UPDATE 1-Oil rig count drops sharply in North Dakota-regulator

By Selam Gebrekidan

Sept 19 (Reuters) - The number of rigs drilling for oil in North Dakota fell to the lowest in more than a year in September as operators sought to cut costs and increase efficiency, the North Dakota Industrial Commission said on Wednesday.

The number of oil-focused rigs in the Midwest state dropped to 194 this month, its lowest level since July 2011, the commission's data showed. The current rig count is 11 percent lower than the all-time high of 214 set in May.

The dip, along with escalating costs and regulatory concerns, could further stall growth in the nation's largest oil find in a generation.

"The combined effect of several factors has led to a noticeable slowing of activity and production growth," Lynn Helms, director of the state's Department of Mineral Resources, said in a monthly note.

Helms, voicing concerns publicly for the first time over slowing growth in the Bakken shale prospect, cited the lower rig count, rapidly rising costs, and uncertainties over regulations on the "fracking", or hydraulic fracturing, drilling technique.

North Dakota became the second-largest oil-producing state in the country this year after output from the Bakken and Three Forks prospects surpassed Alaskan production.

The state produced 674,000 barrels of oil a day in July, the latest month for which data is available. About 90 percent of this came from the Bakken and Three Forks, where a combination of horizontal drilling and hydraulic fracturing technologies has unlocked huge shale reserves.

However, July's output rose only marginally over June, despite the summer's mild and drilling-friendly weather, according to Helms.

The monthly output increase in July was the smallest since April last year, when spring flooding had stalled production.

Helms said operators, which are eating into their capital budgets as costs escalate, are trying to rein in expenses by shifting to fewer and more efficient rigs and cutting costs wherever they can.

This echoes statements from the largest operators in the Bakken, such as Continental Resources Inc and EOG Resources Inc.

Continental Resources raised its capital budget in August for the second time this year as it faced higher costs in the Bakken.

The pullback in the number of rigs could quickly lead to a drop in output in the Bakken shale, where average wells deplete at a steep clip every year.

FRACKING REGULATIONS

Uncertainties over the federal government's bid to regulate fracking centrally are affecting investment decisions in North Dakota, Helms said.

States that sit on large shale oil and gas reserves are sharp critics of the Obama administration's drive to regulate fracking on federal lands. They say the move will create a duplicate layer of oversight and stifle growth by raising costs.

North Dakota Republican Senator John Hoeven, along with Alaska Senator Lisa Murkowski, said on Tuesday that he will introduce a measure to "put states first in the regulation of hydraulic fracturing".

The measure will "ensure that states retain the right to manage hydraulic fracturing and gives them the ability to respond first to any violation," Hoeven said in a statement.