Pushback On Reason For Increased Production In North Dakota In October, 2015 -- December 10, 2015

This is an interesting article to look at a bit more closely.

The headline: "North Dakota Boosted Oil Output Ahead Of OPEC Meeting"

Source: Reuters, posted December 10, 2015.

The story begins:

North Dakota's oil producers boosted output in October to sell as much as possible ahead of last week's OPEC meeting, bucking an industry trend to scale back because of low crude prices.

The increase in the state, as well as parts of Texas and other U.S. oil fields, shows nationwide production may be more resilient than expected. But analysts and regulators caution that output could slip going into the new year as global supply exceeds demand.

The 13-member Organization of the Petroleum Exporting Countries failed to agree on a unified output cap at its semiannual meeting on Friday, effectively letting members pump at will. Oil prices have sunk further, bringing declines to more than 50 percent in the past year.

And then this:

"A lot of (North Dakota) operators were pretty pessimistic about the OPEC meeting, and they looked at October and November to sell oil at what may have been the high price for the next six months," Lynn Helms, head of the state's Department of Mineral Resources, told reporters on a Wednesday conference call.

The output increase appears prescient in hindsight, because prices have fallen significantly since the OPEC meeting.

North Dakota producers also were able to raise output, in part, because of new natural gas collection equipment coming online from Oneok Inc and others.

The source for the headline was Lynn Helms himself. He knows the industry better than anyone, I would assume, so I have to assume his analysis is correct. But somehow the story has the feeling of a Rudyard Kipling "just so" story, or what others might call an apocryphal story.

This is where I have problems. It begins with the headline: "North Dakota" does not sell oil, nor does the state control production (at least not in the sense the headline suggests). Individual producers in North Dakota control their own production and no one elses. One can say "Saudi Arabia increased its production" and probably be correct, but one cannot say "North Dakota increased its production...."

Second, the amount of oil sold in October/November must have been decided some months earlier. I assume most oil is sold on contract and six month contracts at that. If there's any truth to the suggestion that North Dakota operators produced more in October/November because they were concerned about the OPEC meeting seems apocryphal. These events began a year ago. One has to ask the question why production decreased at all this past summer, using the same reasoning. Oil this summer -- somewhere between $35 and $45 -- was certainly better than the $27 /bbl price we're seeing now. (Yes, I know.)

I think there's much more to it than that. Let me count the ways:

• these companies are in survival mode; they need cash flow
• these companies have contracts to make
• CBR -- railroads need cash flow, also; the harvest is over; BNSF could have significantly reduced rates to encourage shipping which has decreased significantly
• going into October/November? going into the cold winter months when fracking will be limited, and then the spring thaws limit opportunities to get out into the fields; October/November is the operators' last push before next summer
• the drillers are drilling/completing only in the very best spots in the Bakken
• each new well that is completed/fracked is very likely producing a huge halo effect; these wells are not singletons on a pad; these wells are new wells on a multi-well pad with an index well drilled years ago and primed for huge halo effect
• the flaring issue may be part of the reason; may wells were taken off-line before flaring rules relaxes; now that  the flaring rules are relaxed, some (many) of those wells were put back on line

Whether or not OPEC was part of the October production push is an interesting explanation -- something I would not have thought. When the numbers come out, we are going to see a relative huge decrease in Eagle Ford production in October/November. Some of the same drillers are in both fields; operators are "not" smarter in the Bakken than in the Eagle Ford.

Just my 2 cents worth. That and $1.98 will get you a cup of Starbucks. Tall.