A Year of Low Oil Prices Means Fewer Rigs in the US — But Not Less Oil

Jay Hesig is working the evening shift at a depot on the edge of Watford City, North Dakota where truckers bound for drilling and fracking sites in the Bakken oilfield fill their tractor-trailers with water. It's been almost 30 minutes since the last truck rolled past his booth and he's getting bored.

A year ago, he told VICE News, a constant stream of tankers rolled past him, day and night. After oil prices began to drop from their $115 dollar higha year ago, drilling new wells in the Bakken became less profitable. The demand for water decreased along with the number of drill rigs — and that means fewer trucks rumbling through this depot.

Hesig's boss cut his hours three times in four months. So he's moving back to Wisconsin where he'll start a new job working on cell phone towers.

"It's time to go home," he said as he looked out on the quiet concrete lot outside his guard station. "If I thought this would make a U-turn in a reasonable amount of time, I would stay."

Hesig has experienced first hand what oil market analysts are predicting — even as oil companies adapt to lower prices, the drilling pace seems unlikely to roar back any time soon, meaning less overtime and fewer jobs. While oil prices have recovered from their low point, they've been bouncing around $60 per barrel since May.

This time last year, there were 1,562 oil rigs punching holes in the ground across the United States, according to the oilfield services company Baker Hughes. Today there are just 640 rigs. Seventy-six rigs are operating in North Dakota, compared to 178 a year ago.

Oil prices began their dramatic plunge last year due to the simple dynamics of supply and demand. US oil production was high, while economies in Europe and Asia began to slow. The Organization of Petroleum Exporting Countries (OPEC), which has historically stepped in to constrain supply and bolster prices, has refused to cut back on production.

"We're talking about a historic drop," Warren Henry, the vice president of research and policy for Continental Resources, the oil company leasing the most acres in North Dakota, told VICE News. "This has been so rapid and so severe that we've never seen anything quite like it before."

That's left US producers to absorb the drop in oil prices, which means holding back on drilling new wells and cutting costs until supplies fall and oil prices rise again.

Oil production from existing wells just began declining in the spring. After a 60 percent drop in the number of rigs since October 2014, the US Energy Information Agency (EIA) estimated this week that crude oil production fell in May.

"If you start dropping rigs sooner or later supply has to roll over and start down," Henry said.

But it likely won't fall very far. The EIA said that despite the recent decline companies are on track for the highest annual oil output since 1970.

Barring a major unforeseen geopolitical event, weak oil prices will likely stick around, said Charles Ebinger, a senior fellow with the Brookings Institution's Energy Security and Climate Initiative.

"I think if we keep prices at around $60 we'll see some modest activity continue," he told VICE News. "As we move into 2016 and it's at $60, production will probably level. If we can get the price up to $65 to $70 by the the time we enter 2016 I think you will see production continue to go up."

Ebinger thinks that the oil market has fundamentally changed and low prices are not temporary.

For one, he said, energy efficiency standards and the growth of renewables means oil is starting to lose market share. In May, the EIA reported that the use of non-petroleum fuels for US transportation is growing. Non-petroleum fuel levels reached 8.5 percent in 2014, a level not seen since 1954.

Plus, he says, China's manufacturing economy is slowing and economic growth is tepid worldwide.

Finally, if negotiations between the United States, Russia, Germany, Great Britain, France, and China, known as the P5+1, and Iran, lead to the end of sanctions, Iranian oil will once again enter the market, adding to the supply glut.

"[G]eopolitics is the big wild card ­­- ­­and climate change," said Ebinger.

Even if analysts like Ebinger don't see prices bouncing back to $100 per barrel, that's only half the story said Henry. Companies like Continental Resources have adapted to lower prices by cutting production costs.

"I'm a little amused when people talk about oil not going back to $100 a barrel in the next several years," Henry told VICE News. "Frankly, that's beside the point. In terms of cash flow per barrel we're going to be very efficient at $80 to $85. It doesn't matter that oil is not going to back to $100 for us. I think it matters very much for most of OPEC membership like Venezuela and Algeria."

Several countries, including Russia and Venezuela, rely on high oil prices to fund domestic spending. And even Saudi Arabia is burning through its large cash reserves at a record pace.

"I think what people internationally misunderstand is how powerful the technology is that we're using and the fact that it continues to improve," he told VICE News.

Plus, Henry is confident in oil's future. "The fact of the matter is as a transportation fuel there is no substitute for oil and there's not going to be for 35, 40, 45 years," he said.

But even drilling giants like Continental don't see a return to the gold rush mentality that defined US oil production from 2005 to 2014 at the height of the fracking boom.

Instead, the industry will reach a steadier, new normal, said Henry.

"I think we had an extraordinary growth period in the past six to eight years in terms of oil demand world wide," he told VICE News. "It wasn't normal."

Related: Despite low oil prices, North Dakota remains an expensive place to live

Photos by Sarah Jane Keller

Follow Sarah Jane Keller on Twitter: @sjanekeller