A Bakken rig in Watford City, N.D.: The state produces 1.2 million barrels a day, but that number is expected to drop in 2015.Matthew Staver/Bloomberg
Drilling activity in North Dakota's prolific Bakken field is falling sharply and production is expected to drop by summer, as Saudi Arabia's strategy of squeezing high-cost producers out of the market begins to bite.
In many areas of Bakken, break-even costs already exceed current oil prices and companies are shutting down development, North Dakota's commissioner of mineral resources, Lynn Helms, said Wednesday.
"The core area is as busy as ever, but you get outside the core area and it's pretty quiet," Mr. Helms told a conference call.
"If we see these kind of prices stick around through the first quarter, then we're going to drop below the production-maintenance rig count," he said.
The Bakken and the Eagle Ford and Permian shale plays in Texas have been the key drivers of the boom in U.S. oil production, which helped to create a glut in global markets.
Saudi Arabia – the world's largest exporter – has abandoned its role as swing producer within the Organization of Petroleum Exporting Countries, and is instead maintaining production in the expectation that low prices will drive others producers – including those in Canada and the United States – out of the market.
North American companies are already slashing spending, laying off staff and shutting down drilling rigs. OPEC appears to be counting on a quick response to lower prices from producers in the United States, where the shale oil industry needs to maintain constant drilling to maintain production.
But supply from both the United States and Canada is expected to grow over the next few months as a result of strong 2014 capital investment, and many analysts are forecasting prices will head lower before recovering in the latter half of 2015.
Oil prices spiked higher Wednesday, though traders cited temporary factors and few analysts expect a sustained rally. U.S. benchmark West Texas Intermediate (WTI) rose by $2.59 (U.S.) a barrel – or 5.6 per cent – to close at $48.48.
While oil sands companies such as Suncor Energy Inc. and Canadian Natural Resources Ltd. have slashed their budgets, the market is looking to the U.S. for relief. The tight oil plays there require intensive drilling just to maintain production.
In North Dakota, the rig count has fallen to 158, down 16 per cent from this time last year and is increasingly concentrated in the core area of the play, where companies can make money even if WTI prices fall to $40 a barrel.
Mr. Helms said he believes 130 rigs could maintain production levels at the state's current 1.2 million barrels a day, but expects the count to fall to 120 rigs by spring.
If oil prices fall to the low $40s and stay there, North Dakota would see production drop to 1 million barrels a day by July and to 875,000 by July, 2016, he told state legislators last week.
But that may be a moving target. Companies are driving down costs and increasing productivity by focusing on the core areas. In November, the state saw a slight increase in production.
At the same time, many companies are not bothering to complete wells that have been drilled but have not done the hydraulic fracturing needed to recover the oil and gas from tight rocks. They're waiting either for state tax incentives to kick in, triggered by low prices, or for a rebound in prices.
Analysts from Goldman Sachs this week lowered their price forecasts to $46 in the first quarter of 2015, and $40.50 in the second quarter.
"To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer," the Goldman analysts said in a report.