fedgazette

The Bakken faces a steep drop in oil prices

Visit our Bakken Oil Boom special feature and explore a range of economic, demographic and financial data for the Bakken.

Rob Grunewald | Economist
Dulguun Batbold | Research Analyst

Published February 6, 2015

The Bakken energy production region of western North Dakota and eastern Montana faces a steep drop in oil prices. The most widely quoted U.S. price for oil, the price of West Texas Intermediate (WTI) at Cushing, Okla., was close to $108 per barrel in June, declined to about $90 in early October and fell below $50 in January. The drop in oil prices has slowed drilling activity, and energy companies have announced that they will scale back future drilling operations.

It’s too early to tell what the full impact of the drop will be on the region, but emerging data provide some context. First, it’s unclear how long oil prices will remain depressed – oil prices reached above $50 per barrel during the first week of February. Nevertheless, they have dropped to a level where energy companies will suspend most exploratory drilling, but many will continue drilling in the core area of the Bakken. Second, the thousands of wells already drilled in the region will continue to pump and require workers for maintenance and transportation. Finally, the silver lining of a slowdown may be an opportunity for communities to catch up on a backlog of infrastructure development.

Falling oil prices

Prices for North Dakota sweet crude have trended even lower than the WTI benchmark price, falling to about $30 per barrel in January (see Chart 1).1

Large chart

Break-even prices for wells in the Bakken vary, depending on drilling costs and productivity. Estimates of county average break-even prices for wells in the Bakken core drilling area by the North Dakota Industrial Commission (NDIC) range from about $30 per barrel to about $60, with break-even prices above $70 estimated for wells along the periphery. These estimates suggest that operators will suspend most exploratory drilling on the periphery and focus on drilling in the core area of the Bakken, where costs are lowest. Many rigs working in the Bakken’s core are drilling multiple wells on a single location; some sites have plans for 20 wells or more.

Rig data show reductions in drilling activity as oil prices have dropped (see Chart 2). The total number of rigs active in North Dakota and Montana decreased from a high of 197 in October to 153 in late January (147 in North Dakota, 6 in Montana). The decrease in drilling rigs so far is smaller proportionally than the decrease in oil prices; from the end of September, rigs decreased 22 percent while oil prices dropped 50 percent. However, industry observers expect the rig count to continue its decline as long as prices stay low. For example, Continental Resources, a major oil producer in the Bakken area, announced in December that it plans to reduce the number of active oil rigs from 50 to 31 across several oilfields during 2015, including in the Bakken and in areas outside the Bakken. The NDIC estimates that if prices remain at current levels, the rig count in North Dakota could drop below 100.

Large chart

In 2008, energy companies sharply dropped drilling activity in North Dakota and Montana in response to decreases in oil prices. Oil prices were as high as $145 per barrel in July 2008; five months later, they dipped as low as $30—well below break-even prices at the time—which led to a corresponding drop in active drilling rigs from a peak of 96 in November 2008 to a low of 36 in May 2009 (see Chart 3). However, once oil prices climbed back above $60, drilling activity started to increase steadily.

Large image

Decreasing oil prices are the main impact on drilling, but regulations and tax issues are also playing a role. Recent changes in flaring allowances have energy companies drawing up plans to lay pipeline and capture gas. In January, the NDIC’s Department of Mineral Resources reported that the percentage of gas flared in the Bakken dropped to 25 percent, down from 36 percent earlier in 2014. Energy companies also face new requirements to remove flammable natural gas liquids to improve train shipment safety.

In contrast, a recent reduction in the oil extraction tax rate will encourage drilling, although it will only partially make up for the sharp drop in oil prices. North Dakota’s gross production tax is 5 percent, and the state’s extraction tax is 6.5 percent. In situations where oil prices fall significantly, a trigger reduces the extraction tax rate. For example, if the WTI price averages less than $57.50 per barrel for one month, the extraction tax falls to 2 percent. The trigger was reached in January, when prices trended below $57.50. The lower rate applies to new wells as of Feb. 1 for the first 75,000 barrels of production or first $4.5 million of gross value for a maximum of 18 months. The trigger is removed after a month averages $72.50 or more.

The latest complete data for oil production are for October. Overall oil production levels in the North Dakota and Montana portions of the Bakken reached 1.2 million barrels per day in October, 23 percent higher than a year earlier. Preliminary November oil production data for North Dakota indicate an increase from October, according to the NDIC. In the North Dakota part of the Bakken, natural gas production was up 31 percent in November compared with a year earlier.

Impact on employment

As the number of active drilling rigs decreases, many in the region are watching for the impact on labor markets. The Bakken area has featured very tight labor markets with unemployment rates below 3 percent for the past four years. The Bakken unemployment rate for the 12-month period ending in November was 1.5 percent and has been relatively level since early 2013. Counties with the lowest unemployment rates include Williams at 0.9 percent, Dunn at 1.1 percent and McKenzie at 1.4 percent.

With unemployment rates so low, employers from many sectors have struggled to find workers to fill open positions. Workers laid off from oilfield jobs could help employers fill job openings in other sectors, depending on a couple of factors. Just over 26,000 workers have oilfield jobs in the Bakken, making up about 28 percent of total employment in the region. But not all of these workers are on drilling rig crews; many service over 8,600 wells already drilled in the Bakken. In addition, an unknown, but possibly large, number of drilling rig workers commute to the Bakken from other states and would likely not take another job in the region.

To the extent that there has been an impact on jobs, it is not yet reflected in the most recently available employment data. Bakken employment for October and November was over 10 percent higher than for the same period a year earlier, stronger than year-over-year growth rates from January to September. However, the overall trend in Bakken employment growth has slowed compared with a few years ago. In November 2011, year-over-year employment growth was 25 percent.

In addition, the number of job openings in the Bakken in December was 18 percent higher than a year earlier, indicating that companies continue to look for more workers despite the drop in oil prices (see related story). Statewide data for North Dakota indicate only slight growth in online job postings for the construction and extraction sector, pointing to a potential slowdown in hiring for these jobs. Total North Dakota online job postings were 21 percent higher than a year earlier. Anecdotally, news reports indicate that job service centers in the Bakken still have plenty of job openings to fill and that an influx of laid-off workers has yet to be seen.

Finally, a slowdown in the Bakken may help communities catch up on a number of infrastructure projects, such as road building and residential construction. However, lower oil prices will translate to lower tax earnings for North Dakota, which could constrain some of these projects.

Taxable sales and business establishments grew before oil price drop

It is also too early to tell the impact of the drop in oil prices on taxable sales and business establishment formation; however, before the drop in oil prices, both indicators showed gains. In the third quarter of 2014, taxable sales and purchases in North Dakota increased 5 percent compared with a year earlier. Taxable sales and purchases had plateaued from the first quarter of 2013 to the first quarter of 2014 after generally increasing since 2010 (see Chart 4).

Large chart

Sales from the oil and gas industry contributed some of the largest gains in taxable sales during recent years. Other industries that support energy production, particularly wholesale trade, have also made substantial contributions to taxable sales growth. Geographically, the largest gains in taxable sales have come from the energy production region in the western part of the state.

Bakken counties continued to add new business establishments, though the rate of increase has slowed since 2012, falling from a peak of 27 percent growth (year over year) in the first quarter of 2012 to 6 percent growth in the first quarter of 2014. Despite the slowdown in new establishment growth, the pace of increase in the Bakken area has remained much higher relative to the rest of North Dakota and Montana. About one in every five business establishments in North Dakota is now located in the Bakken region, up from about one in 10 a decade earlier.

New business establishments within the Bakken are primarily concentrated around Williams (home to the city of Williston), McKenzie (Watford City) and Stark (Dickinson) counties in North Dakota, which together accounted for about 90 percent of total establishment growth in the Bakken counties from the first quarter of 2013 to the first quarter of 2014. On the Montana side of the Bakken, almost all of the increase in business establishments over the same period was accounted for by Richland County (home of Sidney).

In addition, the number of housing units permitted in Williston, N.D., tapered in 2014 to about 1,600 units, down from a peak of over 1,800 units two years earlier. Building permits issued in 2014 declined relative to the previous year for commercial and multifamily housing projects, while construction permit counts rebounded for single-family homes.

For more data and a map of the Bakken area, see the special Bakken page.


Endnote

1North Dakota oil tends to be priced lower than WTI oil due to the relatively high costs of transporting oil out of the region. As new pipeline capacity comes on line over the next few years, transportation bottlenecks are expected to ease somewhat, potentially bringing the price of Bakken sweet crude closer to the WTI price.

Top