Bakken outlook: Oil industry faces hurdles in 2015

Repost from The Dickenson Press, Dickenson, ND

Bakken outlook: Oil industry faces hurdles in 2015

By Mike Nowatzki, Dec 26, 2014
Brothers Dusty, left, and K.C. Sutton of Nine Energy Service prepare to install a blow out preventer on a new well on July 7 south of Stanley that has been fracked and needs to be cleaned out before it produces oil. FNS Photo by Michael Vosburg

BISMARCK — With oil prices slipping to their lowest point in more than five years, new state regulations slated to take effect and lawmakers proposing major investments in oil country, 2015 is shaping up to be a critical year for the oil and gas industry in North Dakota.

Here’s a look at some of the top issues.

New rules resonate

Rules adopted by the North Dakota Industrial Commission in 2014 will continue to resonate in 2015.

Gas capture goals adopted in July will require operators to reduce the percentage of natural gas flared from oil wells to 23 percent by Jan. 1 and to 15 percent by 2016.

Statewide, operators already met the first goal of 26 percent by Oct. 1, beating it by 4 percentage points.

But eight individual operators didn’t meet the gas capture goal, and several postponed completion work on wells to achieve the goal, Department of Mineral Resources Director Lynn Helms said.

North Dakota Petroleum Council President Ron Ness said substantial amounts of gas are being “held hostage” in negotiations over pipeline easements. He estimated well over one-third of the flared gas is the result of three or four easement hang-ups on private, tribal and federal lands.

“Those few bottlenecks are holding up a substantial amount of connections,” he said.

Oil conditioning required

Starting April 1, oil conditioning rules adopted by the Industrial Commission this month will require operators to use equipment to separate butane, propane and other volatile gases from crude oil, and to run the equipment within certain temperatures and pressures to lower the oil’s vapor pressure to 13.7 pounds per square inch.

State officials say the rules will improve the safety of crude-by-rail shipments. Critics contend they’ll do little to prevent the kind of explosive train derailments that spurred their creation.

Ness said the Petroleum Council was amenable to safety standards based on science but “we adamantly objected to the micromanagement” maintained in the final order. Some companies will have to make substantial investments in well-site equipment and testing required by the rules, he said, noting one operator believes their cost could range from $10 million to $20 million.

Requiring the equipment to be installed during the winter months so it’s ready by April 1 also was “a significant misstep,” he said.

“Operators are already in the process of figuring out what they need to do on each of their facilities to come into compliance, but I think we’re pretty frustrated with the process,” he said.

Price uncertainty high

Continued lower oil prices will make some drilling activity less profitable in emerging and mature oil plays, but prices are expected to remain high enough in 2015 to support new drilling in the major shale areas in North Dakota and Texas, the U.S. Energy Information Administration said in its short-term energy outlook Dec. 9.

The outlook forecasts average spot prices of $68 per barrel for Brent crude and $63 per barrel for West Texas Intermediate crude in 2015, with lower prices early in the year, the EIA said, citing “high uncertainty” in the price outlook.

Helms is optimistic prices will recover, calling the recent decline “a blip.”

Ness said the industry doesn’t see it that way, noting most analysts are predicting the price slump could last eight to 16 months or even one to two years as U.S. supply stays strong, global demand remains weak and OPEC continues to challenge U.S. production.

“We don’t know what the new normal for oil prices is going to be,” he said. “We’re in an energy war.”

North Dakota light sweet crude oil has dropped below $40 a barrel.

And while some barrels are hedged, “by and large, we’re probably taking $60 less a barrel than we were six months ago,” Ness said.

As a result, companies will deploy less capital and idle drilling rigs or move them from fringe areas to higher-producing areas, he said.

If low prices continue into February and March, “We’re going to see substantial reduction in exploration activity,” he said.

Helms said falling oil prices, oil conditioning and flaring reduction were factors in North Dakota’s drilling rig count dropping by 10 to 183 as of Dec. 12. He expects a 40- to 50-rig reduction by mid-2015 because of soft oil prices.

Oil tax reform?

Efforts to change North Dakota’s oil tax structure failed during the 2013 legislative session, and it remains to be seen whether similar proposals will surface when the Legislature convenes Jan. 6.

Sen. Dwight Cook, R-Mandan, chairman of the Senate Finance and Taxation Committee, introduced a bill last session that would have ended a series of 10 tax incentives designed to help draw oil companies to the state and keep them viable, while lowering the oil extraction tax from 6.5 percent to 4.5 percent for wells built after 2017. The bill failed in the House, as did an oil tax reform bill sponsored by Rep. Roscoe Streyle, R-Minot.

“I will not be introducing any similar legislation this session, and I haven’t heard of anybody else who has,” Cook said Tuesday. “But I guess I wouldn’t be surprised to see something.”

Trying to get rid of incentives – including reductions and exemptions to the extraction tax that take effect when the price of crude drops below a “trigger price” for five consecutive months – could be a tough sell with oil prices as low as they are, Cook said.

“You need to do that when there are high prices,” he said.

Ness said the Petroleum Council doesn’t plan to push any oil tax reform legislation.

“We fully expect that we’re going to sit back and utilize those incentives if they come,” he said.

Legislative proposals

Elected leaders have unveiled big spending proposals to address infrastructure, housing and other needs in oil-impacted areas of western North Dakota.

Chief among them is Gov. Jack Dalrymple’s budget recommendation to increase the share of oil production tax revenue being sent back to oil producing counties from 25 percent to 60 percent for the 2015-17 biennium, while lowering the state’s share from 75 percent to 40 percent. Senate Majority Leader Rich Wardner, R-Dickinson, is spearheading a similar proposal.

The adjusted formula would generate $1.7 billion for the counties and their political subdivisions, or $1 billion more than what the region is expected to receive this biennium, Dalrymple has said.

The governor also wants lawmakers to fast-track $873 million in “jump-start” funding so the state’s oil and gas region can get a head start on construction projects next spring. He’s also recommending $119 million in Energy Impact Grant funds.

Radioactive waste

Several illegal dumping incidents reported in 2014 focused attention on proper disposal of filter socks and other radioactive oilfield waste.

The North Dakota Department of Health has proposed rules that would increase the limit of radioactivity from 5 picocuries per gram to 50, allowing companies to dump the waste at special oilfield waste landfills and industrial waste landfills instead of having to haul it out of state. Companies also would be required to keep manifests to track the waste.

A public comment period is open until Jan. 31, and the approval process is expected to take several months. The Legislature’s Administrative Rules Committee must approve the rules.

“That’s going to get a lot of discussion,” Cook said.