BISMARCK — When the biggest personalities in North Dakota oil convened a week ago in Watford City for the industry’s annual conference, they had been knocked down a peg from their stature of nearly a decade.

Since making an initial rebound from last year’s pandemic price collapse, North Dakota oil production has held more or less stagnant for the last year. In July, a month in which state leaders had hoped to see the benefits of high oil prices, North Dakota’s output actually dropped by a sizable 5%. In the same month the state lost its status as the country’s second leading oil producer — a position it had held since 2012 — falling behind a booming industry in New Mexico.

The July production numbers, the most recent figures available, prompted a blunt reaction from the state’s top oil and gas regulator, Lynn Helms, during a media briefing earlier this month: “Uff da.”

North Dakota hit its all-time peak of more than 1.5 million barrels of daily production in November of 2019, just months before COVID-19 helped tank oil prices, and the state’s performance has looked lackluster since initially regaining its footing late last year. Though industry analysts and advocates are predicting production increases in 2022, they also note that shifting environmental priorities on Wall Street could put North Dakota at a disadvantage to some other oil and gas states in the coming years.

Ron Ness, president of the North Dakota Petroleum Council, said that while the COVID-19 pandemic dealt a blow to oil production everywhere, the effects may have been more severe for the Bakken. He noted that persisting uncertainty around the legal status of the Dakota Access Pipeline, along with the Bakken’s distance to market, has given operators more reservation about ramping up their output here. And though Ness predicted a change in the trend lines early next year, he also underscored the importance of North Dakota holding its rank against the competition and noted the potential spillover consequences to other businesses, like hospitality.

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Helms struck a similar chord before the industry audience in Watford City last week, comparing the competition with New Mexico to a horse race. As long as North Dakota can hold its spot in the top three it will remain "in the money" in the eyes of investors, Helms said, but he added an appeal for companies to redouble their commitments in the Bakken.

"As policymakers and as capitalists, we never need to take any of this for granted," he said. "Never, never, never take the money that's coming out of this industry and into this industry for granted."

Stagnation and short-term concerns

U.S. oil prices have soared over the last year, hitting $75 a barrel on Monday, Sept. 27, nearly double the prices from this time a year ago. But outputs have held well below the clip that observers are used to seeing under such favorable conditions.

As of Monday, North Dakota had just 26 active drilling rigs, about half the number that Helms has said is needed to sustain growth. Helms has attributed July’s surprising drop in oil production to planned, maintenance-related outages at five different natural gas processing facilities that month, but he has also pointed to labor shortages and lacking capital as underlying causes for the stagnation over the last year.

Even in Texas, which has long been the national leader in oil production, companies have shown smaller appetites for pumping oil since the pandemic price collapse, putting their money instead toward paying down debt and boosting cash returns for shareholders. But analysts said the impacts of recent industry frugality may be having a more pronounced impact in North Dakota.

Artem Abramov, head of shale research at the consultancy Rystad Energy, said that, among significant U.S. oil basins, the Bakken has had one of the lowest reinvestment rates over the last year, about 15% to 20% below average, meaning that many companies are simply maintaining production levels in North Dakota even as they expand their footprints in some other regions.

At the same time, circumstances have been much more favorable to the industry of North Dakota’s recent rival, New Mexico. The southwestern state’s oil fields are part of the greater Permian Basin, where robust natural gas infrastructure and proximity to Gulf Coast markets have made the region the hottest oil play in the country. Notably, Abramov said President Joe Biden’s administration precipitated a land rush in New Mexico, which is majority federal lands, as oil companies looked to stake leases before the Democratic White House curtailed federal drilling activity.

The building movement to combat climate change with a transition away from fossil fuels has forced an existential crisis on some of the largest oil companies in the world. And while analysts said the consequences of the energy transition for oil output in North Dakota are still distant, they noted that shifting priorities among investors toward lower-emissions energy production pose an immediate challenge to the Bakken.

Bakken producers historically have struggled to control environmentally harmful natural gas flaring. Marianne Kah, a senior research scholar at the University of Columbia's Center for Global Energy Policy, said the comparative challenge of curbing flaring in North Dakota probably gives an advantage to the Permian in the eyes of environmentally conscious investors.

Regulators in New Mexico have significantly more stringent requirements for gas flaring than North Dakota, Kah noted, while a Texas coalition of oil and gas companies earlier this year committed to end the practice of routine flaring by 2030. Such aggressive steps would be much harder to pull off in North Dakota, which has less infrastructure for capturing natural gas, Kah said, a difference that could become an issue when it comes to attracting capital.

"It's certainly significant for some companies already,” Kah said of these environmental concerns. “And investors are making it more of a permanent factor.”

Recent industry shake-ups could foreshadow the implications of these investor forces for North Dakota in the years ahead. Just last week, the oil titan ConocoPhillips, long a mainstay of the Bakken, announced a $9.5 billion acquisition of Shell’s assets in Texas — a massive move that Abramov said suggests the company may be looking to exit North Dakota soon.

In an interview, Helms acknowledged that the ConocoPhillips buy could be an indicator that the company is eyeing a cleaner emissions profile in Texas and expressed concern over the implications of the acquisition for North Dakota production. Like Ness, the regulator predicted incremental production increases in North Dakota next year, but he added that a potential shift from a major player like ConocoPhillips raises new questions about where that output will come from.

“There are some serious headwinds,” Helms said. “And we’re just gonna have to figure out how to handle that.”

Readers can reach reporter Adam Willis, a Report for America corps member, awillis@forumcomm.com.