An OPEC sign hangs outside the OPEC Secretariat in Vienna, Austria. (Photographer: Akos Stiller/Bloomberg)

OPEC Has a Second Shale Dilemma

(Bloomberg Opinion) -- Harold Hamm, CEO of Continental Resources Inc., has reportedly pulled out of giving a speech at OPEC’s get-together this week. Hamm has an interesting relationship with OPEC; dismissive of it one moment and calling on it to boost oil prices the next. Plus, President Donald Trump, for whom Hamm has acted as an advisor, appears somewhat displeased with those chaps in Vienna.

Whatever the reason, he could plausibly just say he’s busy. While the oil market right now has one eye on OPEC’s intrigues and the other on the Permian basin’s blockages, production in North Dakota is quietly booming.

Continental is one of the largest operators in the Bakken basin, which stretches beneath North Dakota and Montana, and up into Canada. There was a time when the Bakken generated a buzz in oil circles like the Permian does today. The oil crash changed all that. Yet even as attention, and investment, shifted south to Texas, the Bakken has been coming back:

OPEC Has a Second Shale Dilemma

The Energy Information Administration’s Drilling Productivity Report, published on Monday, shows Bakken oil production has surged by more than 300,000 barrels a day, or 32 percent, since bottoming out in late 2016 (which is when OPEC and associates decided to cut supply to support prices.) At 1.27 million barrels of oil a day, June’s output is expected to surpass the basin’s prior peak in December 2014.

The Bakken’s recovery partly reflects producers working off a backlog of drilled but uncompleted wells (or DUCs, as they’re called). Exploration and production firms can choose not to frack a well that’s already drilled when oil prices are low, in order to save money. In the depths of the crash, Bakken producers’ backlog of uncompleted wells blew out to almost two years’ worth. That has plunged to under seven months:

OPEC Has a Second Shale Dilemma

The Bakken has some of the most competitive barrels in the U.S. While breakeven prices range from around $45 a barrel up to $80 within the basin, averages are at the lower end of the cost-curve, according to estimates from Bloomberg New Energy Finance:

OPEC Has a Second Shale Dilemma

Being closer to Canada than Mexico means Bakken producers also suffer from the bottlenecks currently afflicting many of their counterparts in the Permian basin. The regional pricing benchmark at Clearbrook, Minnesota, trades $6 below Louisiana Light Sweet at the Gulf Coast. Even so, that’s still around $69 a barrel, making much of the Bakken economic for frackers. The opening of the Dakota Access pipeline last summer eased the region’s own major bottleneck — putting pressure on Nymex WTI oil prices in the process — and there is also lots of spare rail capacity to send barrels to refineries on the East and West Coasts too.

Yet there is a hurdle in the form of natural gas. Production of this has surged along with oil; and, as you might imagine, the local market is pretty limited. About 15 percent of North Dakota’s natural gas production was burned off (or “flared”) in April, the latest official data available. That’s already at the limit of what regulators allow, and the cap drops to 12 percent in November (and 9 percent by late 2020.) Meanwhile, production keeps going up as long as oil prices encourage more fracking:

OPEC Has a Second Shale Dilemma

Even so, this is North Dakota we’re talking about, not California. Companies such as Oneok Inc. are building new processing capacity to take higher volumes of natural gas. More importantly, state regulators voted in late April to effectively loosen the regulations via several tweaks — without changing the overall cap levels - such as extending the exemption period on flaring rules from two weeks to two months. Score one for the oil lobby there. The upshot is that the recovery in oil output will likely keep going, absent a big drop in prices.

This isn’t the Permian, of course. Remarkably, though, this region produces more than 1 million barrels a day, has been growing at 15 to 20 percent year over year, and yet is largely considered old news. It now produces more oil at less than $70 a barrel than it did when triple-digit prices prevailed. That’s something for OPEC to ponder this week, even if Hamm isn’t there to talk them through it.

©2018 Bloomberg L.P.