Will Oil Price Collapse Hit Bakken Output? Don’t Count on It

Saudi Arabia has scored some early successes in its battle for global oil market share, which has sent prices crashing and taken the wind out of the sails of the North American shale oil boom. New exploration and rigs counts are down across U.S. shale territories. (See also “Lack of OPEC Control Means a Wild Ride for Oil Prices.”)

Yet the Bakken shale oil formation, located under North Dakota, Montana, Manitoba and Saskatchewan, has been rather resilient to the global price wars. Is theBakken oil boomover? Absolutely not, according to economist Philip Verleger, owner and president of PKVerleger, an energy markets consultancy firm in Carbondale, Colorado. “The Bakken’s vast boom is going to slow down, but it’s not going stop,” he says. In the Bakken’s favor is an economically sound combination of fracking’s disruptive technology and the highly favorable geology of the formation itself. Continuous improvements in fracking technology — rivaling, as Verleger points out, the personal computer’s 40 percent average annual gain in productivity from technological developments during its existence — are on track to expand the recoverable oil reserves and to lower costs.

“My take on this is, there’s a lot of oil down there,” says Verleger. “They’re going to find it. Once they’ve figured out how to get it out the first time, the recovery rates will just keep rising.”

A number of analysts have a gloomier take on the region’s oil industry, though. The Robert W. Baird equity research team has calculated the break-even point for Bakken oil at $61 per barrel.Credit Suisse和瑞银(UBS)估计在每桶65美元保本, whereas Goldman Sachs Group sets it even higher, at $70 to $90. By contrast, the Paris-based International Energy Agency has said the Bakken is profitable at $42 per barrel.

The view on the ground in North Dakota is fairly positive. “The sky is not falling,” says Alison Ritter, public information officer in the oil and gas division of the North Dakota Industrial Commission. “There is some gloom but no doom.” As of February 7 the oil rig count in North Dakota stood at 135, down from 172 in September and 192 a year earlier. Yet although there have already been cutbacks in investment in new exploration, shale oil production levels have held up, the state’s oil producers expect to continue producing about 1 million barrels a day, according to the North Dakota Petroleum Council, a trade group based in state capital of Bismarck. “Companies are going to be looking at doing more in-fill drilling and rather less poking around to see where the oil is,” says Tessa Sandstrom, communications manager at the council.

Some of the home-state confidence stems from the fact that North Dakota calculates that the statewide average cost for new production to be only $15 per barrel for its 11,000 existing oil wells. Even when the cost of mostly rail transportation to refineries in the Gulf is factored in, the total cost comes out to $25 per barrel. Further, North Dakota reports that even new drilling has a cost advantage, averaging $33 per barrel statewide, with costs as low as $28 per barrel in Dunn County and $29 per barrel in McKenzie County, both in the western part of the state. Even if oil prices fall and hover below $45, “it’s economic to continue to drill, and it’s economic to continue to produce,” says Ritter. The U.S. Energy Information Administration’s most recent oil price outlook in January for an average of $58 per barrel in 2015 and $75 in 2016 will get nowhere near the Bakken’s low costs.

As for staying power as an oil producer, North Dakota has 11 billion to 14 billion barrels of recoverable oil, according to the state, or 7.4 billion, according to the 2013 U.S. Geological Survey. “That’s enough to keep the state drilling for the next 20 to 25 years, with existing wells expected to continue to produce oil for 45 years,” says Ritter.

Such long-running production expectations run contrary to the idea that rapid declines in production rates during the early life of shale oil wells can bring some shale oil projects to a swift end. That is a “misperception,” according to an industry brief published last spring by Raymond James & Associates analysts J. Marshall Adkins and John Freeman. A group of wells three to four years old can provide stable, long-term oil production with slowly declining production rates. The authors studied the decline rates of the wells in the Bakken to prove their point. Their model predicts that if the total rig count fell to 76, then production in the Bakken would “more or less stabilize” at 1 million barrels per day.

According to Verleger, Saudi Arabia is likely to continue to wage price wars by adjusting the volumes of oil they release. Come what may, under almost any scenario, the Bakken will be able to go on. “They won’t be paying truck drivers $150,000 a year,” he says. “People will be a lot more efficient.”