DAVID SHAFFER | Star Tribune
North Dakota is poised for another surge in crude oil output, but new state regulations could soon force well operators to cut oil production unless they reduce wasteful flaring of natural gas.
The state’s top oil regulator said Monday that oil production rose 3.6 percent in May to a record 1,039,635 barrels per day, and is poised to increase at a faster pace. The report comes one month after the state for the first time surpassed 1 million barrels of oil production per day.
As summer weather allows more well completions, “I am anticipating … 5- and 6-percent production increases, double what we have seen in the last couple of months,” said Lynn Helms, director of the state Department of Mineral Resources.
Helms said some oil fields are capturing just 2 percent of the natural gas that accompanies extracted crude oil — and burning off the rest. Natural gas pipeline capacity hasn’t kept pace with output. Crude oil shippers faced the same problem but have solved it by hauling away 59 percent of the oil in railroad tank cars.
Under state rules that took effect July 1, well operators are allowed to flare, or burn at the wellhead, no more than 23 percent of the natural gas, Helms said. The limit takes effect in October, and enforcement will begin in 2015, with the state poised to order well operators to curtail production in January if the target hasn’t been met. The rules aim to reduce flaring to no more than 10 percent in 2020.
In another sign that North Dakota’s oil boom is far from over, Whiting Petroleum announced Sunday that it will acquire Kodiak Oil & Gas to become the state’s top producer — with plans to boost its drilling in 2015.
The acquisition, an all-stock deal valued at $6 billion, will create a North Dakota petroleum powerhouse with 107,000 barrels per day of existing production — or about 10 percent of the state’s output — with 855,000 acres of leases and 3,460 future drilling locations.
“We plan to substantially accelerate the Kodiak drilling program by increasing the rig fleet from seven rigs to 12 rigs by the fourth quarter of 2015,” Jim Volker, CEO of Denver-based Whiting, said on a conference call Monday with analysts.
The acceleration, he said, is possible because the combined company will have greater access to lower-cost capital. Lynn Peterson, chief executive of the smaller Kodiak, said such a major expansion in North Dakota was “not something we felt comfortable doing on our own.”
Investors like the deal: Whiting’s stock rose 7.7 percent to $84.58 on Monday. Analyst Rudy Hokanson of Barrington Research set an end-of-2015 price target of $122 per share, a 45 percent increase.
“They have been doing a lot in terms of getting value out of the natural gas, not flaring it,” Hokanson said in an interview. “They have been building [natural gas] processing plants. The company has been pulling down and working on its debt level relative to its overall capitalization to very healthy position and it has plenty of prospects on its own.”
Kodiak, also based in Denver, has extensive oil leases in the Williston Basin that complement Whiting’s, Hokanson said. While adding drilling rigs to tap the Kodiak assets, Whiting also promises to lower the cost to $8.5 million per well, about $700,000 less than Kodiak’s cost, he added.
“There should be cost efficiencies,” Hokanson said. “The bottom line is the deal looks good.”
David Shaffer — 612-673-7090 Twitter: @ShafferStrib