Rob Lindberg: Slowing Down Oil Boom Would Hurt Entire State
For years, the word “slowdown” has been thrown around. It might come from media outlets opposed to flaring, an environmentalist concerned about impacts, or, more understandably so, a western resident longing for times before the Bakken.
What makes the idea of a slowdown so concerning? Unlike previous drilling and exploration in the Williston Basin, the exploration of the Bakken impacts our state to a far greater extent. The oil and gas industry is now one of the state’s largest industries and its success affects each of our communities. Nearly every type of business and worker in North Dakota are tied to the Bakken, while every taxpayer has seen a substantial reduction of income and property taxes. Most notably, the state now relies on the Bakken for more than 50 percent of its total tax revenue.
This last point should be concern us all. A well’s production does not remain steady over time. In fact, it declines very quickly – 65 percent in Year 1, 35 percent in Year 2, 15 percent in Year 3, and 10 percent every year thereafter. While high initial production is advantageous for a return on capital, this characteristic matched with a regulatory-driven slowdown leaves the state with a dangerous reliance on what would be a rapidly declining tax base. The total amount of lost tax revenue would be immense. Drilling at a pace of 2,000 wells per year, a total shutdown of the industry (which happened in the Gulf) for five years would cost the state $43 billion dollars of lost revenue over the life of the wells. A more plausible scenario of a 20% slowdown would be still an enormous $8.6 billion which represents over $1 billion less returned to build infrastructure in oil producing counties and similarly more than $1 billion of lost investment in North Dakota’s Legacy Fund.
If these two losses are of little impact to you, surely part of the other $6 billion will touch your life. The impact on education would be devastating with significantly less ability to fund our local schools, colleges, and universities. Flood control across the state would be a tough battle for funding in a government of limited financial strength. Almost certainly, the groundbreaking on June 12th of the new $124 million medical school at the University of North Dakota would have not have happened if we set a slowdown for the Bakken five years ago.
However, the greatest impact of a slowdown would be on the pace of development in western North Dakota, our state’s small businesses and the careers of young adults.
Talk of development in western North Dakota usually gives an impression that public investments in roads and other infrastructure comprise the bulk of the region’s investment. Despite the impression, private investment in the region has accounted for hundreds of millions, if not several billions of dollars in the past five years. Any sign of slowdown will stop overnight the commitments made by entrepreneurs and investors in western North Dakota, meaning the region loses out on expanded housing, as well as new options for shopping and dining. These investments have bettered western communities and will continue to do so.
A slowdown will have an impact on all of the communities in North Dakota, particularly from a decrease in drilling and the subsequent flight of investment. A reduction in drilling is a direct reduction in well pad tanks produced in Fargo and other well pad equipment produced in Grand Forks. Slower drilling activity means fewer jobs for the software engineers on the east side of the state who design and deploy systems within the Bakken. Lowered demand for housing, commercial and industrial construction will take a big bite out of the success eastern and central engineering, construction, and electrical firms have found in the western side of our state. These types of firms in Grand Forks alone generate hundreds of millions of dollars annually for the community. These are real jobs and businesses that will lose in the midst of a slowdown.
Most disturbingly, a slowdown affects the ability to start a career in North Dakota. For far too many years, our state struggled to create rewarding opportunities that would allow our youth to build a career and start a family. The normal path for a North Dakota native was to graduate high school, attend college near the Red River, and head to the Cities after graduation where the jobs were plentiful and the pay was significantly higher. Today, because of the Bakken, we’ve reversed the trend with an economy that grew and astounding 9.7 and 13.4 percent in 2013 and 2012, respectively. Our state has become the youngest in the nation, the fastest growing economy and population, and a top-five state for personal income.
The cost of a slowdown is truly unbearable and most often based on facts of limited scope. For instance, due to the efficiencies of horizontal drilling and multi-well pads, oil and gas development will cover only 1 percent of the rural landscape. Similarly, the gas flared in North Dakota represents less than 3 percent of the total value of production. Suggesting a slowdown to reduce flaring is the equivalent to the average person choosing to quit work because driving to and from work would cost $100 per month in fuel.
Finally, there is a national and international component to the importance of the Bakken. American oil and gas production is at the highest rates in 25 years or more and we have become the world’s largest oil and gas producer, topping both Saudi Arabia and Russia, respectively, for the honors. Our nation’s ability to take these honors rests heavily on oil production from the Bakken and has minimized the impact of the recent international crisis in Iraq, Syria and the Ukraine. North Dakota’s production, projected to grow from 1 million barrels of oil per day (bopd) to 1.4 to 1.7 million bopd will further bolster our ability to weather world threats to security, energy and industry while creating jobs across the country.
We have to remember that western North Dakota is a work in progress and the region has made tremendous improvements in the past two years. The region’s new roads, housing, shopping, and even opinion polls clearly show it.
So be careful suggesting a slowdown for the industry. The effects impact much more than the state’s oil producers.