North Dakota Fracking Boom Leaves Oil Hub a Bust: Muni Credit

North Dakota Fracking Boom Leaves Oil Hub a Bust: Muni Credit

Oil extracted from wells ringing Williston, North Dakota, helped push the state’s surplus to a record $1.6 billion and generate the nation’s lowest jobless rate. Drilling also left the city broke.

While the U.S. Census counts about 16,000 residents, Williston says it provides services to more than 38,000, including workers living in temporary camps, hotels, and even vehicles. Keeping up with the load is spurring budget gaps that will deplete rainy-day funds, according to Standard & Poor’s, which cut city debt to BBB+ in December, three steps above junk.

The $5.8 million of debt the city sold in December for water and sewer work is a fraction of the $625 million officials say they need for roads, the airport, water supplies and other facilities to handle the Bakken oil boom. The issue, which is exempt from state taxes, included debt due in May 2019 priced to yield 1.5 percent, about 0.75 percentage point above benchmark municipal securities, data compiled by Bloomberg show.

“Williston is the epicenter of this and it’s been, to some extent, destroyed,” said state Representative Robert Skarphol, whose district encompasses part of the city. The Republican has sponsored a bill that would return more oil revenue to Williston.

Dakota Growth

North Dakota’s economy has outpaced every state since the recession ended in 2009, with the fastest growth in personal income, tax revenue, jobs and home prices, according to Bloomberg Economic Evaluation of States data. Its 3.2 percent December jobless rate compared with 7.8 percent nationwide.

Yet in the heart of the oil patch — which pumped a record amount of crude in December — Williston is reaping little of the wealth generated by drilling.

North Dakota ranked second to Texas in crude production in November, according to the U.S. Energy Information Administration. Companies produced $18 billion worth of oil in North Dakota in the first 11 months of 2012, according to the EIA.

About $1.5 million of state oil and gas taxes over a similar period trickled down to the Williams County seat located 18 miles (29 kilometers) east of Montana and 68 miles from Canada.

Planning Challenge

The funds aren’t enough to keep pace with an unconventional oil play that is confounding planners and underscoring deficiencies in the state’s tax and political systems.

State fiscal policies haven’t caught up with the oil boom in North Dakota, said Mark Haggerty, an analyst at Bozeman, Montana-based Headwaters Economics, a nonprofit that researches land management.

In the conventional model, companies drilled vertical wells, built collection facilities and enjoyed a longer production phase requiring few workers, he said. In the Bakken formation, production declines more quickly, requiring more labor to sustain it and deepening the social impact, Haggerty said.

“To maintain production you have to keep drilling and drilling and drilling,” he said.

Nonstop drilling requires more services for more workers, intensifying the strain on Williston’s finances. Balancing the city’s budget is crucial at a time when it must raise money to finance infrastructure work to accommodate growth. S&P analysts warned if Williston’s finances continue to deteriorate, it faces further downgrades.

Obligations Met

Williston officials say the city has historically met its debt obligations. The downgrade occurred because S&P and members of the City Commission “don’t agree with the same level of surplus we need,” said John Kautzman, the city auditor.

“We’ve had a long history of never running away from our debt,” he said.

Cash flows, including those provided by Williston’s voter- approved sales tax, are sufficient, he added.

To reach the Bakken formation, a 360-million-year-old shale bed two miles underground that geologists say holds a 15,000 square-mile region of oil, companies must use a drilling method known as hydraulic fracturing, or fracking. With fracking, water is pumped down a well with sand and chemicals to crack rock and release oil. Officials estimate the field could be productive for as long as 25 years.

Keeping pace with the growth leaves Williston officials little time to plan for the future. Immediate needs include upgrading the city’s wastewater treatment facility, which is on the verge of capacity and threatens to limit the ability to issue building permits.

Capacity Point

“At this point, we have not had to curb any development,” said Shawn Wenko, the city’s assistant economic development director. “There’s going to be a point where we’re at capacity very shortly.”

To raise the $87 million to $100 million necessary to upgrade the plant, Wenko and the city’s auditor are pinning their hopes on legislation authored by Skarphol, the state representative. The city will be better able to respond to S&P’s concerns when this legislative session is over, said Kautzman, the auditor.

If the legislature doesn’t come through before its term ends by May 1, the commission “will have no other option but to look for added places for revenue, or we will make necessary spending changes,” he said.

Skarphol’s bill would return oil taxes to Williston and other cities with 12,500 or more people based on yearly mining employment. For Williston, this would mean about $60 million over the next two years, enough to bond against to make infrastructure improvements, Wenko said.

City Revenue

“This gives hub cities a more dependable revenue stream that I believe bonding entities will recognize as legitimate,” said Skarphol. “That will make them eligible for a more favorable interest rate.”

The bill is under review by the House Appropriations Committee. Republican Governor Jack Dalrymple in his budget proposal in December recommended steps to address the region’s infrastructure needs, including changing the oil and gas production tax formula to funnel more revenue to the area.

North Dakota doesn’t return as much oil tax revenue to the 19 counties most impacted by the Bakken boom as do other Western states to areas affected by drilling, according to Haggerty at Headwaters. The group authored a report last year with Stanford University’s Bill Lane Center for the American West studying how states return oil and gas tax money to municipalities.

Sharing Difference

North Dakota localities are set to receive 11.2 percent of state revenue from oil and natural gas in fiscal 2012-2013, according to the report.

By comparison, localities in Colorado receive 63 percent directly; in Montana, 39 percent; and in Wyoming, 35 percent, according to Headwaters.

Cities that got burned by the bust in the 1980s were slow to respond to the influx of oil workers, said Dean Bangsund, an economist at North Dakota State University’s Fargo campus. They’ve also been stymied by a legislature that only meets every two years, he said.

“We’re looking at something in North Dakota that nobody has seen in their lifetime,” he said.

“We don’t have a lot of other shale plays in really, really rural, sparsely populated parts of the U.S. that have undergone the degree of change in North Dakota and the effect it’s had on our economy. We’re a test case.”

To contact the reporter on this story: Jennifer Oldham in Denver at joldham1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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