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Oil Toil Turmoil SL Magazine October 2013

Oil, Toil, Turmoil

10/22/2013

STATE LEGISLATURES MAGAZINE | OCTOBER/NOVEMBER 2013

North Dakota has become the second largest oil-producing state in the nation, but not everyone's gushing over it.

By Suzanne Weiss

It’s being called “The Luckiest Place on Earth.”

North Dakota—just 10 years ago struggling with dispiriting, persistent trends of depopulation and decline—today finds itself with the hottest economy in the United States, growing five times faster than the national average. It boasts multibillion-dollar budget surpluses, growing infusions of international investment capital and the lowest unemployment rate in the country, 3 percent.

And the source of North Dakota’s good fortune, the 640-square-mile Bakken oil shale formation in the northwestern corner of the state, has only begun to yield its riches. The U.S. Geological Survey earlier this year estimated that more than 7 billion barrels can be extracted from the area over the next three or four decades. 

oil pumpersThanks to high oil prices and technological advances—including horizontal drilling and hydraulic fracturing, better known as “fracking”—production in the Bakken oil fields has increased to more than 800,000 barrels a day, six times more than in 2007. In 2012, North Dakota surpassed Alaska and California to become the second largest oil-producing state in the nation behind only Texas, according to the U.S. Energy Information Administration.

In the past, North Dakotans have seen what looked like booms quickly turn into busts—lignite coal in the 1970s, shale oil in the 1980s and again in the 1990s—so naturally there’s an undercurrent of concern about “whether this is going to last,” says Senate Majority Leader Rich Wardner (R). “That’s something we’re still watching, but of course we’re hopeful.”

Senate Minority Leader Mac Schneider (Dem-NPL) agrees. “No one can predict how long the good times will roll, but this boom does appear to have legs,” he says.

“It’s got a whole different flavor from past booms,” says House Majority Leader Al Carlson (R). “This is mining—it’s not exploration anymore.”

The revenue being generated by the boom—in the form of taxes on oil and gas production, personal and corporate incomes, and retail sales—“is beyond what we could have imagined 10 years ago—even two years ago,” Schneider says. “North Dakota has not seen the likes of this, ever. It’s an incredible opportunity.”

Average per-capita personal income in North Dakota is rising at the rate of more than 12 percent a year, and has more than doubled—from $25,592 to $51,893—since 2000, according to the U.S. Bureau of Economic Analysis. The state has cut individual and corporate income taxes, taken on a larger share (80 percent) of the costs of K-12 education, and invested several billion dollars in infrastructure-building ranging from roads and bridges to water, sewer and flood-control projects.

Oil and natural gas development is the biggest economic driver, but the state is also experiencing healthy growth in other sectors. Deere & Co. and Caterpillar are both building factories in North Dakota, and an Amazon service center is also in the works. Small businesses are springing up as well—from garbage collection to coffee shops.

Still, a windfall of such proportions and likely longevity, particularly in a predominantly rural state, has a downside. 

State and local officials are struggling to get their bearings in the midst of problems ranging from acute housing and labor shortages to rapidly increasing demands on public services to rising tensions between the eastern and western halves of the state.

What is taking place in North Dakota brings to mind the old saying, “Be careful what you wish for.”

In the Belly of the Boom

Over the past several years, one of the most sparsely populated states—10 inhabitants per square mile—has seen an influx of more than 70,000 workers from across the nation who are attracted to high-paying jobs in the rapidly developing oil patch.

Among the many repercussions for locals are a higher cost of living, more traffic, overcrowded schools, businesses losing employees to the oil fields, increased crime and pollution, and a growing shortage of housing.

In Williston, Tioga and other small communities in the western part of the state, one-bedroom apartments that rented for less than $500 a month four or five years ago now go for around $1,500 a month, and two- or three-bedroom units as much as $3,500. Local hotels, motels and mobile home parks are at 100 percent occupancy. Some companies have cashed in on the low housing supply and built “man camps,” makeshift villages of narrow metal-sided buildings that can house up to 3,000 workers.

“It’s been absolutely crazy lately. We just can’t build fast enough,” says Shawn Wenko, workplace development coordinator for the city of Williston. “We’ve seen 2,200 housing units come online this year, but we probably have demand for more than 5,000.”

With oil companies paying top dollar to the new onslaught of workers they need—annual salaries average $70,000 and with overtime, more than $100,000—restaurants, grocery stores, banks and other local businesses are boosting their employees’ pay. As just one example, fast-food outlets in Williston offer starting pay of $15 to $17 an hour, plus a signing bonus.

Two categories of employers—school districts and county governments—have had particular difficulty coping with the changing labor market. With teacher salaries among the lowest in the nation—average starting pay is $31,000 a year—some North Dakota school districts have constructed low-cost housing or converted older buildings into apartment complexes to entice teachers to stay. 

Counties face the same problems hiring and retaining enough workers, for example, to pave roads and drive trucks. And they are needed. Every well drilled requires about 2,000 truck trips in its first year of operation. Hundreds of new wells are being added every year, exacting a heavy toll on roads and highways. 

Added to these problems are an 8 percent increase in violent crime in the past year, significantly longer response times by often all-volunteer ambulance services and fire departments, and a variety of environmental problems associated with oil and gas development. For example, a lack of capacity to transport and process much of the natural gas that is a byproduct of oil extraction has led to a dramatic increase in “flaring,” or burning off, the excess gas. The practice raises the atmospheric levels of carbon dioxide, the gas believed to be primarily responsible for climate change.

Last year, the World Bank reported that flared gas from the Bakken oilfields was the main reason the United States has jumped to fifth from 14th (behind Russia, Nigeria, Iran and Iraq) on the list of gas-flaring nations. Although Continental Resources, a major player in the North Dakota oilfield, captures nearly all of the natural gas coming out of its wells, nearly 30 percent of the gas at most of the other wells is flared, according to Schneider.

“They’re burning off $3.6 million in natural gas a day,” Schneider says. “It’s like throwing away a lot of $10 bills to get at a bunch of $50 bills.”

Wardner says the problem will ease over the next couple of years as oil companies move ahead with plans to build new gas pipelines and processing plants. “That’s a high priority. Aside from environmental concerns, people here in North Dakota are frugal. We hate to see waste,” he says.

Wardner and other legislative leaders note the importance of planning for the post-drilling stage of the oil boom.

A major challenge, he says, is “to strike the right balance. You have to stay focused on what is happening today, but also think about what lies down the road. Remember, it wasn’t that long ago—in 2003—that we didn’t have enough money to give public employees a raise. So, naturally, we’re being a little bit cautious.” 

House Minority Leader Kenton Onstad (Dem-NPL) points out that the population growth the state has experienced in the past several years is already leveling off and will likely slow significantly over the next decade. “The oil industry is very mobile,” he says. “Only 20 percent of the workforce is on the production side—80 percent is on the extraction side. So once most of the wells are drilled, the influx of workers will decline steeply. We want people to put down roots here, but the fact is, a lot of them will leave once drilling is complete.”

Schneider thinks state leaders “need to do more to make sure North Dakota is the kind of place people decide to call home.”

Dividing Up a Huge Pie

As might be expected, oil-boom issues were center stage in the 2013 session of the North Dakota Legislative Assembly, which wound up being the longest in state history.

Over the course of 80 days, legislators enacted a massive tax-relief package that included cutting income-tax rates and boosting the state’s share of financing for K-12 education to 80 percent, thereby lowering the local property-tax burden. They also increased the higher education budget and approved a major expansion of the University of North Dakota School of Medical and Health Sciences. They beefed up budgets for various programs ranging from Medicaid and affordable housing to emergency services, law enforcement and public health. They invested several billion dollars in infrastructure development. And they continued to build up the state’s rainy-day fund and other reserves.

But not everyone thought that was enough.

“This session was notable for its misplaced priorities and a number of squandered opportunities,” says Schneider, expressing disappointment about the defeat of a proposal that would have funneled substantially more money to the rural counties most directly affected by the oil boom.

Even among Republicans, who hold a supermajority in both chambers, there has been some grumbling.

“The session accomplished a lot of good for many people, but I’m afraid it’s what it didn’t do that it will be remembered for,” Representative David “Skip” Drovdal (R) wrote in an opinion piece published in The Dickinson Press. “What it didn’t do was properly fund the oil and gas counties so they will be able to keep up with the drilling activity and the damage it causes.”

Drovdal was among a handful of Republicans who joined Democrats in pushing for an increase in rural counties’ share of oil-production revenues, from 11 percent to 80 percent for the next two years. But the bill that prevailed raised the local share for the 2013-15 biennium to just 25 percent—less than the local share in, for example, Colorado (63 percent), Montana (40 percent) and Wyoming (35 percent).

A majority of legislators also defeated a proposed expansion of a program, administered by the University Land Grant Board, that awards grants to counties with particularly pressing boom-related needs. Grant requests totaled nearly $700 million in the 2011-13 biennium and are expected to approach $1 billion over the next two years, Onstad says. He believes “the amount we’re putting into the program is simply inadequate—only $214 million for 2013-15.”

“It just isn’t right to put these counties in competition with one another for vital needs like health care, law enforcement, road repairs and emergency services,” he says. “We have problems all across the state, not just in the oil counties. When you have money to fix the leaking roof, you’d better fix it and not just keep putting on patches.”

Senator Stan Lyson (R), who represents Williston and other communities in the heart of the oil fields, disagrees. He says he doesn’t feel the legislature has shortchanged the western part of the state at all.

“Of course, local officials aren’t going to say they’ve got everything they want. But on schools, on roads, on a lot of our counties’ needs, I think we did very well this past session. People understand that, just because you’ve got a big pot of money, you don’t need to spend it all,” Lyson says.

Wardner said that figuring out how to deal with the state’s revenue windfall has created “more tension in the chambers” and made it harder to craft budgets. “In the past, we just said ‘No’ because we didn’t have the money, and we were done with it. Now if we say ‘No,’ they say, ‘Come on—we have the money.”

Carlson, the House majority leader, says that legislators in the 2013 session continued to demonstrate a strong commitment to addressing the state’s infrastructure needs, enacting tax relief and planning for the future.

“There are always going to be arguments about who gets money and how much,” Carlson says. “The way I look at, here in North Dakota, we’re a work in progress—and I think we’re doing pretty well.”

State Funds From Windfall

Following the lead of a handful of other resource-rich states, North Dakota has created a mechanism to preserve for future generations a portion of the enormous revenue windfall it is reaping from development of the Bakken oilfields.

Voters in 2010 approved a constitutional amendment establishing the North Dakota Legacy Fund, into which 30 percent of the state’s revenues from oil production and extraction flow each year.

The fund is growing at an astonishing rate—adding $92 million in July 2013 alone —and is expected to top $3 billion by 2015, when the Legislative Assembly convenes its next biennial session.

By law, the legislature can’t begin tapping the fund until 2017. Two-thirds of both houses must approve any spending of principal, and no more than 15 percent of the principal can be disbursed over a two-year budget cycle.

How the fund will be used remains an open question; a legislative study committee was recently set up to evaluate options.

Representatives Al Carlson (R) and Kenton Onstad (Dem-NPL), the House majority and minority leaders respectively, are among a number of state officials who say they favor using a portion of the Legacy Fund to help make postsecondary education more affordable for North Dakotans.

The model they point to is Wyoming’s Excellence in Higher Education Fund and the Hathaway Scholarship Program, which were created by the Wyoming Legislature in 2006 to preserve a portion of federal royalties from oil and gas development.

The first fund, which is expected to reach $100 million over the next several years, is used to endow professorships at the University of Wyoming and the state’s community colleges. The other, named in honor of former Governor Stan Hathaway and building toward a goal of $400 million, provides in-state students with merit- and needs-based scholarships of up to $1,600 a semester, for eight consecutive semesters.

Another quite different model is the $45 billion Alaska Permanent Fund, which was created by a constitutional amendment in 1976, shortly after the opening of the Trans-Alaska Pipeline System. Roughly 25 percent of the state’s oil revenues flow into the fund, which is used to operate state government—Alaska has neither an income nor a sales tax—and to provide Alaskans with an annual cash dividend, which last year was about $900 apiece.

Other such funds include Texas’ $14 billion Permanent University Fund, which uses proceeds from oil and gas production to finance higher education, and New Mexico’s $11 billion Severance Tax Permanent Fund, which the state uses to pay down interest and principal on bonds it sells.

More recently, Utah voters in fall 2012 approved a ballot measure requiring officials to deposit a portion of severance taxes into a trust fund instead of the general fund, starting in 2016. And West Virginia, with increasing natural gas production and an interest in capturing a portion of the expected revenue windfall, recently sent a group of lawmakers to North Dakota to learn about the Legacy Fund and get an update on energy production and its impacts.

A Bank’s Bonanza

The Bank of North Dakota was created 94 years ago to protect local farmers from fluctuating commodity prices, powerful railroads, East Coast banks, challenging weather and more. Today, it’s as strong as ever. As the repository for most state funds, its 2012 annual report showed a ninth consecutive year of record profits, with $81 million in net earnings. Total assets increased $800 million in one year, to $6.1 billion in 2012. It ended last year with $463 million in capital.

The Bank of North Dakota is the nation’s only state-owned bank and a relic of the Peace Garden State’s varied political heritage. It sprang from a populist movement that swept the northern Great Plains, including the North Dakota Legislative Assembly, which created it to protect farmers—offering them low-interest loans and hail insurance. The legislature also created the North Dakota Mill and Elevator.

The scope of the state bank’s activities has greatly expanded, and it now serves as an economic development agency and “banker’s bank,” lessening the loan risks of private banks and helping them finance larger projects. “We think of ourselves as kind of a mini-Federal Reserve,” says Eric Hardmeyer, bank president and CEO.

The bank pays no state or federal taxes and has no deposit insurance; rather, North Dakota taxpayers are on the hook for any losses. But that doesn’t appear to be a problem; since the early 1950s it has transferred more than $555 million in profits to the state’s treasury. And with the development of the Bakken oilfields, the state-owned bank has been able to finance construction of apartments, hotels, office complexes, businesses and water systems in that area of the state.

The state’s populist movement that promoted the idea of a state-owned bank is gone now. Republicans lead the state, with supermajorities in both houses of the Legislative Assembly and control of the governor’s office and two of the state’s three congressional slots. Still, Republicans and Democrats alike maintain strong support for their state-owned bank.

Suzanne Weiss is a freelance writer in Denver who contributes frequently to State Legislatures.

Could California Be Next?

Covering 1,750 square miles and running from Los Angeles to San Francisco, California’s Monterey Shale formation may be the site of the nation’s next oil boom. According to the U.S. Energy Information Administration, the area could contain more than 15 billion barrels of crude oil—nearly four times the amount of the Bakken shale in North Dakota and far more oil than anywhere else in the lower 48 states.               

Until recently, the Monterey Shale wasn’t considered economically viable to develop because its oil is contained in hidden pockets within jagged geologic layers making it difficult to extract. Compared to North Dakota’s Bakken formation, which looks like a layered cake, Monterey Shale resembles an accordion. Technological advances have increased oil industry interest in California, however. And some claim that California could turn into the nation’s top oil-producing state.

The economic potential and employment opportunities of tapping this oil resource is not lost on state lawmakers. In August, a bipartisan delegation of California legislators traveled to North Dakota to learn about the economic and environmental impacts of hydraulic fracturing.

 “It is critical that we examine every opportunity for energy independence and job growth, and that we fully understand the economic and environmental impacts that go along with natural gas and oil extraction,” said California Assemblyman Brian Nestande (R) before leaving for North Dakota.

The California delegation met with North Dakota legislators to discuss possible legislative oversight of fracking and—similar to lawmakers from West Virginia—to learn about North Dakota’s Legacy Fund, which brings in substantial revenue from the development of the Bakken shale. NCSL helped facilitate the workshop and provided the delegation with an overview of how states are approaching hydraulic fracturing policies.

During the final week of session, the California Legislature passed a bill to create a permitting system, require groundwater monitoring and ensure public transparency throughout the hydraulic fracturing process. “This is a first step toward greater transparency, accountability and protection of the public and the environment,” said Senator Fran Pavley (D), the bill’s lead author. The bill passed despite opposition from environmental groups that are concerned about potential air and water pollution, seismic activity, and traffic congestion as a result of hydraulic fracturing. 

—Kristy Hartman, NCSL


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