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North Dakota Oil Output Slips but Stays Above 1M Barrels

Nilanjan Choudhury
Comtech Telecommunications (CMTL) closed the most recent trading day at $26.47, moving +1.26% from the previous trading session.

As per North Dakota’s oil regulator, the state’s daily crude output fell 1.3% in December after climbing 1.1% in the previous month. The North Dakota Department of Mineral Resources’ ("DMR") latest data said that oil production in December averaged 1,181,319 barrels a day, down 15,657 barrels a day from November.

With crude, natural gas output came down too – from November’s record 2,096,440 thousand cubic feet per day to 2,081,522 thousand cubic feet per day. North Dakota’s total number of producing wells numbered 14,293 at the end of December, again down marginally from the previous month’s all-time high of 14,338.

While the slight drop in oil activity – primarily attributed to winter weather – is the first month-over-month production decrease since July, daily output remained above 1 million barrels for the eleventh month in a row. Therefore, notwithstanding the temporary blip, the newest numbers confirm the resurgence in volumes extracted from North Dakota, centered on the Bakken Shale formation.

Rig Count Clawing Back Steadily

Some 52 drilling rigs were active in the state in December. The all-time low of 27 was set in May 2016, while a year ago, North Dakota had just 40 rigs operating. A closely watched yardstick of North Dakota oil industry's strength, the year-over-year improvement in the number of units searching for oil and gas in the region indicates essentially rebounding drilling activities and production. However, the rig count is still down considerably from the peak of May 2012 when North Dakota had 218 units drilling.

Shale Industry Adjusting to New Oil Reality

More rigs in operation and stable production not only confirms the positive developments for the state of North Dakota, but also points to the rising flood of U.S. shale-driven production.

Now at a financial equilibrium, the shale firms are putting more rigs and employees back to work. Throughout the downturn, producers (in North Dakota and particularly the Permian Basin in Texas) worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques.

With these efforts, many upstream companies have repositioned themselves to adapt to the new $50-$60 oil reality and even thrive at those prices. In other words, while OPEC's moves to trim output and rebalance the demand-supply situation has stabilized the market to a large extent, in the process it has incentivized shale drillers to churn out more.

What Lies Ahead?

The U.S. West Texas Intermediate (WTI) benchmark hit a more than three-year high of around $66 recently. Also, we are confident that improving fundamentals have probably put a floor under crude prices for the time being. While we do not rule out chances for short-term pullbacks on oversupply concerns and a stronger U.S. dollar, we remain extremely confident of a bull run in the near future.

In this context, the steady recovery in North Dakota’s production bode well for the region. With oil prices likely to head higher, the monthly output in the second-largest oil producing state after Texas is expected to stay above the psychologically important one million barrel a day mark for the time being.

Dakota Access Pipeline Set to Increase Production Further

Apart from the strength in crude prices, there is another factor that might speed up Bakken output growth – the 1,100-mile-long Dakota Access Pipeline.

Making good on his campaign promises to rev up infrastructure spending, President Trump ignored bitter opposition from environmental activists and signed executive order to smooth the way for Energy Transfer Partners’ ETP $3.7 billion Dakota Access Pipeline just a few days into his new Administration. As a result, disregarding the censure from environmental groups and the Standing Rock Sioux Tribe, the sponsor brought the controversial conduit online in early June 2017.

With the project’s arrival, operators have scrambled to use the Dakota Access Pipeline to send a major portion of their product to market. In fact, around 787 of oil shipments out of North Dakota are now being carried by pipelines, with the costly railroad share dropping from over 24% in the early part of 2017 to less than 10%.

Market players believe that the pipeline has helped in bettering the region’s drilling economics by lowering transportation costs for operators. Set to carry about 520,000 barrels of oil daily, or more than 50% of North Dakota’s output, the commencement of the Dakota Access Pipeline has bridged the gap between Bakken players and producers in other U.S. oil producing areas like the Permian Basin.

The geographically constrained Bakken Shale's crude has now better access to Gulf and East Coast refineries and also reaches international markets. As expected, the pipeline, where energy majors like Phillips 66 PSX, Enbridge Inc. ENB and Marathon Petroleum Corporation MPC have invested, has helped to improve the region’s drilling economics by lowering transportation costs for operators and benefit the state financially.

Products from companies like Continental Resources, Inc. CLR,  and Hess Corporation HES were among the first to reach the international markets (China and Netherlands), with the help of Dakota Access.

Overall, rebounding oil prices, together with the start of the Dakota Access Pipeline, are expected to support further increase in Bakken output by providing the companies a chance to push their produce outward at a lower cost.

With the current operators planning to put more rigs to work in the second and third quarters of 2018 amid a conducive oil pricing environment, the state’s output is expected to break the all-time high record of 1,227,483 barrels/day sometime in the next few months.

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