Oil industry experts have been making dire predictions of $20 per barrel oil. In North Dakota, they're now reality, prompting warnings of more bankruptcies and less drilling in 2016.
Although the U.S. domestic crude oil benchmark is higher — $29.64 per barrel — Bakken producers must sell at a discount because of the region's limited oil pipelines and the higher cost of alternate shipping methods.
On Friday, North Dakota light sweet crude dropped to $20 per barrel at the wellhead, the lowest price since 2002, the state Department of Mineral Resources said. That's one-fifth of what North Dakota producers got in early 2012, when the Bakken oil boom was at its peak.
Now, just 49 drilling rigs are operating in the state, less than a quarter of the number at the peak.
The department's director, Lynn Helms, said the state's oil industry is "running on empty" and quoted a verse from Jackson Browne's song of that name during his monthly "Director's Cut" conference call.
"We are down in the bottom of the bottom of the tank in terms of cash flow and capital," Helms said of the state's oil producers, two of which are in bankruptcy.
Helms said he expects another company to file bankruptcy shortly, and four or five more failures could be down the road. He didn't name the companies.
"We have looked at … production, wells and situations and tentatively think there are four or five more [companies] at these oil prices that are going to run to the end of their financial rope by the end of 2016," said Helms.
Seven of the 10 largest North Dakota oil producers reported losses in the third quarter, including the top three, Whiting Petroleum, Continental Resources and Hess Corp.
Two smaller producers, Samson Resources of Tulsa, Okla., and American Eagle Energy, filed for bankruptcy reorganization last year.
Despite the grim outlook, North Dakota reported a 0.4 percent increase in oil production for November, to nearly 1.18 million barrels per day. Natural gas production also rose slightly. The state's peak oil production was more than 1.2 million barrels per day in December 2014.
But Helms said that at current crude oil prices, the number of drilling rigs could drop to 30 in 2016.
At that rate, North Dakota would barely stay above 1 million barrels per day at the end of 2016, and eventually would fall below that level, he added.
Oil prices also are affecting how much crude is shipped on oil trains, many of which pass through Minnesota on their way to East Coast refineries. About 41 percent of the state's oil moved on trains in November, down from 47 percent in October, said Justin Kringstad, director of the North Dakota Pipeline Authority, which tracks crude oil shipping.
Most of North Dakota oil now is being shipped to market via pipelines, a reversal of earlier trends that favored rail. The economics of oil trains hinge partly on the price of oil on U.S. coasts being several dollars higher than the midcontinent price. Thanks to that price difference, refiners have been willing to pay the extra cost of shipping Bakken oil by rail.
But Kringstad said the differential "has essentially been eliminated," a change driven partly by the revival of U.S. oil exports. "We expect that differential to be negligible for the near term," he said, making the economics of crude-by-rail more challenging.
Helms said one of the state's largest producers believes oil prices will recover later in 2016, a reference to recent comments by Harold Hamm, chief executive of Continental Resources. Hamm told the Wall Street Journal this week that he expects crude oil to double in price by the end of the year because supplies won't keep up with demand.
If the gloomier outlook holds true, and more North Dakota producers file for bankruptcy, it could affect royalty recipients and vendors beyond the state's borders, said David Ganje, a Rapid City, S.D., attorney who practices natural resources law in North Dakota and South Dakota.
"It is a very diverse industry and 48 percent of the royalty owners live out of state," added Ganje, who said he has represented royalty recipients in Minnesota, Wisconsin and other states.
Although royalty holders have legal protections, he said, bankruptcy cases can slow down payments on oil and gas leases. Often, the oil producer in bankruptcy tries to retain the leases, reorganize and keep operating, he added. Sometimes the leases are sold, which can benefit royalty recipients if the new owner is better capitalized, he said.
David Shaffer • 612-673-7090 • @ShafferStrib
