Magic of the price signal to change production levels.
The double black swan of COVID-19 pandemic from the demand side and Saudi Arabia flooding the market from the supply side is creating a sales problem and storage problem for the oil industry.
Regulators in Texas are thinking about about ordering a pro-rate reduction in production. In other words, they are considering giving each producer an order on how much to cut.
North Dakota has no such plans.
North Dakota is planning to rely on capitalism to rapidly adjust production.
4/14/20 – Williston Herald – Helms: North Dakota’s oil and gas industry has shut in at least 260,000 barrels of oil production – Mr. Lynn Helms is the Director of the Department of Mineral Resources.
Mr. Helms is quoted as saying:
“We think the market and the regulatory relief we offered and the business model and market decisions being made are accomplishing the same thing, but in a much better way.”
The only thing the state has done is slightly relax the rules for shutting in a well. In other words, producers may do what they want in order to adjust to the market. Phrased differently, the state regulators are getting out of the way of producers adapting to the market.
In other words, prices will send a far more powerful signal to the everyone in the industry than any orders the state might give. Look at that price level again:
That severe of a drop in prices is telling companies having anything to do with downstream, midstream, fracking, drilling, and oil-field support to rapidly cut operations.
There is a radically stronger and faster signal from prices than anything a regulator could do.
Expect to see production in North Dakota drop dramatically in the next few months. It won’t take any orders from the state to do so.
The price signal is powerful, fast, and reliable if you just let it work.