31, 2014, cash from operations for 127 major oil and natural gas companies totaled $568 billion, and major uses of cash totaled $677 billion, a difference of almost $110 billion.” So there you have it…There are not 127 companies even operating in the 2 major shale plays, much less “major” oil companies. 3.4 million barrels per day of LTO production does not equate to 677 billion dollars of revenue in the first 3 quarters of 2014; this example is not specific to the shale oil industry. Please read the first link I posted.
http://247wallst.com/energy-business/2014/12/30/top-5-producers-in-north-dakotas-bakken-oil-field/
How can the top five shale oil producers in the Bakken, and the biggest single producer in the Eagle Ford, only owe 23 billion, but the rest of the shale oil industry in general has piled up a trillion in debt?
It is way too much, NW, I agree; it is not 1 trillion however.
Everybody is in such a damn hurry to have all their peak oil and oil price predictions come true they are starting to make stuff up so they can be the first on the block to guess right. It isn’t necessary; the shale oil industry is in big trouble. Lets keep our facts straight and we will have more credibility with people who need to know the truth.
What is the point in making stuff up? that’s exactly what the shale oil industry does.
shallowsand on Sun, 4th Jan 2015 8:15 pm
Oily. Look at the comments section to the story about the prediction that US production will increase in 2015 on this site. It was posted a couple days ago. Shortonoil states very inaccurately the average WTI price for the years 2005-2013. That information is something very easy to find. I wonder why short posted figures that are not only so wrong, but easily disproved?
Bob Owens on Sun, 4th Jan 2015 8:36 pm
Given the low oil price, huge debt overhang, super high depletion rates, low EROEI it is hard to imagine these companies surviving for long. Even if they are marginally profitable they may get swept up in the implosion. If the North Sea is shutting down because they can’t make it what chance do these operators have?
Northwest Resident on Sun, 4th Jan 2015 9:10 pm
Shale oil industry debt:
The International Energy Agency (IEA), in a report of July 29, 2014, made clear that since 2008, the oil industry has been borrowing about 20% of the cash it needs, or about $100 billion a year, net new debt. Its total debt has rocketed to about $1.6 trillion, with revenues of under $600 billion a year at $110/barrel average. If the oil price remains in the $60-70 range, that would become $1.6 trillion in debt based on less than $400 billion in revenues—a ratio perilously close to the definition of “unsecured leveraged lending” in banking terms.
http://www.larouchepub.com/other/2014/4150oil_trigger_crash.html
Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.
https://www.google.com/?gws_rd=ssl#q=how+much+debt+does+the+shale+industry+have
Looks like $173 billion just a portion of the HY junk debt incurred:
Other industry observers are less optimistic: The $173 billion in U.S. energy junk bonds make up the biggest portion of the high-yield debt market after the Federal Reserve set low interest rates for years and pushed yield-starved investors toward riskier investments.
Looks like the total junk bond market is about 1.3 trillion:
Bloomberg says investors in these bonds are facing $11.6 billion in losses at the moment. Energy company-related debt issued in the past three years alone – about $90-billion worth – is down on average about 13% since oil hit its 2014 high in June.
That doesn’t compare favorably with the average junk loss in the $1.3-trillion junk bond market during that period of 2.2%. Overall for the year, the total return on energy junk bonds is -5.5%, while the average high-yield bond total return is 3.08% in 2014.
http://www.wallstreetdaily.com/2014/12/11/energy-sector-junk-bonds/
So, how much is it?
GregT on Sun, 4th Jan 2015 11:13 pm
In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter, according to company records compiled by Bloomberg on 61 exploration and production companies that target oil and natural gas trapped in deep underground layers of rock.
http://www.bloomberg.com/news/2014-05-26/shakeout-threatens-shale-patch-as-frackers-go-for-broke.html
This was in May of 2014, when oil was priced at $104bbl.