Beyond a doubt, oil and gas are going to be a big part of North Dakota’s future.
Enormous investments in drilling, production, pipelines and infrastructure all help insure that future.
Oil shale exploration and production in other states and countries, using technologies and skills fine-tuned in western North Dakota, will bring expanded oil production in other states and around the globe. It means more competition for rigs now operating in the state. And as fracking technologies expand elsewhere, it means pressure on the price of oil.
If prices decline, so will the margin of profit on existing wells. More importantly, it will affect the decision-making on drilling new wells.
And it would affect state revenues.
The state has triggers keyed to the price of oil. Presently, the effective tax on oil is 10.8 percent (gross production tax, 5 percent, an plus oil extraction tax and minus incentives and reduction). If oil drops below $52.20 per barrel (West Texas Intermediate price), the effective tax rate would fall to 6.5 percent. That would mean $1.4 billion less in revenue to the state.
The state is operating on a forecast of $75 per barrel. The WTI price of oil at the end of Tuesday was $93.44 per barrel.
“Since the price is so high, we don’t expect any trigger to be hit during the biennium,” said Deputy Tax Commissioner Ryan Rauschenberger. He was addressing a joint meeting of the North Dakota House and Senate Tax and Finance committees.
North Dakotans, however, are a cautious lot, and when it comes to oil, we have good cause. The state can’t control the price of oil, or fracking in Texas or China, or consumer demand.
Although the state has become comfortable with surplus revenues from oil and gas (make that expectant of surpluses), the Legislature needs to take a methodical and well-reasoned approach to any long-term financial commitments. It’s not likely oil production will go away in western North Dakota, but its rate of expansion and production could level off or even decline.
Oil production in North Dakota took off when the technology, cost of exploration and production and price of oil reached a point where wells drilled in the Bakken formation became profitable. Incentives (triggers) from the state, regulations and a business-friendly environment are included in the cost part of that equation. It’s the stuff the state can control.
Legislators must account for the impact of state actions on the costs of oil production, maintaining a balance of taxes, incentives and spending on infrastructure related to the oil industry. As the state’s citizens, directly and indirectly, depend more on the oil industry for their livelihood, maintaining that industry’s viability becomes equally critical.
Oil will be in North Dakota’s future, but expect that future to get complicated.