After staging a significant rally since U.S. crude tested the low $40s earlier this year, WTI crude has traded in a narrow range, and there is potential for more downside-Saudi Arabia recently said it plans to raise output to new highs. On Wednesday, U.S. crude settled at $60.27.
The ongoing pressure since oil prices dropped sharply last fall is squeezing drilling operations in North Dakota and the Bakken Formation. The number of active rigs in North Dakota was 77 as of June 12, down from 145 rigs the same day last year. American Eagle Energy, a Colorado firm drilling in the Bakken Formation, filed in May for Chapter 11 bankruptcy protection in Denver.
Still, many players in the region have the strength to withstand the lower prices, according to Wayne Wilson, who specializes in calculating the value of oil and gas assets as managing director with HSSK, a business valuation and litigation consulting firm that has offices in Houston, Dallas and Austin. Shale oil producers that are currently producing should generally be able to survive the next 48 months unless they have an unfavorable debt structure, he said.
“It’s not a situation where you’re going to see a drying up, but you’re going to see a slowing,” explained Wilson.
One thing that is helping many producers is using new technologies to improve the efficiency of their operations and to lower labor costs, he said, adding, “That allows you to reduce some of the associated costs.”
Lower prices are having a ripple effect on North Dakota’s economy, which benefited from an employment boom in recent years because of growth in the oil and gas industry. The state’s unemployment rate, while still low, increased from 2.8 percent in November to 3.1 percent in preliminary statistics for May, compared to 5.1 percent for the U.S. population, according to the U.S. Bureau of Labor Statistics.
“The bigger problem is going to be the knock-on effect,” said oil and gas expert Jeffery Born, professor of finance and group coordinator at D’Amore-McKim School of Business at Northeastern University in Boston.
North Dakota was the second-largest producer of crude oil in the nation in 2013, after Texas, according to most recent published data from the U.S. Energy Information Administration.
“The state of North Dakota is quite dependent on energy-related activity as a source of GDP,” Born said. The real GDP in North Dakota grew 6.2 percent in 2014, compared to 2.2 percent for the U.S. as a whole, driven by the oil and gas industry, according to data released June 10 by the Bureau of Economic Analysis.
The state itself and its revenue are very dependent on taxes they get from extraction and other type of fees related to energy production. A study at North Dakota State University released in March found that the oil and gas industry generated $2.9 billion in gross production and severance taxes in 2013. Severance taxes are imposed on wells that remove nonrenewable resources, such as crude oil.
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