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Coverage of energy that moves beyond polarized arguments and emotional debate to explore the points of tension, the tradeoffs and opportunities, and the very human consequences of energy policy, production, use and innovation.Inside Energy is a collaboration of seven public media outlets in the nation's energy epicenter: Colorado, Wyoming and North Dakota.

In The North Dakotan Bakken, Size Matters When Oil Prices Fall

Emily Carpeaux
/
Inside Energy
A drilling rig outside Watford City, North Dakota, in December 2014.

Conventional wisdom holds that the crude oil price drop is great news for consumers and terrible for oil companies. But not all oil companies -- or oil fields -- are created equal. When oil prices drop, size and location matter.

Emerald Oil, a small Denver-based oil and gas company that only operates in the Bakken shale of North Dakota, has about 50 wells. That's miniscule compared to giant oil companies. Small operations like Emerald are likely to feel the impact of dropping oil prices first.

Niles Hushka, CEO of KLJ, an engineering firm in Bismarck, says it is harder for smaller firms to quickly get loans and additional financing. With fewer wells, they also have less money coming in to ride out tough times. Companies in North Dakota's Bakken need a lot of money to keep drilling. New wells can cost up to $10 million each.

Another factor that makes smaller companies more vulnerable is a lack of geographic diversity. Larger companies, Hushka says, "will have resources that are spread throughout a number of oil plays and therefore they're much better protected" than small companies who may only have wells in the Bakken.

Then there's the matter of moving that oil around.

North Dakota oil companies have to pay much higher transportation costs than companies in Texas or Oklahoma because they are farther from Gulf Coast refineries. They transport much of their oil by train, which is costlier than pipelines. The price per barrel doesn't reflect that cost, so when you hear that oil has dropped to $50 per barrel, oil companies in North Dakota are only getting about $37.

Geography within the Bakken matters too, says Niles Hushka.

"If you're in one of North Dakota's hot spots, you've got a great big smile on your face," he says.

That's because in the heart of the Bakken, like North Dakota's McKenzie or Dunn Counties, it's possible to drill new wells and still break even with prices in the low $30s. In fact, that's where most of the drilling rigs have moved. But in the more marginal areas, like Divide County, where operating costs are higher and wells don't produce as much oil, it's harder to justify the cost of drilling a new well.

As a small company, Emerald Oil can't afford to drill a ton of new wells. That's because a lot of oil gets produced in a well's first two to six months, so Emerald needs that peak production to come when prices are higher, at least over $85 per barrel.

They'll still drill a few new wells in order to hang onto their mineral leases in North Dakota. Companies have three years to drill a well before their mineral lease expires, assuming their lease is with a private mineral rights owner and not the government.

Other small companies are stopping entirely.

Butch Butler, president of Colorado-based oil company Resource Drilling - which is even smaller than Emerald - jokes that he is the company's landman, geologist, drilling engineer and operations engineer. Whatever else needs to be done.

Butler has just one well in North Dakota, and a few months ago, the plan was to drill another two. When prices dropped, Butler put that plan on hold. Butler's been in the business long enough to have acquired a gallows humor about oil prices. He joked that things were bad, but he wasn't quote "slitting his wrists" yet.

"I've been in this business 38 years," he says, "and truly most of that time has been not so good."

He's come to expect dramatic swings and slides, so he doesn't seem too fazed by the recent price drop. It's a good attitude for an oilman to have.

Inside Energy is a public media collaboration, based in Colorado, Wyoming and North Dakota, focusing on the energy industry and its impacts.

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