While
legislators in one room were getting updated on the revised revenue forecast,
just down the hall other legislators were getting an update on oil production
trends and future estimates. Today, these two topics have everything to do with
each other. Unfortunately for both areas, the budget and oil activity, there is
no crystal ball to tell lawmakers, state officials or industry leaders when
either will improve.
Director of
the Department of Mineral Resources, Lynn Helms, did provide reassurance to
members of the Interim Energy Development and Transmission Committee about the
future of oil development in North Dakota. He said he believes oil prices have
hit the bottom and will start to rebound. His reasoning is the lifting of
sanctions with Iran. He told lawmakers the world supply and demand should come
into balance by the end of 2016.
“Oil
companies are pessimistic about prices in 2016, but more optimistic in 2017,”
Helms said.
According to
Helms, there are 764 inactive wells (wells that are not pumping for various
reasons). In addition, there are close to 1,000 wells waiting on completion (drilled
but not fractured). Those incomplete
wells are a big reason why the state’s sales tax revenues have taken a big hit.
A majority of the sales tax that is collected on a well is done so after
completion. But Helms shed some light on the gloom by telling committee members
to think of that sale tax revenue as sitting in the bank.
“It’s there,
it’s just in the ground and it is in the state’s best interest, in oil
companies’ best interest and the mineral right owner’s best interest to keep it
in the bank until prices rise.”
While oil
production has not been effected by low prices yet, Helms does expect
production to drop in 2017. Currently, 1.1 million barrels of oil is produced a
day in North Dakota. He is now forecasting 900,000 barrels of oil a day in
2017. Helms described how even small
changes in price will have a big impact on rig count. If oil stays below $30,
Helms predicts 30 rigs will be operating in the state this year. If prices can
climb to $40-50, he estimates 60 rigs will be operating in 2016 and 75 rigs in
2017. While the state has seen a
dramatic decrease in rigs–going from 143 rigs in February 2015 to 44 rigs one
year later—Helms told the committee, “If prices rebound to $70 a barrel in
2017, we expect to see industry overcompensate to catch up. There could be 200
rigs back in North Dakota in 2020.”
Likewise, oil
companies are continuing to plan ahead for a future in North Dakota. Nearly
2,000 permits have been issued. That’s about how many new wells were permitted
in 2011. Helms says at the current rig rate, it would take 2.5 years to drill
those new wells.
As mentioned
earlier, the Interim Government Finance Committee also met on February 3rd to
receive the revised revenue forecast and learn more about the plan to make up
for a projected $1.074 billion revenue shortfall. State agencies have been
ordered to cut their budgets by 4.05 percent. Reserve general fund revenues,
along with nearly $500 million from the Budget Stabilization Fund, will also be
used to offset the projected shortfall.
In comparing
revenue trends, the new forecast for 2015-2017 is similar to the level
experienced during the 2011-2013 biennium.
