North Dakota expected to follow Texas’ lead in leaving oil cuts to market

Highlights

Hearing to decide if producing at low prices is ‘waste’

Recent price bump has put proration debate on back-burner

Market-based cuts hit 510,000 b/d in North Dakota so far

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Washington
North Dakota will likely follow Texas’ lead in letting oil market dynamics and individual producers, not state regulators, decide how much production to curtail in the face of low prices and weak demand.

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The combination of a recent bump in crude oil futures and sharp production cuts from voluntary shut-ins has moved the debate over state proration to the back-burner, analysts said this week.

The North Dakota Industrial Commission will take testimony Wednesday on whether to label oil produced below a certain price as “waste,” which could be the first step in state-mandated production cuts. However, all but one written comment received as of Friday opposed the proposal, said Lynn Helms, the state’s top oil and gas regulator.

“We expect that state-level efforts to address the crude glut by placing mandatory limits on production are unlikely to go any further in light of additional OPEC+ cuts, voluntary curtailments from operators in the US, and other market measures,” said Glenn Schwartz, director of Rapidan Energy Group’s Energy Policy Service.

‘MUCH SLOWER’ RAMP-UP

About one-third, or 510,000 b/d, of North Dakota’s production has been shut in response to the oil price collapse in recent weeks.

While Helms said oil prices hovering near or above $30/b would normally be enough of an incentive to return some production, the staggering amount of oil in storage in the US will keep producers from responding to an uptick in prices for some time; potentially not until the fourth quarter of 2020 or Q1 2021.

“The ramp-up will be much slower than most of us would like to see,” he said.

Helms estimated current North Dakota production around 950,000 b/d, down from 1.45 million b/d in February and 1.43 million b/d in March.

The state’s rig count has plunged to 12 as of Friday, down from 55 in January. A single fracking crew is operating in the state, compared with 25 before the recent market turmoil.

WELL WAIVERS

North Dakota has already taken some regulatory steps to make it easier for producers to restart wells and drilling programs once market conditions allow.

In March, the state implemented a waiver program allowing oil and natural gas drillers to keep wells in non-completed or inactive status longer than regulations typically allow. The policy was designed to prevent producers from either bringing more unwanted supply to the market or being forced to abandon wells completely.

Rapidan’s Schwartz said the only thing that might revive state-level prorationing proposals is “another major COVID-related demand hit, such as the potential re-imposition of lockdowns, travel restrictions and limits on economic activity.”

“Barring a reversal of current trends on reopening, a resurgence of prorationing unlikely,” he said.

US President Donald Trump referenced the recent oil price rise and its impact on producing states Thursday during a White House meeting with North Dakota Governor Doug Burgum and Colorado Governor Jared Polis.

“Your oil prices are going up a little bit now,” Trump said. “I saw that you’re at $26, $27 a barrel, and pretty soon you’ll be up to the number that you have to be up to.”

Burgum said that as the No. 2 oil-producing state, North Dakota’s economic hit has come not from the virus, but from the “demand and destruction associated with the oil price drop.”