Report: Bakken Oil Creates Boon, Challenges for North Dakota

The Bakken oil boom has bolstered North Dakota's employment rate and tax revenues, but also has created a number of challenges for state and local government as well as producers operating in the Bakken, according to a report by the Energy Policy Research Foundation.

North Dakota has been an oil producing state for 60 years, but only during the past three years has the Bakken boom made North Dakota the fourth largest oil producing state in the U.S. and one of the largest onshore plays in the country. The success of the Bakken, which the U.S. Geological Survey estimated in 2008 to hold 4.3 billion barrels of technically recoverable reserves, has been largely attributed to advances in oil field technology such as hydraulic fracturing and horizontal drilling. High oil prices, low natural gas prices and ready access to privately held prospects also have contributed to the Bakken's success.

With an unemployment rate of 3.2 percent, the state received $749.5 million in state revenues from crude oil taxes on production and extraction in 2010, and more than $10.1 million in extraction taxes for natural gas last year. The oil and gas industry also spent $1.49 billion in taxable sales and purchases.

However, the influx of drilling activity to the state means that state and local governments face a range of new requirements to support the surge in oil production, especially road repair and construction, the report noted. And while North Dakota enjoys the lowest unemployment rate in the nation, the high wages offered by the oil and gas industry is beginning to make it difficult for local stores, shops and restaurants to keep workers given the opportunities in the petroleum sector.

The rate of services required to support the oil boom also are in short supply, with hotels in petroleum producing regions booked two to three years out and every apartment rented. Many oil companies operate their own "man camps" where employees eat and sleep while they are working. "A challenge for the state is to address the requirements for expanded infrastructure and related services while at the same time address the financial risks of an economic downturn should the rising production prove unsustainable," the report noted.

Limited access to traditional transports on infrastructure such as pipelines means that Bakken production is expensive to deliver to major refining centers and is discounted heavily at the wellhead. Bakken crude sells at a discount to Light Louisiana sweet and even West Texas Intermediate crude, despite its high quality, as transportation costs remain high for shipment to refining centers and major consuming markets. However, new infrastructure developments may soon support higher wellhead values.

Well drilling costs also have increased significantly in the past few years, and are expected to grow further, as rising oil prices have triggered drilling activity in multiple shale plays throughout the U.S. While the cost can vary from company to company depending on a host of factors such as the length of the horizontal lateral, the number of frac stages, and the choice of proppant (sand or ceramic), the cost of drilling and completing an oil well in North Dakota in 2009 was $5.6 million, according to the North Dakota Petroleum Council.

Today, several companies have reported drilling and completing costs of over $10 million per well. The increase is largely due to longer horizontal laterals and more frac stages, but also higher input costs from increased demand in rigs and completion services throughout the country and region.

Constraints on well completion services mean that many companies face a backlog of wells that are awaiting completion. The delay can come from weather related constraints as well as constraints in available frac crews. Projects are currently underway to secure the water supplies needed for hydraulic fracturing activity, but the issue of water supply for both local communities and the oil field will continually be dealt with and debated as drilling increases in the region.

Producers also must overcome severe weather constraints, such as heavy snowfall and temperatures as cold as -40 degrees Fahrenheit in the winter, which can result in well shut-ins. The past few winters have been some of the worst in North Dakota history and are proving to be very challenging for the industry. Additionally, severe spring rains have caused towns to be evacuated due to flooding.

While uncertainties exist about the future of shale oil, "North Dakota is embracing oil development and has thus far provided a regulatory environment that addresses genuine environmental concerns but also embraces the economic benefits of rising oil production," the report said.


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