Eugene Graner

Commodity broker Eugene Graner, of Heartland Investor Services of Bismarck says the oil price drop is related to the American dollar and he expects the downturn in oil drilling in the Bakken will be much worse than state officials are saying.

A drastic fall in oil prices means the booming sound from the Bakken will be muffled next year and at least one commodity expert thinks oil values will remain low for another two to three years.

What it all means for North Dakota’s oil economy is far from certain, but one of the Bakken’s major drillers says half the drilling rigs could be shut down as the industry takes a wait-and-see approach to the market.

Lynn Helms, director of the Department of Mineral Resources, said recently in his monthly update that the rig count — now at 181 — could fall by as many as 30 to 45 next year.

By Tuesday, though, he was hearing news from Continental Resources that it expects the number of idled rigs throughout the Bakken could be as high as 90, significantly more than he had predicted. The company, owned by billionaire Harold Hamm, produces about 10 percent of the state’s daily oil output.

“That’s the most pessimistic view I’ve heard,” Helms said. “That’s their view of what could happen.“

If it does, that’s off-book from Continental’s own investor report for 2015. On Dec. 3, the company said it planned to maintain its 2014 Bakken activity level with an average of 19 rigs and spend $2.6 billion on oil development. That included planned cuts of $600 million for the upcoming year.

Since then oil dropped off again to $53 a barrel, closing at $58 Thursday. Bakken crude is discounted another $8 to $16 a barrel because of the cost of moving it out of North Dakota. It was quoted at $35.75 Thursday.

Marathon Oil has nothing to say yet about 2015 and Whiting Petroleum’s investor relations team says it will announce plans late in January or early February.

Statoil spokeswoman Kirsten Henriksen said the company’s drilling plan for 2015 isn’t affected by the drop in oil prices. “…we take a long-term view and decisions are made on the basis of profitability against longer-term price forecasts,” she said.

But whether Helms’ or Continental’s prediction or something in between the two turns out to be accurate, an equally pressing question is the duration of the downtown and the ripple effects as it moves throughout the industry.

Helms said he’s hearing slowed drilling could last for as long 18 months or as few as nine months, depending on recovery in the price of oil and confidence in price stability.

He’s not the only one with an ear to the rumble.

Not far from Helms’ office on Calgary Avenue, Eugene Graner is in his, using eight monitors to track commodity prices and stock reports. Two flat screens opposite his desk are tuned to all-day news stations with market updates running in ribbons on the bottom of the screen.

Graner, president of Heartland Investor Services Inc., publishes a market newsletter, heads the state’s largest commodity brokerage and is a go-to guy for short- and long-term market analysis. Bloomberg Businessweek calls him for insights, he says.

He keeps his attention on the topic, but one eye really never leaves the monitors wrapping his desk on both sides.

“That’s it, that’s the low-water mark for the calendar year,” he blurts, pointing to a price of $53.60. “The free-fall is about stalling out.“

Graner said he expects the crude oil WTI (West Texas Intermediate) posted price to stick in the $50s until January and maybe February, rally with summer demand and any unrest in the Mideast and be even lower in the fall.

Given the tumultuous history of oil, Graner said the downtime could be a two- to three-year event and prices will remain in a “band” or range of $50 to $80 a barrel that long, not including the Bakken discount. “Prices aren’t going to run away past $80,” he said.

Subhead: How’d this happen?

Given how long the price of oil has been in the $100 barrel range and oil development humming along with it, Helms said he was a little surprised by how quickly it’s dropping off. “It’s very reminiscent of 2008 when the price plummeted. A lot of people are hoping it’s a very hard fall with a very quick bounce,” he said.

Graner said he’s not surprised. As early as July he started warning people who’d invested in Bakken-focused companies to protect their money. His company manages commodity portfolios, not stock portfolios, but he could see trouble coming.

About one-third of the stock market is negatively pegged to energy prices, he said, not bad for portfolios evenly spread, but a problem for those concentrated in energy.

He doesn’t attribute the price drop to Saudi oil production either, like some do, because that’s been constant at 30 million barrels a day. “All they’ve said is they would continue at 30 million day. The world is using 89 million barrels a day and producing 90 million.

Even if demand has softened, that’s not enough to justify a 50 percent drop in price. Something changed,” he said.

Supply and demand are part of the equation, but the largest part is the fact that all oil in the world is priced at the U.S. dollar, he said.

“The U.S. dollar exploded in value and created a displacement value in all commodities,” he said. “This is a multi-year event and it’s not going to go away.“

Ironically, what hurts North Dakota, because of its commodity-based economy, helps everyone else. The average American family will get a $1,000 bonus next year because gas is cheaper, too. Lower oil and ag commodity prices act as an economic stimulus elsewhere while the reverse is true here.

Subhead: What’s next

Graner said he thinks the state’s rig prediction is still too high, because officials and politicians tend to soften bad news.

“No matter what they say, the downside is always much worse. It’s real and it’s going to stay,” he said. If the Federal Reserve increases interest rates next fall, as it’s discussing, oil value will fall off into the $40s, he said.

For now, Graner says, “A lot of drillers will be shutting down. The fringe (oil development area) is going to take a hit, but there will be pressure in the (drilling) sweet spot.“

He said Williston will go from being insane to just a little crazy as the new normal kicks in. Established oil companies will survive, but “Johnny-come-latelies are not going to make it,” he said.

“I don’t feel nervous. It just got of hand. Oil is still needed. We had a bubble, but the bubble burst and most are still in denial. This brings us back to reality. It will help North Dakota get caught up with its way of life and infrastructure,” he said.

Helms says it’s important to look at the situation from the right end of the binoculars.

“I expect this to have a short-term impact on a long-term play. Even if (Graner) is right about two years (low prices), that’s only 10 percent of a 25-year program. We still have 60,000 wells to drill,” he said.

The biggest risk, and he’s seen it happen before, is the displacement of oil workers, who left home for good jobs in North Dakota. “If the price stays low long enough and there are layoffs, they go home and don’t come back. When oil prices recover, which they will, it will be much harder and more expensive to fill those jobs.“

For that reason, Helms said oil companies will resist making cuts too quickly.

The Department of Mineral Resources conservatively pegs about 120 jobs to every rig drilling.

Subhead: By the numbers

Helms still expects in the range of 1,000 to 1,500 new wells drilled in 2015, about half of what’s been average, and a sizeable number of the 650 drilled wells waiting hydraulic fracturing to be completed.

Oil companies are only allowed one year between drilling and fracking, or completing the well. But fracking now exceeds the cost of drilling by a $5 million to $4 million ratio on an average $9 million well.

Emergency extensions have been granted in past years, but Helms is unsure whether that will come into play this time around.

Helms said in the past month he’s seen more companies willing to top lease, or renegotiate mineral leases, essentially buying more time until it has to hold the lease with actual oil production, than actually drilling the well.

“It’s cheaper to renegotiate,” he said.

This top lease opportunity affects a relatively small number of them. The department estimates that less than 15 percent of leases in the core Bakken area are not drilled.

Subhead:Trigger happy

If the daily closing WTI price averages less than $55 a barrel for a month, drillers can take advantage of a trigger in state law that knocks 4 percent off the extraction tax. The trigger expires in July and only applies to the first 75,000 barrels of production.

Even so, it could equate to more than $4 million in tax savings per well.

“It gets you your frack (cost) back,” Helms said.

A separate trigger kicks in if oil stays below $52.50 for five consecutive months, in which case the 6.5 percent extraction tax is suspended for up to two years, a scenario that was nearly reached in 2009.

Subhead: Drillers react

Monte Besler, owner of Fracn8tr, a fracking consultant company, said he was recently shut down in the middle of a fracking job and another client operator has significantly scaled back operations.

There’s already talk that a Stanley housing development will be emptied out by the layoff of a 75-man rig moving crew.

Besler said it’s all about the numbers on the investment side.

Bakken wells tend to come in big, delivering an early payback and then dramatically drop off in production.

“At $80 to $90 a barrel they couldn’t miss. Now (with lower oil costs) that early high return goes away. The investment sector dollars, this will hit them hard,” Besler said.

On the other hand, as service companies compete for fewer drilling jobs, there will be savings in the field.

“As the prices go down, they will be able to drill a well for some significant reductions. It could get to the point where they can drill three wells for what at the peak they spent on one,” Besler said.

He agrees with Helms’ assessment of valuable oil field employees.

“If the (slowdown) is not long, they will put available capital into trying to maintain employees,” he said.

(Reach Lauren Donovan at 701-220-5511 or lauren@westriv.com.)

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Reach reporter Lauren Donovan at 701-220-5511 or lauren@westriv.com.

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