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Bakken could feel pinch from coronavirus as oil demand drops

Bakken could feel pinch from coronavirus as oil demand drops

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020120 Bakken Pumpjack 5

A pumpjack in western North Dakota extracts oil from deep underground on Feb. 1.

The global coronavirus outbreak has caused a drop in oil demand, and although the Bakken is not yet feeling any ripple effects, it could in the months ahead.

That was the message state officials delivered Friday when they released the latest oil and gas production figures for North Dakota.

Demand for oil has fallen in China since the outbreak began there in December as residents quarantine at home, businesses shut down and ships carrying goods sit idle. Over the past month, oil prices have dropped about $6 amid an oversupply of the fuel. The International Energy Agency predicts that global demand will contract during the first quarter of 2020 for the first time in more than a decade.

State Mineral Resources Director Lynn Helms said the state’s older and lower-producing wells are “really vulnerable” to the price drop that has occurred in the wake of the new virus. Those wells are only profitable at higher oil prices and could idle if prices stay low.

“I think we are going to see our inactive well count climb all the way through the middle of the year,” Helms said.

It can take a while for the Bakken to react when oil prices shift, said Justin Kringstad, director of the North Dakota Pipeline Authority.

“It typically takes about six months before we start to see that reflected in actual production in the state,” he said.

The lag has to do with new drilling. It takes about six months from the date drilling begins until production starts from a well, Kringstad said. Wells coming online today were planned months ago.

Some relief for the oil industry could come after OPEC meets in March. Its leaders are weighing a production cut to try to reduce the global oversupply. Helms said he expects a cut would “moderate” the impact of the drop in demand, but he doesn’t think it will be enough.

He compared the impact of the coronavirus on oil to that of the SARS outbreak 17 years ago. SARS is an illness caused by another coronavirus. Helms said it caused oil prices to drop by $5 to $7 per barrel and stay low for an entire year.

“It’s eerily similar to what’s happening with the (new) coronavirus,” he said.

The World Health Organization named the latest virus “COVID-19” last week.

Helms said North Dakota produced 1.476 million barrels per day of oil in December, the latest month for which figures are available. That represents a 3% drop from November.

The drop was the result of companies curtailing oil production to rein in natural gas flaring in an effort to comply with the state’s 88% gas capture target, Helms said.

North Dakota produced 3.06 billion cubic feet per day of natural gas in December and captured 84% of it.

Helms said he anticipates the oil patch will come into compliance with the state’s flaring goal this spring as new processing and pipeline capacity catches up with gas production. The gas capture target increases to 91% in November.

Helms said he felt a recent move by the state Department of Trust Lands, under the direction of the Board of University and Trust Lands, to collect unpaid natural gas royalties was too aggressive and could “be a disincentive in terms of flaring reduction.”

The department sent out letters to companies earlier this week outlining a plan to pay back money they had deducted from royalties for developing state-owned minerals. The deductions accounted for “post-production costs,” which are expenses associated with gathering the gas and removing impurities after it’s extracted from a well to get it ready for sale further down the processing chain.

The effort to collect the money follows a legal dispute over the deductions and the North Dakota Supreme Court siding with the state last summer. The state seeks to collect the unpaid royalties plus penalties and interest, the severity of which depends on how quickly companies comply.

Helms addressed the matter during the public portion of a Land Board meeting earlier this week, telling members that the “quickest and easiest way to reduce the royalty burden on gas is to flare it,” he recalled.

He said he urged the board to look holistically at royalties, the bulk of which come from the oil wells produce and not the gas. If the state’s approach to collect the unpaid money were to disincentivize drilling new wells, the state would receive less in future royalties than it would otherwise, he said.

“If one gets too aggressive trying to collect a few pennies on natural gas, then you could give up dollars on the oil side,” he said.

Reach Amy R. Sisk at 701-250-8252 or amy.sisk@bismarcktribune.com.

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