Boomtown fears another bust
North Dakota town adjusts to harsh reality of oil’s collapse
It became one of the most-photographed signs in America, proclaiming a brash welcome to the North Dakota crossroads town that became a symbol of a new American oil rush: “Welcome to Williston. Boomtown USA”.
And for the past five years as U.S. domestic oil production soared to outstrip that of Saudi Arabia, Williston did indeed boom, its population more than doubling from 15,000 to 35,000 as oil companies piled into the area to frack the “tight shale” formations of the Williston Basin.
As always with booms, those who got in early got rich — rents spiked to Manhattan levels, land values quadrupled, unskilled labourers earned more than US$100,000 a year and some “mom and pop” restaurants took in US$20,000 a week. For a while it seemed like the party would never end.
Now, inevitably, it has. The plunge in oil prices over the past six months from more than US$110 a barrel to less than US$50 today has sent an economic chill through Williston almost as icy as the Chinook winds that can drive winter temperatures here as low as minus 51C.
Oil has always been a cyclical business — old hands remember the painful bust Williston endured in the 1980s — but the sheer speed of the latest price crash caught even them by surprise.
“No one expected prices to fall this far, this fast,” said Ward Koeser, the longtime former mayor of Williston who lived through that 1980s crash. “It’s fair to say there is a lot of nervousness around town. A lot of people worrying if it’s a case of ‘here we go again’.”
And it’s not hard to see why. Everywhere in Williston there are signs of retrenchment. Oil companies and the contractors who provide them with everything from drilling rigs to pork ribs, pipes to Portaloos, are now battening down the hatches for what many fear will be a prolonged period of lower prices.
The headline indicators are stark. The number of drilling rigs in North Dakota fell to 156 last month from a 2014 high of 206 and the lowest number since 2010. Nationwide rig numbers fell by about 15% in the last 60 days, according to Halliburton Co.
Oil services companies have already announced a series of layoffs, from Baker Hughes Inc., which will cut 7,000 jobs in 2015, to Halliburton, which shed 1,000 at the end of 2014, to Schlumberger Ltd., which will axe another 9,000 this year — and while these layoffs are not all in North Dakota, Williston has had its fair share.
Across the board, investment is falling, with nearly 40 major oil and petroleum companies announcing capital expenditure plans for 2015 that are, on average, 30% below 2014 levels.
After several months of “phoney war”, when the oil price fell but the rigs kept turning, the effects are being felt on the ground in Williston among everyone from the rig workers to restaurant owners, car dealers to estate agents.
“It’s lunchtime and just look at the empty tables,” says Maeve MacSteves, owner of the Red Rooster BBQ restaurant in downtown Williston, “My business is off 60%, maybe more, and honestly I’m not sure what I’m going to do. To be honest, I’m frightened, very frightened.”
In another sign of belt-tightening, the local paper, the Williston Herald, reports that the US$25,000-a-year Bakken Club, a private members’ club with “a hand-crafted menu from the classic Italian region of Tuscany” has been being forced to close because of a row over unpaid rents.
For labourers who were once begged to work at any cost, times are also suddenly hard. Some have already gone home and many who remain are now searching desperately for extra hours as companies cut overtime to avoid layoffs.
That’s contributing to fears that Williston could see the kind of bust it endured in the 1980s when, as the old bumper stickers used to say, would the last person out “please turn off the lights”.
However, in the Williston offices of Statoil SA, the Norwegian statecontrolled oil major which already has more than 500 wells sunk in the Bakken formation, they are not rushing for the exits just yet.
Torstein Hole, head of Statoil’s U.S. onshore operations, does not downplay the severity of the slowdown — Statoil’s capital expenditure for 2015 will be down 25% on last year — but he is also clear that there are fundamental differences between today and the 1980s.
For a start there are already nearly 10,000 wells in the Bakken, all of which will continue pumping and require servicing for the remainder of their 30 or 40-year lifespan.
Secondly, unlike in the 1980s where exploration in North Dakota was still a hit-and-miss game, today the Bakken formation, which contains at least 12 billion barrels of recoverable oil, according to the U.S. Geological Survey, has been minutely mapped.
“The resource is there. It is proven,” Mr. Hole says. “This is a big basin of oil and gas and it will eventually be produced. How quickly will depend on price, but also the efficiency and creativity of the industry — how quickly we can adapt to lower prices.”
In practice, says Mr. Hole, that means that in the next year oil companies will be ruthlessly driving down costs from their service providers and focusing on the “sweetest” areas of the Bakken.
How individual companies fare in the new environment will depend heavily on their debt structures, adds Lance Langford, Statoil’s Bakken resource manager, who was working in North Dakota in the 1980s and remembers that bust well. “Companies that have really high debt, and the price of oil drops 50%, then their capabilities are reduced much more than 50%,” he says, predicting a round of consolidation as better-placed, lower-debt operations pick up assets from more highly geared competitors.
“On the best plays, the service costs are going to come down to whatever level is needed for that play to make money. Otherwise, what are the service providers going to do? Are Halliburton and Schlumberger going to close their doors? Of course not.”
This is a big basin of oil and gas and it will eventually be produced