Another Company Cuts Back Spending, Drilling In North Dakota Due To Oil Prices

More ugly news for a state that has an aggressive spending budget built on oil tax revenues, despite what Governor Jack Dalrymple has claimed.

Two days ago Oasis Petroleum announced that they were cutting back their drilling operations in the Bakken region from 16 planned rigs to 6 and that they’d be cutting their 2015 capital expenditures in half.

Now another company – Emerald Oil – is also announcing cuts, and oil prices are the reason.

“Management has decided to further reduce the 2015 development program given the current commodity price environment,” a statement posted on the company’s website reads. “Emerald released two of three operated rigs in the last two weeks. The updated 2015 production and CAPEX guidance is now based upon a variable one rig program in 2015.”

The company is also cutting its budget for the state by about $150 million, from $225 million down to $72 million.

“In the next few months, everyone in the oil market will be intently watching the volume of new drilling activity in the shale plays of the United States for any signs of a slowdown in response to the fall in oil prices,” Reuters columnist John Kemp wrote recently.

Emerald Oil is a smaller producer, and you’d expect them to be the first squeezed by falling prices. Oasis Petroleum is much larger,though, and you wonder if these aren’t the first dominos to fall.

Of course, a surge in oil prices would put all to rights again. “As Emerald has a backlog of permits in hand, additional wells will be added to the 2015 development schedule if commodity prices improve,” the company’s press release states.

But with the state piling on more regulations – a flaring crackdown earlier this year, and new requirements for conditioning oil this month – and lawmakers raising taxes on oil production in the last session you have to wonder how much less resilient to falling prices we’ve made these producers.

I wonder now if lawmakers wish they’d been more accepting of calls to reform the state’s oil tax during the 2011 and 2013 legislative sessions? The oil industry was willing to get rid of a “trigger” in the code which cut their taxes in half if oil prices fell below about $56 per barrel in exchange for a lower top rate (they pay an effective rate of about 11 percent now).

It seems unlikely that the oil industry would make that deal in this session, with prices calling and the possibility of a “trigger” is very real. Which would be a disaster for the state, costing a huge amount of revenue in the face of an aggressive spending agenda set by Dalrymple, but good for the industry.

Meanwhile, news yesterday evening was that the state saw a 46 percent decline in tax revenues in the 3rd quarter of this year, compared to the previous year. That’s because of oil prices which have been falling since June.