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North Dakota Officials Eye Oil Price Declines; Fear Rig Cutback

Bakken sweet crude oil on Wednesday was fetching $66.25/bbl, prompting North Dakota's chief oil/natural gas regulator to spend most of his time during a monthly production webinar lamenting the possibility of future slowed production in the state's otherwise uninterrupted oil boom.

If oil prices stay down below $70/bbl, Lynn Helms, director of the state Department of Mineral Resources, predicted there could be about a 10% cutback in rigs operating throughout the state. Based on current prices, it is uneconomic to drill new wells in three smaller producing counties, but in North Dakota's four major producing counties (Dunn, McKenzie, Mountrail, Williams), the breakeven prices are still lower than current levels, Helms said.

"We don't really know where oil prices are headed," Helms said during his monthly session reporting new records for oil and gas production in August, the most recent month for which there are complete statistics. He said he has been checking to see how the global price drop was affecting "our chief competitor," OPEC.

Based on OPEC public budgets, particularly Saudi Arabia, the breakeven price is $92/bbl to meet current government budget needs, Helms said. Iraq is $116/bbl, United Arab Emirates (UAE) is $90/bbl and Kuwait -- "the only one really in good shape" -- is $59/bbl oil.

"So we're in this together," Helms said. "Not only is North Dakota under a lot of pressure, but the OPEC countries are under a lot of pressure right now, too. I think the really big concern on oil prices is the $52 WTI trigger for North Dakota tax incentives. We're not really that close to that number yet, but there are serious concerns out there."

A big drop in the WTI price (on Wednesday it was $82.30/bbl) could mean a drop in North Dakota's windfall revenues in the state coffers from two combined taxes (gross production and extraction) adding up to 11.5% on oil/gas production. Under a state legislative-established formula, if the WTI price of oil stays at $52.06/bbl or lower for five consecutive months, the tax is lowered by 4% for at least five more consecutive months.

"If the [6.5%] extraction tax trigger is met, new Bakken/Three Forks formation wells would be taxed at 2%, as opposed to the regular 6.5%," Helms said. "It would be an incentive for the operators to continue drilling and producing, but it would have an enormous impact on state budgets."

Helms said the state has not calculated how much revenue it would lose in that situation, but he knows it would be substantial. "We have not looked at that, but it would be interesting and the numbers would be enormous," he said.

Within the state, the breakeven prices of oil production, which vary greatly among and within counties, are driven by two main factors on any given well project are: (a) initial production rates and (b) how much water is produced with the oil. "Water disposal costs are an enormous part of operating costs [for producers]," Helms said.

In response to questions on his webinar about what the operators are doing in response to the softening of prices, Helms said they are looking at added ways to slash costs, and one of them is to give up diesel-powered rigs and go to gas-fired onsite generation instead of diesel fuel. "If the oil prices keep dropping, we can expect to see capital budgets for 2015 reduced," Helms said.

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