While the price of oil has begun to climb from its precipitous crash at the beginning of this year, the drastic impact on oil drilling activity in Montana and North Dakota has leveled off, but has not recovered.
The last time we looked at the price of oil in January, it had crashed to $48.59, a drop of nearly 60% over six months. The price has recovered slightly to $59.14 as of May 10, which is still over 40% lower than it was last June. You can click the graph at left to see the detail.
The local price of gas has followed the price of oil. After a dramatic decline at the end of 2014, gas prices have risen somewhat. The lowest price in the region as of May 10 is $2.26 at the Town Pump in Columbus, up from a low of $2.03 in January, but still much lower than the price of $2.97 in November.
No recovery in oil rig counts
But what has not recovered is oil drilling activity in the Bakken. As we explained last January, there are two components of cost in producing oil from a well: the fixed cost of finding the oil, drilling, and generating the initial output, and then the variable cost of keeping the well going over time. Fixed costs include primarily equipment costs and labor, and variable costs are mostly labor and electricity.
When an operator is making a decision in advance about whether to drill a well or not, he looks at the total of both fixed and variable costs to determine whether it is going to be profitable to drill the well. Profit over time is the difference between expected revenues and the total of fixed and variable costs.
But once the decision is made to drill a well and the well starts producing, the fixed cost is spent. From that point on, the decision about whether to keep operating the well is based on whether the revenues are greater than the variable cost of production.
While oil prices have been high enough to cover the variable cost and allow many existing wells to continue operation, there have been few new wells dug. Nationally, the oil price bust has had a tremendous negative impact on the number of oil rigs in operation. As you can see by clicking on the graph at left, the number of operating rigs has been cut in half since January.
The decline has been even greater in the Bakken. According to the Dickinson Press, North Dakota had 80 active drilling rigs as of last Friday, about 60% fewer than a year ago, when the state had 174 active drilling rigs. That number was one greater than the week before, the first weekly increase in 2015.
Don’t expect a significant increase in the number of rigs until the price reaches $80 or so. And along the Beartooth Front, the price will have to rise even higher before ECA and other operators return.
Locally, landowners trying to manage the impact of the boom-and-bust oil industry on their communities remain hard at work. They seek to regulate oil and gas drilling locally to protect not only their land and water, but the generations-old way of life in their communities.
They understand that following the cycles of boom and bust is a fool’s errand.