Yesterday, during his speech at CERAWeek in Houston, Saudi oil minister Ali al-Naimi made it explicitly clear that Saudi Arabia would not cut production, instead saying that it is high-cost producers that would need to either "lower costs, borrow cash or liquidate” adding that there is "no need for cuts as marginal barrel will get out of the market." He was right.
Today his wish is slowly coming true after news that North Dakota's largest producer, Whiting Petroleum, would suspend all fracking, and that Continental Resources has effectively done the same after reporting that it no longer has any fracking crews working in the Bakken shale.
As Reuters reports, Whiting said it would "suspend all fracking and spend 80 percent less this year, the biggest cutback to date by a major U.S. shale company reacting to the plunge in crude prices."
It was also confirmation that the Saudi plan to put high-cost producers on ice is working, if only temporarily.
After sliding 5.6% to $3.72, Whiting stock jumped 8% to over $4 per share in after-hours trading as investors cheered the decision to preserve capital, even if it means generating far less revenue.
Whiting's cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows. The cuts will have a big impact in North Dakota, where Whiting is the largest producer.
The Denver-based company said it would stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance.
Rival producers Hess Corp and Continental Resources Inc have also slashed their budgets for the year, though neither has cut as much as Whiting.
As noted above, during its earnings report, Continental said that in 2016, the Bakken drilling program will continue to focus on high rate-of-return areas in McKenzie and Mountrail counties, targeting wells with an average EUR of 900,000 Boe per well. Based on the higher EUR and a lower targeted completed well cost of $6.7 million per well, the Company expects capital efficiency to increase 17% and finding cost to decrease 15% in 2016.
Given its plans to defer most Bakken completions in 2016, Continental expects to increase its Bakken DUC inventory to approximately 195 gross operated DUCs at year-end 2016. However, Continental also said that while the Company currently has four operated drilling rigs in the North Dakota Bakken and plans to maintain this level through year end, it noted that it currently has no fracking crews deployed in the Bakken, which led some, including Bloomberg to believe, that Continental too has halted Bakken shale fracking.
One thing is certain: the cuts will drag down production and likely reverberate in the economy of North Dakota, the second-largest U.S. oil producing state after Texas, which currently pumps 1.1 million barrels per day. It means that after the 250,000 oil workers already laid off (according to Credit Suisse estimates), tens of thousands of new pink slips to highly paid workers are about to be handed out.
And another thing: as of this moment, Saudi's oil minister is taking a victory lap in his Lamborghini - after all his plan to push the price of oil so low that marginal oil producers have no choice but to mothball production is starting to bear fruit.
There is just one problem. Whiting Chief Executive Officer Jim Volker said that "we believe this conservative strategy should help us to maintain our liquidity position and leave us well positioned to capitalize on a rebound in oil prices."
In other words, the moment oil prices rebound even modestly, and according to many the new breakeven shale prices are as low at $40-$50/barrel, the Whitings and Continentals will immediately resume production, forcing Saudi Arabia to go back to square one, boosting supply even higher, and repeat the entire charade from scratch.
And so on.