Boom's End? Saudis Sock It to North Dakota

Not everywhere in North Dakota adjacent to the Bakken Formation can be a boomtown.

Only a few weeks ago--it feels like eternities now--we talked about how the Saudi Arabian government convinced other OPEC nations not to lower their cartel's output in response to falling oil prices. Rather than take their collective foot off the pedal of production, it signaled that it would be steady going as far as output was concerned. The result has been a further fall in oil prices. In the space of less than half a year, they are down over 50%.

Although it's still early going, some of Saudi Arabia's intended targets--US shale produeers--are feeling the pinch. In particular, producers in marginal sites are in trouble given their higher operating expenses in extracting oil and gas. That is, not enough is extracted there to make up for what it costs to perform hydraulic fracturing at current market prices. Anecdotally, the number of oil rigs operating in these sites in North Dakota--second after Texas in terms of shale production--is noticeably declining:

Only five oil rigs were drilling in Divide County this week, down from 12 last August, according to state data. While those only account for a handful of the more than 162 rigs still drilling in North Dakota, the drop has been much steeper than elsewhere in the state and could signal trouble across the No. 2 U.S. oil producer behind Texas if prices continue to slide.

A "Coming Soon" sign still marks the spot on a patch of fallow farmland just outside of Crosby, the county seat, where a 200-person "man camp" to house oil workers was set to be built. Late last fall, Timberline Construction Group, an Alabama-based contractor, put the project on hold after an oil company pulled out of a housing contract. In downtown Crosby, restaurants and bars report fewer rig workers, and foot traffic has noticeably slowed. Two businesses have been put up for sale.

To be sure, there are more profitable sites that can probably wait out the current decline in oil prices. That said, those operating outside of these sweet spots are in trouble since they only become economic to extract at rather higher prices. Consider the aforementioned Divide Country:

That's partly because the state's Bakken shale formation is geologically immature throughout most of Divide County, only 40 feet in width here versus 60 feet in richer counties further south, according to state records. "Divide County is a little bit on the edge," said Julie LeFever of the North Dakota Geological Survey. "Each part of the Bakken has its own little idiosyncrasies."

The four counties immediately south - Williams, McKenzie, Dunn and Mountrail - now produce 90 percent of the state's oil, and Divide was mostly left for smaller companies willing to take the risk when oil prices were riding near $100 a barrel. At under $50 a barrel, the economics change dramatically. The breakeven oil price, the price level needed to drill a new well, for Divide County is $85 a barrel, according to the state; for Williams, it's just $37. The difference is due to geology, among other factors.

To paraphrase another saying, is geology destiny? If it's mostly smaller, less-resourced oil concerns operating in these marginal sites, then they will be first to go. Not only do they have fewer financial resources to weather a period of sustained power prices as smaller companies, but they also have higher costs of operation in extraction. That said, it will take more to discomfort those with more productive sites, so the Saudis will have to wait and see if that comes to pass. The first wave of smaller companies falling by the wayside may not have much effect on oil prices, but if they can get to the ones operating at the heart of Bakken, who knows if the Saudi strategy can actually work?

1/17 UPDATE: The EIA provides further numerical support for the title's contention: from a recent peak of 1,609 rigs drilling for oil in October 2014 in the US, they are now down to 1,366. As for Bakken in North Dakota and Eagle Ford in Texas...

The total number of oil rigs working in the Williston basin, which includes the Bakken shale of North Dakota, has dropped by 34, or 17 per cent, since October, while the number in the Eagle Ford shale of south Texas has dropped by 32, or 16 per cent. The number in the Permian basin of west Texas is down 81 rigs, or 14 per cent.

It's game on: Are you tough enough to withstand the House of Saud, Yanks?