North Dakota producers not adding investment despite high oil prices

Even with petroleum prices rocketing in recent weeks, oilfield operators did not add any new drill rigs in North Dakota.

Nationwide, the drill rig count — a key indicator of new oil production — has risen, but it's still nowhere near its pre-pandemic level.

"It makes you a little a curious as to why our largest oil and gas companies are not ramping up," Lynn Helms, North Dakota's mineral resources director, said Tuesday during a monthly call with reporters.

With war in Ukraine, West Texas Intermediate — the benchmark U.S. crude price — topped $130 a barrel last week before falling back to Earth in recent days, settling Tuesday around $95 a barrel.

Helms said he expects oil prices to range from $95 a barrel to $125 a barrel "on any given day." That should translate into gasoline prices of $3.50 to $4 per gallon in the Midwest, he added.

North Dakota released its January oil production numbers Tuesday, and they were grim. Output fell 5 % from the previous month to 1.09 million barrels per day, the most significant drop since COVID-19 hit in 2020, Helms said. Natural gas production fell 7%.

Particularly cold weather was to blame in January, which gummed up machinery, he said.

There were far broader problems, though. North Dakota's rig count currently stands at 33 — and has barely moved for several months. The rig count was in the mid-50s prior to the pandemic.

Yet WTI was trading above $70 per barrel for most of the past six months — well above the break-even price in North Dakota and other U.S. shale oil regions.

The Biden administration has even tried to cajole U.S. oil companies to boost production.

Last week, at an annual energy conference in Houston known as CERAWeek, U.S. Energy Secretary Jennifer Granholm said the country was on a "war footing" and that oil and natural gas production needed to rise.

At that same conference, several oil company executives contended that the oil market wouldn't be so tight had the federal government been more supportive of the industry, Reuters reported.

Helms said oil company executives have told him that the Biden administration is reducing their appetite for new investment risk. Their outlook: "Long term, this administration doesn't want your business," Helms said.

Shale drillers, who dominate U.S. production, have been particularly irked by the Biden administration's moratorium on new oil and gas leases on federal land. "The total number of leases is really low," Helms said.

Federal lands, though, account for only 24% of U.S. oil output, according to a 2018 report from the Congressional Research Service.

Thousands of potentially productive leases are essentially being inventoried by oil producers. The shale oil industry's reticence to drill reflects a newfound financial discipline.

For years, publicly traded shale companies expanded production non-strategically as oil prices rose, only to see shareholder disasters — like cascading losses and bankruptcies — during market pullbacks.

Energy stocks were one of the worst equity investments for much of the past decade.

Rebuked by investors, shale companies since COVID have been eschewing rapid expansion in favor of returning cash to shareholders. With high oil prices, they're raking in profits.

The executives of two major shale oil companies — Pioneer Natural Resources and Devon Energy — signaled last month during earnings conference calls that they intend to remain disciplined.

"I want to be clear that there is no change to our cash return playbook," Devon CEO Rick Muncrief told stock analysts. Pioneer CEO Scott Sheffield told analysts, "We're not going to let the growth rate jump."

In October, Sheffield told the Financial Times that even if prices topped $100 a barrel, frackers would be cautious. "All the shareholders that I've talked to said that if anybody goes back to growth, they will punish those companies," he said.

After COVID caused shutdowns in the U.S. in March 2020, global oil demand cratered as factories cut back production and motor vehicle drivers stayed home. WTI stayed below $50 a barrel for much of 2020.

But over the past year, demand for oil has outpaced the industry's output. OPEC and other oil exporting nations — who control over half the world's supply — have been disciplined, too.

And like many industries, the oil business faces a tight supply chain for oilfield equipment and other supplies. Plus, oil companies been scrambling to find workers, another disincentive for production, Helms said.

"We have seen a lot of pressure on fracking crews," he said.