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North Dakota's May oil output falls 30% on month as DAPL shutdown clouds outlook

Highlights

May natural gas output drops 29% on month to 1.9 Bcf/d

Drillers with hedges, federal permits remain active

300,000 b/d would need to find rail routes if DAPL shuts

Washington — North Dakota oil and natural gas production saw its sharpest monthly drop on record in May, as low prices and weak demand continued to curb drilling activity while the looming shutdown of the Dakota Access Pipeline threatens the state's recovery.

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The state pumped 858,395 b/d in May, down 30% from April and the lowest since June 2013, according to data released July 17 by the North Dakota Pipeline Authority.

About 494,000 b/d of North Dakota oil production was shut in from 6,770 wells in May, the data showed.

May's oil production was down 43% from February's 1.5 million b/d, before the double whammy of the Saudi/Russian price war and coronavirus lockdowns crashed global prices and demand.

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North Dakota's natural gas output sank to 1.9 Bcf/d in May, down 29% from April, according to the pipeline authority.

State regulators had predicted that May would be the rock bottom for production shut-ins as a result of the pandemic, but the court-ordered shutdown of the 570,000 b/d Dakota Access Pipeline presents new uncertainty for the outlook. Pipeline owner Energy Transfer secured a temporary stay of that order while an appellate court considers the ruling.

"The second quarter of 2020 was a five-alarm fire for North Dakota's oil and gas industry," Lynn Helms, director of the North Dakota Department of Mineral Resources, said during a briefing on May's production figures.

'NO INCENTIVE' TO PUMP

The discount for North Dakota light sweet crude to WTI averaged $14/b in May with WTI at $28/b, Helms said.

"The price was terrible, the differential was even worse," he said, adding: "There was no incentive for North Dakota operators to produce and market North Dakota crude oil unless they had that crude oil hedged."

S&P Global Platts average assessment for May barrels of Bakken crude in the Williston Basin averaged about a $12.80/b discount to the May NYMEX calendar-month average. Front-month May barrels, which typically trade about a month ahead, reached a low of WTI CMA minus $14.50/b on April 2. The previous low for Bakken Williston was posted on November 30, 2018, when it was assessed at a $18.35/b discount to WTI CMA.

Helms said the bulk of May drilling activity represented either drillers with hedged production or drillers holding federal permits for wells that they wanted to drill before the November presidential election brings a potential change in administration and tighter drilling policies.

North Dakota's drilling rig count currently stands at 10, the same level Helms reported last month and down from 52 rigs in March.

RAIL ECONOMICS

A single fracking crew is operating in the state, unchanged from last month. Helms said two additional crews were gearing up to return, but the DAPL ruling halted those preparations.

About 300,000 b/d of North Dakota oil would need to move out of the state by rail if DAPL is forced to shut in August and all alternative pipelines max out their capacity, said Justin Kringstad, director of the state Pipeline Authority.

He said crude-by-rail barrels would head first to the West and East coasts, with anything else heading to Cushing, Oklahoma, and the Gulf Coast if economics allowed.

Moving crude on DAPL to the Gulf Coast costs $6-$8/b plus around $1/b for gathering, Kringstad said.

That compares with about $10/b for all the costs associated with moving crude by rail from North Dakota to the West Coast. Routes to the East Coast and Gulf Coast run about $1-$2/b higher than that, he said.

Helms said the state's oil output may return above 1 million b/d by July.

The US Energy Information Administration estimated overall US oil production at 10.98 million b/d in June, down from 12.73 million b/d in March. EIA sees US output rising to 11.2 million b/d by December 2021.

Helms said he considers the EIA outlook too optimistic.

"I think we're going to see a permanent change in the world economy and the world's demand for liquid petroleum fuels," he said. "I'm not sure that the world is ever going to return to pre-COVID-19 demand numbers."