Then and Now: Bakken Economy By The Numbers

Results of an economic study aimed at explaining the connection between North Dakota's oil and gas industry and the state's economy shows where the oil and gas industry has been, but knowing where it’s going is the challenge.
By Patrick C. Miller | April 08, 2015

Announcing that North Dakota’s oil and gas industry had a tremendous impact on the state’s economy in 2013 might seem like the setup for a well-known car insurance company’s “Everybody knows that” TV commercial.

Well, did you know that with a total economic impact of $43 billion in 2013—in just eight years—the industry’s contribution to North Dakota economy has grown nearly eight times beyond the level it was at before the Bakken oil boom began?

While this might not be as entertaining as knowing that Old McDonald couldn’t spell a word without including E-I-E-I-O as that popular insurance commercial reminded us, well-researched data is what transforms a widely held assumption into a verifiable fact.

Since 2005, the North Dakota Petroleum Council has commissioned a biennial study conducted by the North Dakota State University Department of Agribusiness and Applied Economics to measure the impact of the oil and gas industry on the state’s economy. NDSU research scientist Dean Bangsund presented study results last month during Energy Day at the State Capitol Building in Bismarck.

“The numbers that we pulled together from 2013 are tremendously large, more so than what we’ve found with any study we’ve done to this point,” Bangsund noted during his talk.

For example, the $43 billion economic impact of the oil and gas industry is a 750 percent increase in the industry’s size since 2005, the first year the study was conducted. This represents a 303 percent increase in total jobs supported by the industry and a 991 percent increase in direct jobs.

The total number of direct jobs in the industry has expanded from 5,051 in 2005 to nearly 41,000 in 2011 and to 55,137 in 2013. In 2013, secondary employment added another 26,403 jobs for a total of 81,540, a 37 percent increase over 2011.

Nancy Hodur, an NDSU research assistant professor who co-authored the study, says that the results are accurate because they’re based on data supplied by the industry.

“We go directly to the industry, we ask them what their expenditures are and they tell us,” she explains. “It’s challenging to collect the data, but it also makes a very valid and defensible statement.”

Hodur says providing accurate data for the study is in the best interest of the industry.

“There’s not a magic pot of data that you can just go claim,” Hodur notes. “They’re actually sharing with us confidential information about what they’re spending. We aggregate it and then are able to draw a picture and a description of the effect of the industry on the overall economy.”

According to the NDSU study, there were 2,183 wells completed in 2013 with an average monthly rig count of 185, which Bangsund says grew from a $1.4 billion impact in 2005 to a $20.4 billion impact in 2013.

The study shows that in 2013, there was an average impact of $860,000 per well of in-state expenditures, creating $1.7 million of direct and secondary expenditures and 2.4 direct and secondary jobs. Each well generated an average of $324,000 in severance tax and $23,500 in other taxes, such as sales, personal income, corporate and property.

Each drilling rig generated an average of $40 million of in-state expenditures and $105 million in direct and secondary impacts, creating 177 direct and secondary jobs, as well as $1.4 million in tax revenue.

Bangsund says that North Dakotans have an intense interest in royalty rates, another area covered in the study.

“What does this mean for the people who own the minerals?” he asks. “The survey data we got this time around was very consistent with the survey data we got in 2011. The royalty rate (for oil) is about 17.5 percent across all wells across the state. The royalty rate for gas is slightly lower (17.43 percent).”

The industry paid $5 billion in total mineral royalties with $4 billion of this amount going to private mineral ownership royalties. Bangsund says oil operators were asked what portion of that amount came back to the state.

“As long as it came back to North Dakota, that’s what we were interested in,” he says. “About 40 percent of that $4 billion comes back to North Dakota.”

The study also demonstrates how other sectors of North Dakota’s economy benefit from oil and gas industry activity. For example, it created $11.3 billion in retail trade revenue and $9.3 billion for households, which includes royalties, lease bonuses, salaries, wages and other income.

“This is a complex industry,” Bangsund says. “I’ve been working with the industry for six separate studies, and every time we do this, I learn something new. We break the industry into segments that are consistent with what we think industry does.”

The segments and their economic impacts are:
• Exploration and development includes drilling and well completions, which generates $7.6 billion in direct impacts and $12.8 billion in secondary impacts.
• Production and extraction includes well management and oil and gas extraction and production, which generates $7.7 billion direct impacts and $7.6 billion in secondary impacts.
• Transportation and processing includes transporting oil and gas out of state and in-state processing and transportation, which generates $957 million in direct impacts and $1.9 billion in secondary impacts.
• Infrastructure spending covers what the industry is spending to add infrastructure in the state, which generates $1.5 billion direct impacts and $3 billion in secondary impacts.

The gross business volume of North Dakota’s oil and gas industry is perhaps the best indicator of its explosive economic growth. The $15.3 billion total in 2013 represents a 72 percent increase over 2011 ($8.9 billion) and a 474 percent increase over 2005 ($2.7 billion).

“What portion of that $15 billion do we get in North Dakota?” Bangsund asks. “In other words, not everything that the industry needs to produce a well comes from somebody in the state that can provide those goods and services. We estimated that about $7.3 billion of that $15 billion gets circulated through our economy. “

Every dollar spent by the industry results in $1.48 in economic activity. Government received $4.4 billion from taxes, royalties, leases; licenses, permits, fees and donations—money used to fund schools, roads and infrastructure, law enforcement, parks and recreation.

Finance, insurance and real estate account for another $4.5 billion in economic activity. Other sectors including business and personal services; communications and public utilities; professional and social services; construction; manufacturing, transportation and others contributed $12.7 billion to the economy.

What everybody also knows about the oil and gas industry is that because of falling oil prices, the booming statistics reflected in the 2013 study are likely to be reduced when NDSU looks at data two years from now. The question is: how much?

Future Study Results
“If oil prices remain in the current range, we’re going to see a pretty substantial pullback in the drilling activity,” Bangsund says. “We’ve already observed a fair reduction in the number of rigs. A lot of the companies have come forward with their investor declarations. Their capital expenditures budgets are rolled back considerably from what they have been previous years. They’re simply stating up front that they’re not going to be spending the money that they have in the past.”

North Dakota’s legislators are already taking this into account in their budget planning for the next biennium. The revised oil tax revenue forecast issued by the North Dakota Office of Management and Budget in mid-March estimates that the state’s total oil tax revenue during the 2015-‛17 biennium will be roughly $3.4 billion, down from the $4.2 billion forecast at the start of the year.

This is based on the assumption that North Dakota’s production will average 1.1 million barrels of oil per day throughout the 2015-‛17 biennium. Pam Sharp, OMB director, expects North Dakota oil prices—always discounted 15 percent from West Texas Intermediate by the OMB—will range between $42/b and $52/b, a number more conservative than the legislature assumed in its January revenue forecast.

While noting that the unforeseen drop in oil prices is a reminder that forecasting future economic trends is difficult at best, Bangsund believes that in 2015 and 2016, North Dakota’s oil and gas industry will see mixed economic impacts, mostly in the industry segments of production, processing and transportation.

“The substantial drop in price is going to have an immediate effect on severance tax collections,” he says. “It’ll affect the royalties and other revenue streams that come from those wells. Those wells will still need to be maintained. They’ll still need to have employment associated with them. We’re still going to be adding wells. We’re not completely abandoning the drilling activities.”

Both oil production tax triggers—the small and large trigger—will impact parts of the current and upcoming biennium. For the past five months of the 2013-‛2015 biennium, the small tax trigger will be in effect. The small trigger provides a reduction to producers in the extraction tax for new horizontal wells drilled in the month after the previous month averaged less than $57.50 per barrel for West Texas Intermediate.

“There have been so many things going on with the price of oil lately and no one can say where it is going to lead. Earlier, we didn’t know if the large trigger was going to be in place, but now it looks like it is definitely going to happen,” Sharp says.

The large trigger—a tax reduction applied to all wells for the first 24 months of all wells in production—will be in effect for the first 11 months of the 2015-‛2017 biennium, the OMB predicts. The large trigger is only turned off when WTI trades above $55.09 per barrel for five consecutive months. The large tax trigger could be in place from May 2015 until April 2016, according to the OMB. The January revenue revision only slated the large tax trigger to be in place for 10 months.

While the presence of the large tax trigger impacts several budget allocations, it greatly impacts the resources trust fund. “That is funded by just the extraction tax,” Sharp says. “Once the big trigger is kicked on we don’t have any extraction tax for 11 months. It funds all of the statewide water projects. That is clearly something that is problematic when they were counting on a lot more money.”

Despite low commodity prices and a reduction in the revenue generated from oil and gas, North Dakota should see an increase in sales and use tax, according to the OMB’s budget. In the upcoming biennium, sales and use tax revenues will total $2.87 billion. The 2013-‛2015 biennium revenue from sales and use tax will total $2.5 billion.

Bangsund believes that while nobody can accurately predict the long-term overall impact of low oil prices, the near-term consequences will be more evident further into 2015.

2015 Outlook
“The companies are focusing on the most productive regions of the Bakken; probably the average productivity per well is going to go up. It won’t be a one-for-one drop in production,” he says. “We’re just not going to be drilling as many wells. The industry is going to be focusing even harder now on efficiencies and cost reductions than they were after the leases were secured.”

Because production will continue at a high rate, Bangsund says economic activity in transportation and processing might exceed 2013’s numbers. 

“The refining activity and the gas processing activity is going to continue even if the price of the input—primarily gas and crude oil—goes down,” he explains.

While some see low oil prices as a negative, Bangsund says there is a potential upside if prices eventually increase. 

“Some of these current economic conditions might result in efficiencies that the industry develops more quickly than they would have normally,” he notes. “In the long run, if oil prices rebound and we’ve developed new and better ways to get oil production out of the shale, that could be positive because it might allow these marginal areas to become producing areas if the economics were favorable.”

The long-term prospect is still very positive for a considerable amount of oilfield development in western North Dakota, according to Bangsund.

“We’re seeing a pullback now because of the low prices, but I haven’t heard anyone suggest that we’re going to maintain the current economic climate over the next 20 years,” he says. “Everybody seems to think that prices will return and increase back to closer approaching what we had in 2014. If that’s the case, industry could put more rigs back into that region. They could be drilling wells in areas that are not just the most profitable now.”

Bangsund says the reason oil companies continue to invest billions of dollars into the Bakken for infrastructure projects is because experience has taught them that it’s a tremendous resource.

“The resource is there and we know that it’s extensive; it covers a large geographic footprint,” he notes. “We also know that there are billions of barrels of oils left to be extracted. If we can get caught up with the growth that’s occurred to this point, the state would be in much better position to handle the ongoing development of this oilfield, which is likely to go on for many years.”

And that’s a fact, not a punch line.

Author: Patrick C. Miller
Staff Writer, The Bakken magazine