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North Dakota Oil Production Slips but Set for 2018 Milestone

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As per North Dakota’s oil regulator, the state’s daily crude output fell 0.4% in February after edging down 0.3% in the previous month. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in February averaged 1,174,769 barrels a day, down 4,795 barrels a day from January.

But unlike crude, natural gas output went up – from January’s 2,071,820 thousand cubic feet per day to 2,102,266 thousand cubic feet per day – a new all-time high. As operators scramble to the core areas of the Bakken, wells here tend to produce more gas along with crude (present gas flare rate of around 15%).

Meanwhile, North Dakota’s total number of producing wells numbered 14,327 at the end of February, essentially unchanged from the previous month.

While the slight drop in oil activity – primarily attributed to cold weather – is the third month-over-month production decrease in a row, the decline was much smaller than anticipated. Moreover, daily output remained above 1 million barrels for the thirteenth month.

Therefore, notwithstanding the temporary blip, the newest numbers confirm the resurgence in volumes extracted from North Dakota, centered on the Bakken Shale formation.

Steady Rise in Rig Count

Some 57 drilling rigs were active in the state in February, up one from the January average. The drilling rig count increased to 59 in March and climbed further to tally 60 per the latest count. The all-time low of 27 was set in May 2016, while a year ago, North Dakota had just 39 rigs operating.

A closely watched yardstick of North Dakota oil industry's strength, the improvement in the number of units searching for oil and gas in the region indicates rebounding drilling activities and production. Going by the outlook of crude producers, seven to ten more rigs are likely to join the fleet by the end of this year.

Though the current rig count is still down considerably from the peak of May 2012 when North Dakota had 218 units drilling, one must note that sophisticated drilling rigs have enabled producers to get more oil out of each well. In other words, modern rigs have helped boost the per-unit output.

Shale Industry Adjusts to the New 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.

Is the Oil Crisis Over?

The U.S. West Texas Intermediate benchmark hit a more than three-year high of around $68.5 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 an extended period of gains 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: The Bakken Game-Changer

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 - Free Report) $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 – carrying a Zacks Rank #3 (Hold) – brought the controversial conduit online in early June 2017. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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 78% 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 little over 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 - Free Report) , Enbridge Inc. (ENB - Free Report) and Marathon Petroleum Corp. (MPC - Free Report) 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 - Free Report) , and Hess Corp. (HES - Free Report) were among the first to reach the international markets (China and Netherlands), with the help of Dakota Access.

While there are apprehensions that growing North Dakota production could outpace the pipeline capacity again sometime next year leading to widening discount for the regional crude, current prices continue to exceed breakeven costs by around $30 per barrel.

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.

In fact, Lynn Helms – the director of DMR – feels that a conducive oil pricing environment is likely push the state’s output beyond the all-time high of 1,227,483 barrels/day sometime by mid-2018, eventually hitting 1.3 million barrels by the end of the year.

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