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N.D. oil regulator says lower oil prices spell gloom, not doom

BISMARCK — North Dakota’s top oil regulator told lawmakers crafting the state’s budget Thursday that lower crude prices are spelling gloom but not doom for the nation’s second-leading oil producer.

Department of Mineral Resources Director Lynn Helms said many things about the Bakken oil play haven’t changed. It still contains close to 20 billion barrels of recoverable oil, with another 60,000 wells expected to be drilled during a 25-year development plan, he told the House Appropriations Committee.

“Yeah, there’s gloom, but there’s no doom,” Helms said.

Lawmakers face a challenge in trying to figure out how much revenue the state will have to work with for the 2015-17 budget and beyond, said Rep. Jeff Delzer, R-Underwood, the committee’s chairman.

“The ongoing revenue is something we have to watch as much as the oil revenue,” he said. “There certainly will be a lot of discussion about that, where it ends up. But everybody is cognizant about the value of the oil industry.”

Helms said there will be “a very different picture” during the next two years.

Crude oil prices that have dropped by over half since July to their lowest level in five years are already taking their toll. North Dakota’s drilling rig count is down 30 since September, to 166 as of Thursday, he said, and could drop to 150 by July 1 and to as low as 125 rigs by the end of the year if depressed oil prices persist.

At least 140 rigs are needed to maintain the 1.2 million barrels pumped per day in October, the most recent figure available, Helms said.

“It’s a gloomy number in terms of revenue forecasts when you couple it with that production drop,” he said.

Helms said it’s “almost certain” that lower oil prices in January will trigger the smaller of two tax exemptions for oil wells in the state noting the benchmark price of West Texas Intermediate crude has been under the $55 trigger price since Dec. 26.

The state tax commissioner’s office estimates that if the incentive is triggered Feb. 1 and remains in effect through June 30 — when it expires in state law — it will cost the state $120 million to $205 million in lost revenue. A larger exemption, triggered if the price of West Texas Intermediate crude averages less than $52.59 for five consecutive months, would result in $5.4 billion less collected during the next biennium, based on the same forecast.

Gov. Jack Dalrymple’s budget recommendation assumes oil prices will climb from $74 to $82 during the 2015-17 biennium and that production will reach 1.4 million barrels per day.

“But the current picture is flat-lined, and it’s also built on $70-plus oil, and that’s not where we are,” Helms said.

Dalrymple has stressed that only 4 percent of general fund revenues come from oil taxes, with the rest goes to special reserve funds, and that he’s committed to ongoing spending not exceeding ongoing revenues.

About 700 wells have been drilled but not completed in North Dakota, and signs are “that they’re in no hurry to frack these wells and bring them on at $40 oil,” Helms said, meaning they also produce no tax revenue.

But he said it’s not only prices affecting production. Operators have delayed well completions to meet the state’s new natural gas capture goals that aim to reduce flaring. They also have to adjust to oil conditioning standards taking effect April 1, to make Bakken crude safer for rail transport. Combined, those rules could cut production by 23,000 barrels per day, he said.

Rep. Roscoe Streyle, R-Minot, said he thinks the state has “way overshot” regulations on the oil industry, affecting its ability to compete in the world market.

“I think we’re hammering these guys,” he said.

North Dakota Petroleum Council President Ron Ness agreed.

“Let’s stop kicking the goose here for a while, because the goose is about to go lay down somewhere,” he said.

Streyle asked if delays were being considered for some regulations.

“We have absolutely started having those discussions,” Helms said.

Ness said the oil price slump could last six months to two years, and the big question is what will be the “new normal” for prices.

House Majority Leader Al Carlson, R-Fargo, said the good news is the state still has one of the finest oil plays in the world.

“We still collect a lot of tax on a lot of oil, and we will survive,” he said.

Mike Nowatzki

Mike Nowatzki reports for Forum News Service. He can be reached at (701) 255-5607.