North Dakota Releases Internal Output Forecast

A stark breakdown from North Dakota projecting how falling oil prices could affect production was formulated using proprietary corporate data and a state official's personal model.

Late last Thursday, the Department of Mineral Resources caused a stir in world oil markets by releasing slides from a presentation to the state legislature that included a range of output forecasts based on different oil price scenarios, including one showing production would begin to decline by the middle of this year if crude prices remained at current levels.

The projections presented by Lynn Helms, head of the state's energy regulatory agency, cut to the quick of a pivotal question for global oil traders and executives: How quickly will U.S. shale producers, particularly those in the booming Bakken of North Dakota, respond to the collapse in oil prices?

While consultants and analysts have been frantically reviewing and updating their own "cost curve" models, attempting to predict a potential turning point in the market at which shale growth will begin to stall and oil markets stabilize, this was the first such forecast from the heartland of fracking - and it appeared to be markedly more pessimistic than many.

Most analysts expect U.S. oil production to continue growing this year, powered partly by the Bakken, even if prices remain low. But Helms' analysis suggested North Dakota production would flatline at around 1.2 million barrels per day (bpd) even at a $65 a barrel wellhead price, which translates into around $75 for U.S. futures that are now below $50.

The question, as with all such forecasts, is how they are constructed.

For the full presentation see: https://www.dmr.nd.gov/oilgas/presentations/FullHouseAppropriations010815.pdf

In this case, according to the department, they reflect years of careful collection and analysis by Helms, a chemical engineer by training who previously worked at Texaco and Hess Corp before joining the state government in 1998. He has run North Dakota's Department of Mineral Resources since 2005.

The analysis is based on detailed and often private data about an oil well's economics, royalty costs and other metrics that energy companies must present to state officials when they request a variance for certain rules, said Alison Ritter, a Department of Mineral Resources spokeswoman.

Common requests include exemptions to strict new anti-flaring standards and permission to put more wells on an oil pad. To win their appeal, companies must often present sensitive data they typically don't release to the public.

Helms then crunches that data through a statistical model he developed to determine a best guess on where oil production could go in the state, where output has risen six-fold since 2010 to over 1.2 million barrels a day.

He performs the calculations himself and does not consult an economist, Ritter said, and also tabulates the lowest possible cost that oil producers could abide in each county in order to drill a new well.

Helms was not available to comment due to the state's ongoing biennial legislative session.

He has privately collected the breakeven data and production projection data for years, sharing it only with the state's Office of Management and Budget as it crafts a proposal for state spending.

Yet last October, with oil prices falling, Helms decided to release the breakeven projection to assuage concern.

"Just because there's a price collapse doesn't mean there's a cause for panic," Ritter said.

Helms' decision late last week to release the production projection was born from the same logic, Ritter said. It also should help state legislatures as they seek to craft a two-year budget, with several large infrastructure projects tied directly to oil tax revenue. (Reporting by Ernest Scheyder