North Dakota, Canadian oil producers at disadvantage when crude prices are low

If a new era of bargain crude prices arrived with Monday's oil-market rout, producers in North Dakota and Canada will likely be at a disadvantage.

Both are simply farther from the hub of the North American oil market, the Gulf Coast, raising transportation costs, analysts said.

Canadian oil-sands producers face higher production costs, too. Minnesota is the primary conduit of Canadian oil imports into the United States via Enbridge's corridor of cross-border pipelines.

"It's generally agreed that the farther you are from the Gulf Coast, the less cost-efficient you are," said Sandy Fielden, an oil-industry analyst in Texas with Morningstar.

Of course, there's an upside for consumers in Monday's oil massacre: Gasoline prices, already relatively low by historic standards, should fall further if oil prices remain depressed.

Oil prices have been dropping in recent weeks as global demand has rapidly declined — an economic blow courtesy of the novel coronavirus. But over the weekend, oil markets suddenly faced the specter of a supply glut, too, after talks between Russia and Saudi Arabia broke down over production targets.

The Saudis pledged to open their taps — and oil prices staged a historic collapse. "Unprecedented is an understatement," Kevin Birn, an oil analyst in Calgary, Alberta. with IHS Markit, said of the turn of events.

West Texas Intermediate — the benchmark U.S. oil price — fell 26.1% Monday and settled at $30.49 per barrel, the lowest mark since it briefly dipped below $30 in early 2016. As of Monday, WTI is effectively below the break-even cost of a new shale oil well in the U.S., data from Rystad Energy show.

The oil patch won't just suddenly shut down. Sustained low prices "take a while to work their way through the system," Fielden said. "The U.S. will supply a lot of oil to the market, whether or not it wants it."

Lynn Helms, director of North Dakota's Department of Natural Resources, said in a statement that it "typically takes three to six months for this type of price drop to impact oil and gas activity."

Unless prices rebound in the next 30 to 60 days, "we can expect to see an impact to production and [oil] field activity," Helms added. "In both 2008 and 2015, similar price drops took two years for prices to fully recover."

North Dakota is the nation's second-largest oil-producing state after Texas, and the fracking boom since the late 2000s has transformed the state's economy and fortified its tax coffers. However, Helms noted that North Dakota's current budget forecast is based on oil prices well above $30 per barrel.

North Dakota and the rest of the U.S. shale industry reacted to the 2015 oil bust by improving productivity and cutting costs. The WTI break-even price for a barrel of oil in North Dakota's Bakken fields fell from over $70 in 2014 to an estimated $46 in 2019, according to a December report by Rystad Energy.

However, the break-even prices as calculated by Rystad (which include transportation costs) are between $35 and $40 in parts of the Permian basin in Texas and New Mexico — the nation's largest shale-oil play.

Canada's big oil production region — Alberta's oil or tar sands — is at an even greater cost disadvantage than North Dakota. Indeed, after the last North American oil bust in 2015, major oil companies cut back their investments in Alberta or exited Canada altogether.

"We've never really had a recovery in western Canada," Birn said.

Still, there should be enough crude production to merit Enbridge's planned new Line 3 pipeline, given the current dearth of pipeline capacity coming out of Canada, Birn said.

"We think there is so much [oil-production] capacity installed and existing that Line 3 could be filled when it is turned on."

The controversial 340-mile pipeline would run across northern Minnesota to Enbridge's terminal in Superior, Wis. The $2.6 billion pipeline would almost double the flow through the current Line 3, which is corroding and running at half-capacity due to safety concerns.

Enbridge is waiting for several final state and federal permits before beginning construction. Line 3 opponents say the new pipeline — which partly follows a new path — is an environmental threat, and won't be needed in the future as transportation is electrified and global oil demand weakens.

The duration of the current oil meltdown could hinge on the battle for market share spawned by the Saudi-Russia tiff. "The extent of the destruction depends on how long they play this game," Fielden said.

Mike Hughlett • 612-673-7003