When silver linings tarnish

Instead of trying to weaken companies, we should be creating an environment where all businesses can become stronger and allowed to grow because the old adage is true: a rising tide does lift all boats, and we saw it happen in western N.D.
By Tessa Sandstrom | March 03, 2016

Apart from the photos of kids or presidential posts about the Donald or Bernie Sanders,  the most common social media posts I am seeing on my newsfeeds are those asking for oil prices to go back up. At one time, the lower prices were somewhat welcome, as communities caught up on infrastructure, businesses and motorists enjoyed lower gas prices and the bad eggs were weeded out and sent home. It seems, however, that those few silver linings are beginning to tarnish as the impact of low oil prices begin to hit closer to home.

If there was ever a reminder that all of these perceived big oil companies were made up of real people, this is it.

Concerns within the industry are high as layoffs and bankruptcies seem imminent if there is not relief soon. Yet, there are those who scoff at those concerns, accusing the industry of fear-mongering or seeking pity. They say this industry should be taxed more, penalized more or bled more, despite the fact that oil and gas production taxes already account for at least half of all state tax collections. I say “at least” because those numbers do not even account the sales and use, income taxes or the fees and royalties paid by the industry and its employees and mineral owners.

Some want to tax the industry more, even as the profit margins have shrunk to almost nothing and for some companies, into the red. If these artificially low prices continue, it means more lay-offs are ahead and some research analysts predict that at least one-third of existing companies will shutter their doors before the year is over.

Meanwhile, the federal government seems poised and ready to deal the deathblow as regulation after regulation is being proposed. The U.S. Bureau of Land Management is already making rounds to push rules on flaring that would seek to grasp at pennies, but ultimately will mean a sacrifice in dollars as wells could very well be plugged and abandoned.

That, after all, could be the aim of the federal government, but even within our state we’ve seen a movement toward more regulations, often as knee-jerk reactions to those who are ill-informed on the issues in question or who believe that government interference and micromanagement is the only solution.

This is not to discourage reasonable regulation. Such regulations are important components of creating a level playing field and protecting people and resources. But the economic impacts must be taken into consideration because they affect much more than the profits of a business. They will impact people’s jobs, their livelihoods, other businesses, and even our own retirements and pensions since most are invested in oil and gas stock.

It may seem as though I’m writing about a bust, but that is not the case. Many companies are still holding on to what they already have, showing that they want to be long-term members of our state and community. While 2016 is projected to be a down year, the future of the Bakken over the course of decades is bright. Many CEOS consider the Bakken to be among the top two best domestic resources in their play books. There is a large upside for improved oil recovery technology and the better production decline rates and the large oil ratio per barrel makes Bakken crude attractive at higher oil prices. 

Companies are getting more efficient and able to increase oil recovery, making it possible to develop at lower prices, but everything has its limits. At between $20 and $30 per barrel, even a regulation that could cost $1 per barrel represents 10 percent or more of after-tax profits and that is not a sustainable expense.

We have a tendency to hold the technology industry high as the golden child, and for good reason. Technology has made life easier, healthier, and more comfortable and connected than ever. The tech industry also makes a lot of profits and for good reason. As Andy Grove, Chairman of Intel and one of the founders of Silicon Valley said, “Profits are the lifeblood of enterprise. Don't let anyone tell you different.”

Without profits, no industry can adhere to new regulations. They can’t improve and innovate. They can’t become more efficient. They surely can’t pay employees or taxes. Without profits, they simply can’t exist, but we’ve found ourselves in an environment where that does not seem to matter.

For a long time, North Dakota had policies that encouraged companies to come to our state to do business. We understood they meant jobs. Now, we have many companies that are fighting to stay, but many are trying to push them out.

Instead of trying to weaken companies, we should be creating an environment where all businesses can become stronger and allowed to grow because the old adage is true: a rising tide does lift all boats, and we saw it happen in western N.D. as business after business popped up in the wake of a growing industry. But the overreach by federal government has begun to punch holes in many boats’ hulls. We need industry, its employees, its mineral owners, and our own local and state leaders to stand up and plug those leaks rather than delivering any further blows.

Author: Tessa Sandstrom
Communications Manager,
North Dakota Petroleum Council
tsandstrom@ndoil.org
701-557-7744