Some North Dakota Shale Producers Cushioned From Oil-Crash Pain

(Bloomberg) -- Although North Dakota’s Bakken shale region won’t be spared in the oil-price crash, some producers are cushioned from its worst effects.

“A lot of our operators have the majority of their crude oil hedged for 2020,” said Lynn Helms, director of the Department of Mineral Resources. “They are still going to be getting $50 or $55 a barrel. That’s going to help cushion us through this year, but as far as I know there are no hedges going out to 2021.”

While many U.S. shale producers tend to hedge their future production, some types of insurance bought ahead of the recent downturn have offered better protection. Hess Corp., for example, used put options -- which lock in sales at a set level even if prices fall -- on U.S. crude and Brent benchmarks at $55 and $60 respectively, according to company records from the end of last year. On Tuesday, the company said it had 80% of its oil production hedged for the year.

The combination of winter weather and the start of the coronavirus pushed down North Dakota oil production by 3.2% in January to 1.43 million barrels a day, according to a state report on Tuesday.

Production has held above the 1 million-a-day mark since January 2017, and it’s highly unlikely that it will drop below that milestone, according to Helms. “We’ve looked at a large number of price scenarios and none of them take us below 1 million barrels a day in the next four or five years,” he said in a webinar.

See also: Oil Output in the Heart of U.S. Shale Is Still (Sort of) Rising

The massive hit to oil demand from the spreading coronavirus pandemic and the price war between Saudi Arabia and Russia have already sent prices tumbling to their lowest levels since 2016. West Texas Intermediate for April closed on Tuesday at $26.95 a barrel in New York, while prices were even lower in the Bakken.

“Those numbers don’t in any way, shape or form reflect break-even prices for any but the core, core area of the Bakken,” according to Helms.

Operators are already scaling back, with Hess announcing plans on Tuesday to cut the number of drilling rigs in the Bakken to one from six. And more will follow as hiring slows and drillers seek to protect their bottom lines.

During the last downturn in early 2015, the number of drilling rigs in the state collapsed over time to 27 from 185, he said. “We are looking at similar kinds of numbers probably at the bottom of the cycle,” he said, though the starting point is lower this time around given the rig count currently stands at 56.

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