Thursday, June 30, 2011

North Dakota's Booming Oil Economy

If there's any doubt that domestic drilling of oil and gas generate huge and significant positive economic benefits (more jobs, income, output, tax revenues, etc.), the booming economy in North Dakota provides a convincing case study.  The Peace Garden State's economy is doing so well on so many different measures, here are some highlights of its ongoing economic success:  

1. Monthly oil production dipped slightly in April, but is above its year-ago level by 23% and above the April level two years ago  by 78.5% (see chart above).  Oil production this year has averaged more than 10.5 million barrels per month, which is double the monthly production levels in 2008, and triple the levels from five years ago. 

2. Oil-related employment in North Dakota has more than doubled in just two years, from 6,800 jobs in May 2009 to 15,200 jobs in May of 2011.  While the national economy struggles with another "jobless recovery," North Dakota has continued to add jobs, and not just oil-related jobs.  The overall state employment level reached an all-time high in May and is 2.5% above the June 2009 level when the recession ended.     

3. In the first quarter of 2011, North Dakota led the country with a 6.9% increase in personal income.  Second place Wyoming at 2.6% wasn't even close, and North Dakota's increase was almost four times the national average of 1.8%. 

4. In 2010, North Dakota led the country with a 7.1% increase in real state GDP, almost three times the national average of 2.6%, and two full percentage points above the 5.1% growth for second-place New York.

5. North Dakota continues to lead the country with the nation's lowest jobless rate.  In May, North Dakota's unemployment rate of 3.2% was lower than second-place Nebraska's rate of 4.1% by almost a full percentage point, and was almost six percentage points below the national rate of 9.1%.   

6. As a result of North Dakota's booming oil-based economy, tax collections from 2009-2011 have exceeded projections by $237.5 million.  Through May, sales tax collections exceeded projections by 13% and income tax revenues by 10.6%. 

Bottom Line: North Dakota's impressive economic success clearly illustrates some of the benefits of domestic energy production: more jobs, record economic growth, huge gains in personal income, and even more tax revenues.  There's no reason that the economic success of North Dakota can't be duplicated elsewhere, if we would only open up more U.S. land and off-shore areas to domestic energy exploration and drilling.   

24 Comments:

At 6/30/2011 10:00 AM, Blogger rjs said...

now all you need is a way to get the oil to refineries, instead of storing it in cushing...

 
At 6/30/2011 10:07 AM, Blogger Brian said...

RJS - it goes down by rail to the gulf coast. Most of the available trains are under contract.

MJP - love your blog, but that graph is a bit silly. We expect oil jobs to go up with oil production levels if our baseline is de minimis, right?

 
At 6/30/2011 10:37 AM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

 
At 6/30/2011 10:41 AM, Blogger Buddy R Pacifico said...

If oil production goes up dramatically, then should employment track so closely despite productivity gains? The answer may be more proof of the multiplier affect of high value added jobs.

-----------------------------------
North Dakota has the lowest unemployment and Nevada the highest. Stimulus spending was to help generate jobs. North Dakota has received twice as much stimulus funds as Nevada has per person. ND should have recieved the lowest per capita of stimulus, if any at all.

 
At 6/30/2011 12:07 PM, Blogger Che is dead said...

"ND should have recieved the lowest per capita of stimulus, if any at all."

Further evidence - if any were needed - that the Democrats are clueless when it comes to the economy.

 
At 6/30/2011 12:26 PM, Blogger Paul said...

"ND should have recieved the lowest per capita of stimulus, if any at all."

The reason is North Dakota had an all Democrat Congressional delegation at the time of the stimulus. Ask Benji about that one.

 
At 6/30/2011 12:58 PM, Blogger DL said...

I wonder how N. Dakota's economy would be affected if we ended the so-called "subsidies" for the evil oil companies.

 
At 6/30/2011 2:09 PM, Blogger Benjamin said...

Good call, Buddy.

The rural states have been getting much more back from the federal government for not for decades, but generations. A state like North Dakota is afloat in federal lard. At latest count, they get back about $1.68 for every dollar sent to DC. It amounts to $5,000 per capita net, back in 2005. Probably double that now.

Imagine, the N Dakota family of four sits down, and there is $20k of federal lard at the table. Every year. See Tax Foundation.

I deeply admire the guys drilling for oil, and wish them all the best. I also wish North Dakotans could stand on their own two feet, instead of relying on Uncle Sam for their economic vitality.

Yeah, it's those rosy-cheeked N Dakatons working hard--at leeching off of federal taxpayers.

 
At 6/30/2011 2:12 PM, Blogger Jim said...

On a related note, West Virginians keep electing Democratic state and local representation despite their stated intention to eviscerate coal production.

Is this the perfect example of party elasticity? It is puzzling.

 
At 6/30/2011 2:14 PM, Blogger DL said...

Benjamin @ 2:09

Just as a hypothetical, suppose that the 5 states with the smallest population were to break off and form their own country (far-fetched, I realize).

Would the other 45 states be better off as a result?

I would say no.

 
At 6/30/2011 2:39 PM, Blogger juandos said...

"I wonder how N. Dakota's economy would be affected if we ended the so-called "subsidies" for the evil oil companies"...

Isn't it amazing that when politicos throw that little phrase around they really don't define what an 'oil company subsidy' supposedly is?

 
At 6/30/2011 4:07 PM, Blogger Benjamin said...

DL-

I can tell you that CA would be far better off without federal affiliation. About $60 billion a year flows out of CA into rural America. We also have to pay for a bloated and coprolitic military archipelago that no other nation on earth would pay for, including an independent CA.

 
At 6/30/2011 4:31 PM, Blogger DL said...

Juandos,

The way I figure it, politicians on the left get to “kill three birds with one stone”.

First, many of their constituents think that the oil companies control the global price of oil, and should be punished for letting prices rise. Second, politicians who propose raising taxes on oil companies can appear to be concerned about the deficit. And third, a significant portion of their constituency consists of people who would like to see a significant reduction in the amount of oil drilling being done, regardless of the economic consequences of such a reduction. So from a political standpoint, their rhetoric makes a lot of sense.

 
At 6/30/2011 4:34 PM, Blogger juandos said...

Nice try pseudo benny in your sad attempt to defend the 'libtard parasites' you and the majority of the Californians keep sending to Sacramento...

Now you have 'Moonbeam' sitting the palatial governor's mansion proving you people can't or won't learn from your past mistakes...

California's tax base is moving away...

From the Orange County Register: 69 more firms move jobs, facilities out of California

 
At 6/30/2011 6:56 PM, Blogger Craig said...

Benjamin said:

A state like North Dakota is afloat in federal lard.

Well, then the problem is doing away with the federal lard, isn't it. Criticizing North Dakota is just snark.

 
At 6/30/2011 7:24 PM, Blogger VangelV said...

Bottom Line: North Dakota's impressive economic success clearly illustrates some of the benefits of domestic energy production: more jobs, record economic growth, huge gains in personal income, and even more tax revenues. There's no reason that the economic success of North Dakota can't be duplicated elsewhere, if we would only open up more U.S. land and off-shore areas to domestic energy exploration and drilling.

The same argument could have been made for the dot.com bubble. Employment was booming and tax receipts were exploding as massive amounts of capital were invested in ventures that would make a great deal of profits. The problem was that most of the ventures did not make a profit and the entire boom turned out to be a capital destroying bubble that made the nation ultimately poorer even as it enriched those speculators who were early to the party and decided to cash out when things got too heated.

The current shale boom is another version of the dot.com bubble. Yes, some wells are very profitable and a good investment. But the average well will lose money and there is no way for investors to make money from producing shale gas. The reason is obvious; the depletion rates are too high and the UARs are much lower than the assumptions being made by the producers. We have already seen the NYT and other outlets blow the whistle on the scam as they point to insider e-mails that are making exactly the same point that some of us have been bringing up over the past few years.

And note that all of the 'good news' for the ND economy did not translate into good news for the producing companies in the region. While the drillers got rich by seeing their rates bid up by the producers, the producers were losing money as the collapsing real economy caused demand to fall below supply.

Sorry Mark but the conference calls and the profit reports are indicating an obvious bubble. If the producers had to use UARs that reflected the production data and had to justify their reserve estimates you would see a rapid crash that will resemble what you saw in the housing sector. But the SEC does not seem to care about the truth and wants to prevent a collapse in the sector at least until the next election is over. But somehow, I would not continue the illusion to last that long. Eventually, even trusting souls like you will see reality for what it is.

 
At 6/30/2011 7:27 PM, Blogger VangelV said...

I wonder how N. Dakota's economy would be affected if we ended the so-called "subsidies" for the evil oil companies.

You don't even have to wait for that to happen. The shale gas and oil producers are hurting because the depletion rates are too high and cash flows are lousy. They can't make a profit from selling their product so they settle for the next best thing. They inflate their reserves (you can thank the SEC for that one) and sell them off to conventional producers looking to hide their own reserve declines.

 
At 7/01/2011 2:36 AM, Blogger juandos said...

"The shale gas and oil producers are hurting because the depletion rates are too high and cash flows are lousy"....

Still pushing that 'peak oil' scam eh, vangeIV?

 
At 7/01/2011 7:00 AM, Blogger VangelV said...

Still pushing that 'peak oil' scam eh, vangeIV?

It is hardly a scam. The peak for the production of light sweet crude was in 2005. Total production was maintained at a plateau until 2008 thanks to hundreds of billions of dollars of new investment but that level is unlikely to be reached again.

Even the IEA and EIA have finally admitted that depletion rates were more than 50% higher than what they were estimating a decade ago and the shale producers are bleeding red ink as their estimates for ultimate recovery are not being met. Only an idiot would buy into the hype when the insiders' e-mails are painting a totally different picture.

 
At 7/01/2011 7:16 AM, Blogger VangelV said...

Here are numerous rebuttals to the NY Times "hit piece"

from: Government, academics, independant experts, investors, analysts, industry, and peer media.


Good. Let us look at the responses.

First the EIA.

One guiding principle that we employ is, “look at the data.” It is clear the data shows that shale gas has become a significant source of domestic natural gas supply. Prior to 2005 shale gas constituted only 4% of natural gas production and had grown to become 23% of production for 2010. EIA’s continued monitoring of the situation indicates that growth in shale gas production continues and that shale gas has exceeded 30% of total marketed natural gas production through May of this year.

This is meaningless. Of course shale gas production has increased. That is what we expect when billions of dollars are spent to drill new gas wells. The Times certainly does not dispute that point. What it says is that the wells are not profitable because the depletion rates are too high and the ultimate recovery is way too low to justify the drilling cost. This is why the producers are losing money as a group from shale gas drilling.

Let us move on to the Aubrey McClendon comments in the Oklahoman.

"It is also ludicrous to allege that shale gas wells are underperforming as we sit awash in natural gas, with natural gas prices less than half of what they averaged in 2008,” he said. I also note that Chesapeake and other shale gas producers are routinely beating our production forecasts. How can shale wells be underperforming if shale gas companies are beating their production forecasts and as U.S. natural gas production has recently surged to record highs?"

This is the same point as the EIA. They point to the aggregate production figures rather than the actual per well production data that shows that his well depletion and UAR data. As Bill Powers pointed out the average UAR assumption made by Aubrey McClendon's company has only been met by less than 1% of the wells drilled. Now it is obvious that some wells that were just drilled cannot possibly be expected to meet that figure but when you look into the production data you will find that the depletion rate makes it impossible for the new wells to reach it in the future.

This is one of those deception moves where the argument is designed to divert attention from the actual material points that were made by the analysts.

Keller said he talks with lots of industry officials in the course of his work and hasn't heard anybody talk about inflating reserves.

Wow. He hasn't heard? Why not look at the actual per well production curves and do the calculation instead as the critics have done?

More on next post...

 
At 7/01/2011 7:27 AM, Blogger VangelV said...

Let us look at the Exxon comment quoted on the Oklahoman link cited above.

"The Times questions the value of our country's vast shale gas resources with little more than anonymous sourcing, two-year-old emails and analysis unsupported by fact," the blog said.

Actually, the depletion rate issue and the failure of wells to reach the assumed EUR are the material facts that Chesapeake, Exxon, and other shale gas hopefuls have failed to address in their responses.

Let us go on with Exxon's response.

"Ironically, author Ian Urbina did not call ExxonMobil, the largest natural gas producer in the United States, for comment. You would think an investigative journalist for one of the world's great newspapers would have been curious to know why the world's largest publicly traded energy company has invested billions of dollars in a so-called ‘Ponzi scheme.' Of course we're doing no such thing, no matter how hard the article works to imply otherwise."

Exxon is not dependent on shale gas for its production or profit so I understand why the reporter would not call the company. And the reason why Exxon is interested in shale gas 'reserves' is very clear. The market would punish the company if it showed that its reserves were in decline to the extent that they really are in decline. The SEC rules allowed Exxon to paper over its reserve problems by buying shale gas players with inflated estimates and using the oil equivalent trick to hide the decline.

Melanie Kenderdine, executive director of the Massachusetts Institute of Technology Energy Initiative, said her group currently projects that roughly 500 trillion cubic feet of shale gas are recoverable at costs of less than $7 per thousand cubic feet.

That number depends on EUR and depletion rate assumptions. If the figures being thrown around cannot be achieved by more than 99.5% of the wells the estimate will be much lower and the costs would be much higher.

more on next post...

 
At 7/01/2011 8:48 AM, Blogger VangelV said...

We move on to the cited piece, Natural gas giant EQT is optimistic about the future of drilling in the Marcellus Shale.

Here we have the company EQT trying to promote the Marcellus shale formation. Here we read the following paragraph:

Understanding of the Marcellus Shale gas play is growing and, with it, industry interest in the play’s West Virginia region.

It’s a maturation process that took place in the more developed shale plays, Rodney Waller of Range Resources explained recently to The State Journal: first in the Barnett Shale in Texas and over time the Haynesville in Louisiana and Texas and the Fayetteville in Arkansas and Oklahoma. Range Resources operates in the Barnett and Marcellus shales.


I expect that most readers missed the irony. The Fayetteville has already peaked. While new wells that are just in the drilling phase can get production to rise slightly the long term for the formation is down after just six years of serious development. The production data shows that the depletion rates are too high and the estimated EURs are
not going to be reached by any but a tiny fraction of wells. The Fayetteville formation has been a net destroyer of capital even as it created jobs and helped the local economy.

More on this on next posting...

 
At 7/01/2011 8:50 AM, Blogger VangelV said...

EQT is increasingly bullish on the Marcellus in general, according to company Chairman and CEO Murry Gerber, for several reasons.

Well costs have dropped in the past year, Gerber said, to about $3 million per well, a number he said the company is happy with.

At the same time, estimated ultimate recovery, or EUR, levels are moving up, resting now between 3.5 billion and 4 billion cubic feet on average per well in EQT’s West Virginia and southwestern Pennsylvania footprint, with good expectation of edging toward the top of the range.


In the Q2 2011 earnings conference call our pal Aubrey McClendon moved his EUR levels from 2.4 to 2.6 bcf without noting that less than one third of one percent of the wells drilled have reached that level and that the production data for existing wells suggest that the level cannot be obtained by the average well, which means that the costs will be higher and the production will be lower.

Here is Bill Powers on the issue:

To put into perspective how ridiculous CHK’s claim of 2.6 bcf is, consider the following: Of the company’s 742 operated wells completed in the Fayetteville shale over the past five years, only 66 (9 percent) have produced more than 1 bcf and none have produced more than 1.7 bcf. CHK’s average Fayetteville well has produced only 541 million cubic feet (mmcf). On its Q4 2010 earnings conference call, Southwestern Energy upped its EUR for its proven undeveloped drilling locations from 2.2 bcf per well at the end of 2009 to 2.4 bcf per well at the end of 2010. The third largest operator in the Fayetteville, Petrohawk Energy (NYSE:HK), which recently sold its Fayetteville acreage to ExxonMobil for $650 million, has not publicly disclosed its EUR for the Fayetteville for some time, likely due to the poor performance of its wells. However, given that it locked in a huge loss in its sale of Fayetteville assets, I expect HK’s Fayetteville shale well EUR to be far lower then either of its two competitors. (More on HK’s sale later.) Based on information I found on the Arkansas Oil and Gas Commission’s website on 4/11/2011, there is strong evidence to suggest that CHK and SWN are overstating their EURs per Fayetteville well. Here are some of the highlights of my data mining efforts:

Only 11 wells of the 3,110 wells drilled into the Fayetteville since 2005 have produced more than 2 bcf. In other words, slightly more than a third of one percent of all wells to date have produced more than 2 bcf.

79 wells (2.5 percent) have produced more than 1.5 bcf

1,552 wells (49.9 percent) have produced less than 500 mmcf of gas.


Notice how the skeptics are using actual production data that looks at the performance of each well and the profitability of operations while the promoters are talking about aggregate production data and ignoring the profitability issue altogether?

but let us ignore the reality and go with the hype again. We read:

Gerber’s enthusiastic comments about reasons for that increase in Marcellus EURs reveal some of the "wild west" nature of a new gas play.

With experience, the company improved its well completion techniques for the Marcellus in 2009, he said. It has learned to target the most brittle section of the formation, which is both the richest part and most susceptible to hydraulic fracturing, or fracking.


The company admits that much of the formation is difficult (and likely unprofitable) so it is targeting the low hanging fruit, which will permit it to report lower losses on the shale operations but book high reserves that can be sold off to some other company with profitable conventional production and a need of a way to hide its reserve declines.

 
At 7/01/2011 8:54 AM, Blogger VangelV said...

OOPS....

Sorry. The last few postings were for another thread.

 

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