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After months of record Bakken oil output, dip expected next month

Washington — Record-breaking North Dakota oil production is expected to level off early next year, but the output peak could still be years away, state regulators and analysts said.

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A combination of winter weather and sluggish upstream investment in the Williston Basin because of declining oil prices will likely cause output growth to plateau or slow in early 2019, potentially until May, Lynn Helms, North Dakota's top oil and gas regulator, said.

Helms added that investments in drilling, fracking and well completions all are slowing down because of the decline in Bakken oil prices.

Bakken crude oil price differentials saw pressure in October and November as growing production in the Williston Basin began to outpace available pipeline takeaway capacity. Other factors that put pressure on prices was prolonged seasonal maintenance at Midwest refineries this fall and record-low prices for competing Canadian crude as oil there faced issues with takeaway constraints as well. Bakken crude in the Williston basin was assessed at a multi-year low November 1 at a $20.50/b discount to the NYMEX WTI calendar-month average. The differential averaged WTI CMA minus $12.75/b in October and November. At their strongest level this year in June, Bakken Williston was trading at WTI CMA plus $1.75/b

Prices quickly rebounded in December, however, after refinery maintenance was complete and there was an announcement that the Alberta government ordered a 325,000 b/d curtailment of Canadian crude production, starting January 1. Differentials spiked in December and Williston basin crude reached WTI CMA minus $3.50/b before leveling off at the end of the trade cycle for February. A few trades for January Bakken continue to get done and it was heard bid Thursday at WTI CMA minus $3.25/b.

Helms reported last week that North Dakota oil output averaged a record 1.39 million b/d in October, up nearly 32,600 b/d from September and an all-time high. North Dakota oil output has broken a new record in five of the past six months.

"As we enter year-end and winter, we're going to be leveling off," said Justin Kringstad, director of the North Dakota Pipeline Authority in an interview.

Using short- and long-term US Energy Information Administration price forecasts, Kringstad said he expects Williston production to be level before increasing in the second half of 2019 and climbing to a peak of just below 2.2 million b/d in roughly a decade. EIA forecasts WTI spot prices to average $54.19/b in 2019 and $50.60/b in the first five months of next year.

Under a more conservative forecast, Kringstad sees next year's leveling off leading to a roughly 100,000 b/d decline before recovering in 2020. According to this forecast, Williston output would peak about 1.7 million b/d more than a decade from now. Kringstad said the future path of growth is largely determined by price, but also corresponding growth of pipeline takeaway capacity and gas-gathering infrastructure.

Current pipeline and refining capacity within the Williston Basin averaged just above 1.42 million b/d in 2018 from 1.37 million b/d in 2017. That capacity is expected to stay flat in 2019, before climbing to over 1.65 million b/d in 2020 when the 49,500 b/d Davis refinery begins operation late that year, Kringstad said.

S&P Global Platts Analytics forecasts Bakken production to average over 1.42 million b/d in 2019, up 172,000 b/d from 2018.

"We see continued growth in the Bakken in 2019," said Rene Santos, an analyst with Platts Analytics. "However, the rate of growth is a bit slower than in 2018 as a result of relatively flat rig count and limited gas-processing capacity potentially forcing [the] state to ask operators to lower gas flaring to meet gas-capture targets."

North Dakota had 69 operating rigs Thursday, up from an average of 64 in November, but well below the all-time high of 218 in 2012. Bakken operators plan to add one to five new rigs in 2019, depending on workforce and infrastructure constraints, according to Helms.

In October, Bakken producers flared 527 MMcf/d, which represents roughly 20% of all gas produced in the state and the highest volume ever flared in the state. But penalties from exceeding gas-capture goals, coming as the US Bureau of Land Management works to give North Dakota and other states more regulatory oversight over methane emissions, could hinder oil output growth, at least in the near term.

Graham Walker, an oil market analyst with consultancy Petrologica, said he expects that Bakken production will likely be a bit below the 2018 record-setting pace of production, due to a combination of factors, from gas-capturing limitations, Bakken differentials and pipeline limits.

Still, Walker said that despite an initial drop off to start 2019, Bakken production has yet to peak, particularly given some surprisingly high results from well results outside the Bakken's traditional core drilling areas.

"As it stands, we don't see the Bakken peaking before 2020," Walker said.

-- Brian Scheid, brian.scheid@spglobal.com

-- Laura Huchzermeyer, laura.huchzermeyer@spglobal.com

-- Edited by Valarie Jackson, newsdesk@spglobal.com