FARGO — North Dakota’s crude oil industry is bracing for a possible contraction.
Under the weight of spreading coronavirus fears, and an apparent weekend price war between Saudi Arabia and Russia, oil markets crashed and stocks took a dive as markets opened Monday morning, March 9.
As the day wore on, analysts were calling the oil market crash the most significant single-day drop since 1991.
"This is going to cause some significant concerns, and you can look at the stock values to know the impact," said Ron Ness, president of the North Dakota Petroleum Council, whose organization represents more than 650 oil and gas-related companies in the state.
The North Dakota crude oil industry could see a contraction if volatile market conditions last, he suggested.
"With any dramatic price drop like this, you're going to see individual producers make different decisions,” Ness said. “Some will have to slow down their spending and their drilling ... or maybe even shut in some of their wells because they may not want to produce that barrel of high-quality Bakken crude oil for $20 to $30."
North Dakota is the second-largest crude oil producer in the nation, behind Texas, and it’s big business in the state.
Monthly crude oil revenue was $1.255 billion in February, above the forecast $1.205 billion, with a $52.92 average price per barrel in December 2019. Production in December topped out at 1,475,685 barrels per day, according to the North Dakota Office of Management and Budget.
West Texas Intermediate crude oil prices dropped more than 20% Monday. Within minutes of the market opening the sting was felt, and by mid-morning prices were abysmal, hovering just above $30 per barrel, lows not seen in four years, according to The Washington Post.
Oil prices had already dropped as much as 10% in recent weeks due to coronavirus fears, but the weakened market suffered more over the weekend when Saudi Arabia launched an apparent price war against Russia.
The Saudis had been pushing for a cut in output to prop up prices, according to The Post, but did a reversal when Russia balked and decided, instead, to flood the market with hundreds of thousands of additional barrels per day at a steep discount — a move analysts fear may trigger a price war.
Panic triggered the first-ever forced halt on trading after the S&P 500 sank 7% shortly after open on Monday, according to The Post. The Dow Jones Industrial Average sank as low as 2,000 points.
"Certainly, the economics weren't great two weeks ago, so it's going to be a pretty rough spell," Ness said. "Let's hope it's very short-lived. I think everybody's probably going to have to do some reassessment."
Ness attributed the depressed market at the beginning of the year partially to the effect of the coronavirus outbreak, but said an oversupply of crude oil could also have been responsible.
He said the industry went through a similar situation in 2015 when OPEC tried to destroy American shale producers by lowering the price, but it didn't work. He said the industry got more efficient and lowered its costs, but if this is not just a short-lived episode, the industry doesn't have that kind of fat to trim this time around.
Ness said the industry in the Bakken has done well to "squeeze the economics" to become competitive around $50 a barrel, but it becomes more difficult when the prices are much lower than that mark.
Will this be like the 2015 crash?
"It's really a question of how long it stays at those levels and what the individual decisions of those companies are," Ness said.
He said the advantage North Dakota may have is that "the core of the Bakken is still the best place to put a dollar in the American oil shale business."
Ness said he hopes that the effects of the price drop are buffered in North Dakota as a result.
Lynn Helms, director of the state Department of Mineral Resources, released a statement Monday saying while it’s never a good time for such a significant price drop, “the timing of this drop does allow the state to plan ahead for the next legislative session and will allow lawmakers to adjust priorities in preparation for the next biennium.”
The price in the North Dakota budget forecast is $48.50 per barrel at the wellhead, said Helms, which “we are significantly below at this point.”
“While the impact on revenues from gross production tax and extraction tax will be immediate,” he said, “it typically takes 3 to 6 months to work those impacts into any type of revised revenue forecasting.”
Likewise, Helms said, it typically takes three to six months for this type of price drop to impact oil and gas activity.
“Unless prices rebound within the next 30 to 60 days,” he said, “we can expect to see an impact to production and field activity. In both 2008 and 2015, similar price drops took two years for prices to fully recover. Oil production will likely remain flat to slightly down during that time.”