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North Dakota sees $4 billion drop in oil revenues

State adopts flat oil tax to staff off devastating drop in income
Ron Ness
Regina – Ron Ness has spent several years as president of the North Dakota Petroleum Council talking about the good times. Each year for the past six years Pipeline News has interviewed him about the ever-booming state to the south, which, in that time, caught up to Saskatchewan’s daily production, doubled it, and then added more on top of that. This year, our annual chat with Ness was a little more muted.
Pipeline News: How are things going in North Dakota now that the price of oil has dropped essentially by half?
Ron Ness: Well, the Bakken in North Dakota continues to be a world-class resource. We were at 186 drilling rigs in December. Today we’ve lost about 100 drilling rigs. The big thing is we have over 900 wells that have yet to be completed. That’s kind of the inventory, or grain in the bank, for the operators.
We’ve had pretty significant impact on the exploration side, in terms of employees and various things. But we’ve still got 1.1 million barrels of production per day. We’ve had two months in a row where it’s decreased. That’s tremendous activity. A million barrels of oil everyday, a BCF of gas every day, a million plus barrels of water that needs to be moved, a tremendous build out of infrastructure going on …
Of course the rail and loading facilities are going strong.
P.N.: The state put out numbers a year ago saying if we had X number of rigs going, we’d produce this much. If we had Y number of rigs, we’d produce that much. You’ve now fallen below the threshold of maintaining production. If you stay at 86 rigs, where do you see production going six months down the road?
Ness: Our estimate for this year is hopefully we would remain flat from the 2014 number, somewhere around 1.1 million. We were a little over 1.23 million barrels per day. When we get past some of the road restrictions in June hopefully we’ll see some more of the wells being completed. 
Of course, the companies have high-graded their rigs into their best assets, so you get high-graded in terms of production volumes. Some of the flaring issues have stymied production a bit. 
I think we’re still bullish throughout 2015 we can remain flat, if this price deck continues into 2016 and you don’t see those budgets increase in the fall for the next drilling year, I expect we’ll see production drop a bit.
P.N.: One of the terms we’re seeing in the media now is a “fracklog.” You referenced that, saying a number of wells hadn’t been completed. Can you explain what this phenomenon is? 
Ness: When you look at a typical North Dakota Bakken well, it’s eight to 10 million dollars to drill the well. Companies had drilled the wells – you can drill that well in 18-20 days, but the extremely expensive portion is the completion, to bring it online. Those companies that have backed off on their fracs, or completions, have really built themselves and inventory. That’s what they’re holding as reserves. As cash becomes available, they can go back and complete that well and cover costs. 
Others that don’t have the capital constraints are going to hold onto them and complete them at better prices. So, it’s a lot of different strategies. It really depends on what are your obligations, what’s your debt ratio. And yet, I think industry has been trying to maintain a steady enough flow of completion crews so that we can ramp up if price recovers. That’s one of the concerns. We were losing so many of the frac companies, they were beginning to have to let people go, let crews go, they’re going to be hard to get back. We don’t want to devastate our workforce.
P.N.: What has been the impact on the workforce? Can you actually find an apartment in Williston now, without breaking the bank?
Ness: We were talking this morning, the folks from Minot, saying the vacancy rate is beginning to grow. You’ve got a lot of units coming online. 
In Williston, we hope the price, the cost per unit for a rental unit or home begins to slide. I think it’s moderated, it’s flattened, it’s dipped a bit. Not quite sure. A lot of people built those on the expectation that they were going to have ‘X’ amount of a return. So they’re going to try to hold on as long as possible. But I think, just as with the service costs in the industry, sooner or later, you’re going to see the tipping point and you’ll see those costs fall. Those costs are critical to getting people back here.
P.N.: Have enough people left that there’s such a thing as an empty, vacant room?
Ness: I would think that there is. You’ve certainly see that with hotels. I think the purchasing of houses has slowed. My guess is you’re going to see that continue to tip.
The crew camps are all trying to see their path forward. Some are still doing well. Others are going to have to adjust. It will be interesting.
P.N.: When things turn around, and we all know they will turn around, where will North Dakota be positioned at that point?
Ness: As we’ve tried to explain to our legislature, which is just leaving town today, this is a really big machine. And you don’t just turn it around on a dime. It took us four or five months, really, on the low price side to get things ratcheted down because of the forward spending and the contracts. When you try to turn around the other direction quickly, I think it’s going to be hard. I think it’s going to be hard to attract people back. 
Companies now have been able to highgrade their workforce, but we all know we’re going to need more people back here. The economy in other parts of the country has improved. There’s jobs for them at home. 
In fact, there was a story yesterday. A guy had walked into the Dickinson job service. He had been laid off from his job on a drilling rig. They asked him, “Well, what are you looking to do?”
He said, “Well, I don’t know. I’m looking for a job that pays $35 an hour, guarantees me 50 hours a week, pays for all my housing, and I get a $150 per day diem.”
She laughed at him, and said, “Good luck with that.”
Those are the type of jobs the oil industry brings to the region. You don’t just replace those overnight.
P.N.: Alberta is looking at a $7 billion deficit. Saskatchewan is looking at a $700 million decline in revenues from oil royalties. What’s North Dakota’s impact? Are they, financially as a state, going to be in a bit of a bind?
Ness: North Dakota was looking at about a $4 billion reduction out of the anticipated $9 billion in oil tax revenues, maybe a little more. Our legislature had done a tremendous job of ensuring there were a lot of different reserves and accounts. They’re going to make it through this next biennium.
They did restructure the oil tax. There was a significant tax incentive that would have kicked in, in June, if prices were below a certain threshold. There was a compromise reached to flatten that tax now and get rid of that trigger which would have been somewhat devastating to the state.
It was an antiquated tax structure that needed to be changed. We’ve gone to a flat tax structure now that will provide more stability to the state. 
It’s a reduction on the top end. It will allow the industry to plan forward. It’s a compromise. 
P.N.: Is there any consideration of a sovereign wealth fund in the future, when things pick up?
Ness: We do have the North Dakota Legacy Fund, which we put 30 per cent of our revenues into.
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