Dropping oil prices sound alarms for North Dakota oil patch investments
By Matthew Price High crude prices catapulted North Dakota into the top tier of the global oil market and doubled or tripled the size of once-sleepy towns that suddenly had to accommodate a small army of petroleum workers. But now that those oil ...
By Matthew Price
High crude prices catapulted North Dakota into the top tier of the global oil market and doubled or tripled the size of once-sleepy towns that suddenly had to accommodate a small army of petroleum workers.
But now that those oil prices have tumbled, the shifting oil market threatens to put the industry and local governments on a collision course. Farming and ranching communities that committed to building homes, roads and schools for the swelling population are worried about how they will pay for those improvements as oil-related tax revenue evaporates.
"Everyone is asking the same question: Holy cats, where do we go from here?" said Dean Bangsund, an economist at North Dakota State University who has tried to help oil-rich McKenzie County gauge its needs, with an eye toward balancing growth against revenues. But none of his economic models were pessimistic enough to match how low oil prices dropped.
For now, the oil extraction goes on. Despite the price plummet, drilling remains profitable in the heart of the state's Bakken oil patch, due to the sheer volume of crude flowing from so-called hot-spots.
nd so the building continues in Watford City, a century-old town that once marked the end of the line for the Great Northern Railroad. Roughly 60 rigs are drilling in surrounding McKenzie County -- 40 percent of the rigs statewide. New neighborhoods and retail centers creep ever deeper into former wheat fields.
"We're making a new, 15,000-person city in the middle of a pasture," said Brent Sanford, mayor of Watford, the county seat."The question is if we get money put into the pot to do it."
The county, which a decade ago had a population of about 5,000, has become a magnet for "man camps," where newly arriving workers and their families live in trailers, RVs and just about any other structure that can stand up to North Dakota's whipping winds.
The pace of growth over the past decade has been "hyperventilating," slackening only slightly as oil prices have fallen, Sanford said. "You can't catch a breath."
With oil prices hovering near $100 a barrel for most of the past four years, ambitious plans were laid out to transform the city from a chaotic, sprawling crash pad for transient workers into a larger, more livable community.
Sanford and other local leaders drafted a long wish list -- more housing, more schools, better roads, a new water treatment plant and expanded law enforcement.
Developers eager to cash in started construction of thousands of apartments and single-family homes. A new high school and civic center began to take shape. A new bypass was built to the south of town to ease traffic jams.
Then oil prices began to drop.
Daniel Kuo, vice president of a Chinese-backed real estate company that's building a 2,000-unit housing complex on the outskirts of Watford, keeps a close eye on oil prices. He's met with McKenzie County economic development agents to soothe any worries that the company might pull back.
"You're in too deep to let a price blip derail you," Kuo concluded at the end of one meeting.
He shared the optimism expressed by Sanford and many others in Watford that oil prices will rebound.
Leaders in the North Dakota Legislature have pledged to keep public-works improvements as a priority.
Whether that's sustainable depends on how long oil prices stay down. Oil and gas revenue forecasts for the state already have dropped $4 billion, reducing earlier projections by roughly half.
$70 OIL IN 2016?
Watford and McKenzie County have joined other western North Dakota counties in seeking help from the state.
Politicians and business leaders from the region flocked to the Capitol in Bismarck to press the Legislature for a larger stake of what's left of the oil revenues.
Leaders in towns like Watford are worried about getting saddled with all the downsides of the boom -- dangerously crowded roads, overtaxed utilities, jam-packed schools and unchecked growth -- without the financial means to impose order.
"At this point, it's like downtown Seattle," said Aaron Pelton, who owns Outlaws' Bar and Grill along Watford's main thoroughfare. "If you can't come to a small community and have a quality of life, what do you have?"
Like many oil towns, Watford has endured the boom-bust cycle before. Oil was first found in McKenzie County in 1952. Within a decade, hundreds of workers had moved on.
Another boom kicked off in 1976, with up to 100 wells a year being drilled until prices started plummeting four years later.
In the last decade, the industry refined the hydraulic fracturing, or fracking, technology that allows drillers to pull oil out of rocky shale. The fracking rush has seen more than 11,000 wells drilled, and analysts predict a total of 50,000 to 60,000 before all the oil is gone. Industry observers expect the wells already in place to sustain last year's production level of 1.1 million barrels a day at least through 2015.
Still, the sudden drop in prices caught most observers off guard and shook confidence in the boom.
"If I could tell everybody that we'd have $70 oil in 2016, we could breathe easier," said Gene Veeder, director of the McKenzie County Job Development Authority.