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  • Oil Outlook Q&A with Petroleum Council President and CEO, Ron Ness

    Oil Outlook Q&A with Petroleum Council President and CEO, Ron Ness

    North Dakota is facing a pandemic that is crippling to the local and national economy. Congress is responding with unprecedented measures including large appropriations for programs to try and provide businesses and the general public relief. One significant challenge to our economy, that is not getting a lot of press is the decline in oil prices. What’s unique about this issue is there are outside factors, along with the pandemic, that are causing this decline. In a recent Q&A with Senator Hoeven he stated: 
     

    “I’ve spoken repeatedly with the Saudi Ambassador to the U.S. and the Saudi Energy Minister, stressing the need to stop the oil price war and work with the U.S. and community of nations to combat the impacts of the COVID-19 pandemic.”
     
    Negotiations on this price war have made headway recently with an agreement by Russia, Saudi and other oil-producing nations to cut oil production. The decline in oil prices is significant to North Dakota’s economy, considering how reliant we are on oil tax revenue to balance the state’s budget and the thousands of jobs this industry creates. GNDC had the opportunity to ask questions to Ron Ness, the President and CEO of the North Dakota Petroleum Council to help understand this important issue.       

    What is the current landscape of the oil industry in North Dakota?  
    Ness: The oil industry in North Dakota has been dramatically impacted by world markets, including the unprecedented decrease in demand for oil due to the COVID-19 pandemic, as well as the oversupply of crude oil that has resulted in the collapse of oil prices. The economics of the Bakken simply don’t work if the price is below $30 a barrel, Bakken producers already take a discount $14-$15 dollars per barrel to get their oil to market. Oil producers will react in their own unique ways to get through a downturn, most will stop or reduce their expenditures on new wells, some will shut-in or idle their producing wells, and many will continue to produce their existing wells to generate cash flow and fulfill their contractual obligations. We anticipate a slow recovery on the price of oil. World markets are flush with oil because of the technology we’ve developed in North Dakota. However, the Bakken is still the best place in North America to invest a dollar in oil exploration, when the positive economics return, the Bakken will be among the first areas to recover.
     
    What external forces are causing this downturn?  
    Supply and demand impact commodity markets. Agricultural commodities follow the price of oil, and our state, economy and the state budget rely on oil prices staying above $45 a barrel. World demand for oil is down 30 million barrels per day, this will continue until we get past the COVID-19 crisis and get the economy moving forward. Until then, we should be searching for every opportunity to reduce costs on business and seek financial support to get our businesses, industry, and workforce through this challenge.
     
    What effect is this having on North Dakota’s oil industry?
    The effect of $20 oil has been fast and dramatic. The State of North Dakota estimates that in three weeks the drilling rig count has dropped 35%, around 4,600 producing oil wells have been shut-in (24%), and daily oil production has declined by 260,000 barrels per day. I would anticipate that our workforce has likely seen similar declines. This will not change quickly as we anticipate the impacts and reductions to continue through the rest of the 2nd quarter.
     
    North Dakota is heavily dependent on oil tax revenues, what does this mean for state and local budgets? 
    I think most North Dakotans recognize that 50% of the tax revenues collected by the State of North Dakota come from the combined 10% oil production and extraction taxes. What most folks don’t realize is how dependent our general fund has become on sales tax collections from the drilling and completion of new Bakken wells. Sales tax is applied to the pipe used in the well and the sand used in the completion along with all the other components used to drill and complete a well. This can amount to approximately $250,000 of sales tax per new well drilled. In 2019, the oil industry drilled and completed around 100 wells per month, that’s $25 million per month in sales tax collections. If the industry drops the drilling rigs and completion crews by 50% to 70% for the next 18 months, that’s a tremendous fiscal impact to our state’s general fund. As a state, we must find a way to diversify tax revenues and reduce reliance on oil.
     
    What are the short and long term outlook for the oil industry in North Dakota? 
    The short-term impacts of a price collapse like this are severe, the length of the depressed oil market will dictate the long-term impacts and the time it takes to recover. The long-term outlook in the Bakken is still strong. I suspect the industry will look different post-Covid-19 recovery. This reaffirms that North Dakota is playing on the world stage and our energy and agriculture resources must be able to compete globally. The economics of the Bakken will change forever, and we must become a low-cost producer in order to tackle the swings of the market. Research, technology, skilled workforce and common-sense government regulations will all play an even more critical role going forward.
     
    The key to recovery for the Bakken is access to financial capital for the industry via banks and other institutions, ensuring the banks have the backing and support of the federal or state government to assist their business customers through this downturn is critical. The Bakken will rebound and we must have a strong service sector with a trained workforce that’s ready to activate when the time comes to get back to work.