Oil storage may hit critical in 2 months

BISMARCK -- Based upon the dwindling number of operational rigs, North Dakota oil workers could face 1,000 to 1,200 more layoffs as a national storage shortage threatens an already low crude oil price, according to North Dakota's top oil regulator.

“I think we’ve seen the worst of it,” Lynn Helms, director of the Department of Mineral Resources, said of layoffs.

As stockpiles of cheap oil -- waiting for better prices -- grow at storage facilities around the U.S., a storage shortage is mounting. North Dakota oil industry representatives predict the oversupply will have substantial effects on the workforce and the economy in the state.

Ron Ness, president of the North Dakota Petroleum Council, maintains that the financial strength of every company is going to be tested in the coming months.

State oil production declined 3 percent in January to about 1.2 million barrels per day, Helms reported Thursday. He said the production decline is coming as wells age and new wells are not replacing them.

Ness said it won’t be a freefall but production declines likely will persist. Companies need to complete 115 wells a month to hold production steady, according to Helms, who expects production to decline and rise in a cycle – three months of decline followed by a surge as unfinished wells are brought online.

Glut of oil

Despite the decline in North Dakota, oil production is still too high. Helms said a study in the Oil & Gas Journal revealed the U.S. is overproducing crude oil by 1 million barrels per day. Meanwhile, the Energy Information Administration has reported that U.S. storage capacity is 63 percent full, compared to 48 percent a year ago. Continuing at the current production rate will fill storage tanks in two months.

Ness said about 60 percent of Bakken crude is shipped by rail and is delivered directly to a refinery. Storage issues are going to hit the remaining 40 to 50 percent of North Dakota oil being delivered by pipeline, according to Helms.

North Dakota crude is already discounted $10 to $20 per barrel because of transportation costs. That discount could increase to as much as $30 per barrel if it is sent to the already oversupplied Midwest via pipeline and has to be stored.

This also will likely put more pressure on a stressed rail system to ship more crude, as companies try to avoid that additional storage cost discount, according to Helms.

There are 112 rigs drilling in the state -- a count that has dropped by 70 rigs in three months, said Helms, adding that companies have told him 10 to 12 more rigs are still on the chopping block and, with them, the men that run them.

Helms said Thursday that operators are postponing well completions to avoid giving up their high initial production when profits are low.

In January, companies completed 47 wells, compared to 183 in December. An estimated 825 wells have been drilled and left incomplete.

“The best storage place for companies is in the ground,” Ness said.

Helms said companies will complete most of those unfinished wells by the end of the year, with 125 of them being completed in June to meet state regulations that wells are finished one year after being drilled, according to Helms.

How long a company can continue to drill and cap will vary from one to the next, according to Ness.

Cost reduction

Smaller companies, especially, are being pressed to reduce costs.

“You start looking at travel, overtime, everything is on the table,” said Ness, pointing out that workers have already seen declines in the number of hours and days they work. Workers with jobs closely related to the rigs and drilling have experienced more layoffs as companies try to cut costs.

Ness said it will be the best crews in the highest-producing areas that will be kept on. Helms said there will be demand for good workers on the fracking side. Rig hands who are good workers could make the switch.

“The fracking folks are going to want them,” Helms said.

Some of those switches may already be happening. Despite cutbacks, oil and gas industry unemployment claims have remained relatively stable, said Darren Brostrom, director of unemployment insurance for North Dakota Job Service.

Seasonal layoffs are typical for industries such as construction and oil and gas. This year, about 1,800 more people than average have filed unemployment claims since Oct. 1, compared to the same time period for the past three years. Of those claims, the oil and gas industry makes up about 35 to 55 percent weekly.

Brostrom said oil and gas claim numbers are about the same this year as they were in years when prices were high. Whether all of those people are able to return to work this spring remains to be seen.

While job openings are down, a job fair in Williston this week still showed some demand remains, Brostrom said. According to Job Service’s online job openings report for February, there were 363 fewer job openings in the construction and extraction fields compared to a year ago, a 23.4 percent decrease. There were 462 fewer transportation jobs, a 20.8 percent decrease.