North Dakota produces more crude oil per capita than other any large oil-producing state in the country, including nearly 10 times more than Texas. So it seems unjust that its oil production has fallen further during the pandemic-driven oil rout than that of any other major oil producer.
Between January and May North Dakota’s crude oil production plummeted 40%, according to data released late last week by the state, outpacing the 10% overall decline in U.S. production over the same period.
The size of the drop in the state’s production — from 1.4 million barrels per day (b/d) at the start of the year to 860,000 b/d by May — could exceed the oil production decline in Texas in both percentage terms and outright, even though Texas produces four times more oil.
This is “a five-alarm fire for North Dakota’s oil and gas industry,” said Lynn Helms, director of North Dakota’s Mineral Resources department, which released the data.
Fueled by the prolific Bakken shale basin in the state’s northwest corner, North Dakota has ranked second only to Texas in oil production since roughly 2012. But it may have sunk back into third place behind New Mexico beginning in May, if Friday’s state-level figures are echoed in soon-to-be-released federal data.
Experts have warned before that North Dakota is vulnerable to an oil bust. Located far from the country’s refining hub along the coast of the Gulf of Mexico, producers here rely on costly networks of pipelines, rail and truck shipments to transport their output. Oil companies plumbing Bakken shale require a “breakeven” oil price of around $45 per barrel to cover their operating expenses, more than the roughly $40 average per barrel that producers in the Permian basin in Texas and New Mexico need, analysts estimate. In recent weeks, oil prices have wavered around $40 per barrel.
Production costs could rise another $5-6 per barrel if the Dakota Access pipeline, which carries around 570,000 b/d from North Dakota to refineries in the Midwest and along the Gulf Coast, is forced to shut down by legal challenges brought by local tribes and environmentalists, which would force producers to pay for costlier export options. On July 6th, the U.S. District Court for D.C. ordered the Dakota Access pipeline to shut down by early August, saying that pipeline builder Energy Transfer
Only one other company is currently completing new oil wells in North Dakota, said Helms, the agency director, but it depends on being able to route oil through the Dakota Access Pipeline. “They’ve protected themselves from the market,” Helms said, “but they’re not protected from the [courts].”
The slide in production may already have reversed. Producers have gradually begun getting back to work and overall output could return to at or near 1 million b/d for July, said Helms, although that data will not be published for two more months.
Still, North Dakota will struggle to return to levels from just this March or April. The active drilling rig count in the state — a measure of how many new wells are being drilled — stood at only 10 in the second week of July, according to separate data from oil services firm Baker Hughes
If this is the bust, North Dakota has seen the boom. After new drilling techniques unlocked huge shale oil reserves deep underground in the late 2000s, towns got new high schools and main streets got makeovers. Fresh high school graduates were making $80,000 a year as truck drivers for the oil industry. GDP per capita soared to $63,000 by 2016, well above the U.S. average of $50,600, though both had been about the same a decade ago.
Now North Dakota’s finances could be on the chopping block. The oil industry accounts for around half of the state’s total tax collections, underwriting everything from K-12 education to local infrastructure. Worried about the state’s dependence on oil, in 2010 voters approved what is known as the Legacy Fund, a which receives 30% of oil tax collections each year to invest in new industries. But as Helms admitted, “It’s not large enough yet” to meaningfully diversify the economy.
Unemployment in the state’s oil and gas industry is running at around 20%, Helms said, which alone would be painful for an industry that accounts for one of every five jobs and where wages average $98,000. But if there is a bright side to the state’s economic situation, it is that unemployment overall was just 6.1% in June, the fourth lowest in the nation after Kentucky, Utah and Idaho, according to the Bureau of Labor Statistics. Unemployment has hit coastal states with large leisure and entertainment industries harder than rural states.
It is not all downhill from here. The bloodletting of the oil sector was poised to let up in June’s data and may already have begun to reverse. After an initial body-blow, oil demand is steadily recovering in the U.S. and much of the world as drivers get back on the road. Total global demand could return to pre-coronavirus levels in one year’s time, according to some projections, although others disagree.
But before anything resembling a return to normal, North Dakota has more turbulence to navigate, including continued bankruptcies. On Friday, the same day that the Mineral Resources department released its latest data, oil driller Bruin E&P filed for bankruptcy, suffering the same fate as other major North Dakota-focused producers, such as Whiting Petroleum Corporation