Is it even worth it? North Dakota to mull whether pumping oil at low prices is a waste

BISMARCK — Have oil prices fallen so low that pumping crude out of the ground in North Dakota amounts to wasting an important natural resource?

The North Dakota Industrial Commission, which regulates oil and gas, is pondering that question, sparking a fierce debate about whether the free market or state intervention should be used to bring petroleum supply and demand back into balance.

In almost 100 pages of written comments filed with regulators, oil and gas representatives and mineral owners overwhelmingly opposed declaring oil produced at substantially reduced prices waste — a determination that could enable state-ordered production cuts.

The North Dakota Industrial Commission will hear testimony Wednesday, May 20, to determine whether oil produced in the Oil Patch constitutes waste under a provision in state law that seeks to avoid squandering natural resources.

One definition of waste under the law: “The production of oil or gas in excess of transportation or marketing facilities or in excess of reasonable market demand.”

The “waste” oil proposal is backed by a few oil producers — including Harold Hamm-led Continental Resources — but most oil companies argued against state intervention in written comments.

“Free markets are best able to recover from periods of instability in supply and demand,” wrote Holly Camilli, general manager of ExxonMobil subsidiary XTO Energy’s Bakken business unit. North Dakota hasn’t declared oil at very low prices to be waste and ordered production cuts since 1965, allowing more recent price collapses to selfcorrect, she noted.

“Operators and producers are in the best position to determine whether economic waste is occurring,” she wrote. “The determination as to whether waste is occurring in any given well or unit will depend on the unique circumstances of each operator.”

Declaring oil waste could lead to production restrictions, which in turn could allow oil companies to break their agreements with pipeline companies and suspend royalty payments to mineral owners, some critics said.

So the members of the Industrial Commission — Gov. Doug Burgum, Attorney General Wayne Stenehjem and Agriculture Commissioner Doug Goerhing — will have to balance the interests of different constituencies in making the waste decision, said Ed Hirs, an energy economist with the University of Houston and BDO, an accounting and advisory firm.

Although painful, the better course is for companies to curtail production and wait for the economic slowdown caused by the coronavirus crisis to end, allowing oil markets to return to balance rather than intervention by regulators, Hirs said.

“Everybody’s getting hurt here,” he said of what likely is a recession. “For North Dakota or any jurisdiction to basically pick winners and losers is something that’s going to be quite challenging.”

Regulators in Arkansas, Oklahoma and Texas have considered ordering oil production cuts but have not taken such action, according to comments filed with the Industrial Commission.

Todd Slawson, president of Slawson Exploration Co., urged a waste declaration. He wrote that a partial rebound in prices will prompt some producers to prematurely increase production, making the supply glut worse. Production quotas would provide a more stable investment environment, he wrote.

But Hirs and others argue that action taken in North Dakota can’t influence global markets. At its production peak in February, when North Dakota produced 1.5 million barrels of oil per day, the state accounted for 1.45% of global oil supply, he wrote.

Members of the Three Affiliated Tribes, of the Fort Berthold Reservation, filed numerous written comments opposing the waste oil declaration.

Raymond Cross, a retired lawyer, is concerned the move could result in suspension of royalty payments, an important source of income at Fort Berthold.

“This would give them immunity from having to follow their leases,” he said. Doing so would create what economists call a “moral hazard,” creating reckless decisions because firms wouldn’t suffer the consequences, Cross said.

Blu Hulsey, a senior vice president of Continental Resources, said the industry is grappling with a “period of manipulated global supply with challenging commodity prices,” referring to the coronavirus crisis and an oil price war sparked by Russia and Saudi Arabia.

He advocated a temporary allocation of production caps to allow supply and demand to realign.

Ron Ness, president of the North Dakota Petroleum Council, which represents the industry, said free market principles should be allowed to work. He joined Continental Resources, however, in urging the Industrial Commission to conduct a cost-benefit analysis of regulations to identify those that are not “substantially improving health, safety, and environmental conditions.” Those that aren’t should be repealed or modified, Ness said.

Jodi Smith, commissioner of the North Dakota Department of Public Lands, said a waste declaration “could result in a major loss of revenue for the State by unnecessarily curtailing production.”

She agreed with many oil executives who noted that companies have acted swiftly to reduce production in North Dakota, now estimated to be around 950,000 barrels per day, with more than 7,000 wells idled.