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Spotlight on Economics: Forecasting Oil Production in N.D.

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North Dakota Oil Production North Dakota Oil Production
David Roberts, an assistant professor in NDSU's Agribusiness and Applied Economics Department David Roberts, an assistant professor in NDSU's Agribusiness and Applied Economics Department
Oil production in North Dakota could reach 41.18 million barrels by January 2020.

By David Roberts, Assistant Professor

NDSU Agribusiness and Applied Economics Department

It is no secret that North Dakota’s economy is changing as a result of technological and market changes in agriculture and energy.

Historically, the state’s economy has been dependent on agriculture, which accounted for more than 87 percent of its land cover in 2007 (about 39.5 million acres). Energy production is also a large and growing economic sector in North Dakota, predominantly from coal and oil. In fact, oil production from the North Dakota portion of the Bakken Formation increased from 98,500 barrels per day in January 2006 to approximately 1.19 million barrels per day in March 2015, a 12-fold increase.

Rapid development of the oil industry in the Bakken Formation has been facilitated by horizontal drilling and hydraulic fracturing since the mid-2000s. One estimate of total crude oil reserves in the Bakken is 300 billion barrels, slightly more than three times the size of the oil reserves of the United Arab Emirates. Research by James Mason published in the Oil & Gas Journal indicates the maximum daily production rate for the North Dakota Bakken is 1.5 million barrels daily, which could be achieved by 2023 and sustained for a further 25 years.

Rapidly increasing oil production in North Dakota has focused world attention on the Bakken Formation, especially in light of increasing oil prices in recent years and quickly increasing oil demand in emerging markets. Even the recent downturn in oil prices does not appear to have caused a persistent negative effect on total oil production in the state. In the near future, North Dakota will be one of the largest oil production regions in the world, contributing significantly to the domestic and international supply.

I have been working with my graduate student, Jaesung Choi, who is working toward a Ph.D. in Logistics and Transportation, to forecast monthly oil production for North Dakota using time series econometrics. The particular forecasting method is known as a seasonal autoregressive integrated moving average (S-ARIMA).

We created forecasts for varied regions of the state - the minor oil-producing counties and the major oil counties - and for the state as a whole. Our results indicate that, with the exception of Bowman County, oil production has been increasing exponentially since about 2005 in all the major and minor oil-producing counties. Production has decreased in Bowman County since the end of 2007 because the emphasis on development and extraction has moved into the central Bakken, where oil has become more accessible due to the introduction of horizontal drilling with hydraulic fracturing.

Jaesung and I used data from the Oil and Gas Division of the North Dakota Industrial Commission’s Department of Mineral Resources. Our forecasts indicated that oil production in North Dakota could reach 41.18 million barrels by January 2020, which is a 40 percent increase relative to January 2014. It also amounts to 19 percent of current total U.S. crude oil production - 222.22 million barrels - and 1.7 percent of world oil production - 2.29 billion barrels - in March 2013.

Mason’s 2012 research suggests that producing 1.5 million barrels per day by 2023 is technically feasible for the Bakken Formation. Our forecast for January 2020 translates to approximately 1.36 million barrels per day, on average. Based on these forecasts, the cumulative oil production in North Dakota from January 1970 to January 2020 would be 4.95 billion barrels, which is a small fraction of the estimated 300 billion barrels of technically recoverable oil reserves.

We based our forecasts on the production data from January 2006 to January 2014. Notably, statewide production during this time tracks closely with the upper 95 percent confidence limit we estimated early in 2014.

We hope the forecasting results will be useful to the federal government in planning for domestic energy security, and to oil producers and state and local governments in North Dakota as they plan production and infrastructure. Oil development and extraction rapidly have drawn a large influx of new residents to western North Dakota, and new infrastructure and public services are needed to meet the needs of the expanding population. Tax revenues from oil production will help meet these increased infrastructure needs.

One caveat is that structural changes in the transportation fuels markets could reduce the accuracy of time series methods for forecasting. For example, if, in the near future, a new technology that made oil extraction in the Bakken Formation more efficient were developed, this might lead to actual extraction levels during the forecasting period being much higher than our forecasts.

On the other hand, if a new liquid transportation fuel became available to readily replace gasoline at low cost, oil extraction in the Bakken Formation and other places likely would diminish. In either of these scenarios, S-ARIMA and other time series models would fail to provide accurate forecasts.

What we can predict with great certainty is that North Dakota’s contribution to the domestic and global oil supply will increase in the future, especially during the next five to six years. This is good news for those who are concerned about domestic energy security in the U.S. One of the three main parts of the Obama administration’s energy security plan is to increase domestic energy production. This likely will be a goal for future administrations also, and production in the Bakken will help.


NDSU Agriculture Communication - June 22, 2015

Source:David Roberts, (701) 231-9796, david.c.roberts@ndsu.edu
Editor:Ellen Crawford, (701) 231-5391, ellen.crawford@ndsu.edu
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