Oil boomtown creates challenges
By Larry Dreiling
In 1951, Amerada Petroleum Corp. discovered oil in the Bakken formation of western and central North Dakota. The company—now known as Hess Corp.—and many other operators, have been exploring for oil and natural gas in the area ever since.
The U.S. Geological Survey indicates as much as 4.3 billion barrels of oil and natural gas lays inside the shale of the 24,000-square mile Bakken field, making North Dakota second only to Alaska with the largest proven reserves of oil and natural gas in the United States.
But these production firms couldn’t get more than a trickle of oil from the dense, nonporous shale that lay two miles underground.
That all began to change as early as 1976, when the old U.S. Bureau of Mines began pilot testing hydraulic fracturing of shale. It wasn’t until the late 1990s when fracking—as the technique became known—of shale, took off. The process—technically known as slickwater fracturing—was then tried in a formation similar to the Bakken near Fort Worth, Texas, known as the Barnett Shale.
The concept is complex: Drill down into the shale one mile and then make a horizontal turn and drill another mile through the gas-bearing rock—allowing a single well to reach more gas. Huge volumes of water (over 20 million gallons removed from Lake Sakakawea and hauled to wells daily) and chemicals are blasted down the well to crack open the rocks and free the oil and gas trapped inside.
In August 2003, production on the Bakken was 49,843 barrels. In August 2013, using slickwater fracturing, nearly 9,500 wells through all of North Dakota were pumping 26.261 million barrels, or a little over 847,000 barrels of oil and 1 million cubic feet of natural gas per day.
It’s estimated another 9,000 wells are yet to be drilled. About 2,000 wells are now drilled each year, with anywhere from 15 to 25 years of top production in each well, although most wells can have a life of up to 45 years. The estimated 615,000 barrels of oil produced from the shale of each well is light sweet crude, the oil easiest to refine into gasoline.
“Drillers come in with segmented plugs,” said Dale Patten, president of the McKenzie County Bank of Watford City, N.D., to the American Bankers Association’s recent National Agricultural Bankers Conference, at Minneapolis, Minn. “That way, each segment is fracked through the entire formation. It’s very efficient.”
And profitable, too. While each well costs about $9 million to drill and complete, it’s estimated the net profit from each well’s lifespan will be $20 million, paying $4 million in taxes, $7 million in royalties, $2 million in wages and $2 million in operating expenses.
While about one-third of the natural gas is currently flared off, much of the gas is now being trapped and is sent onto a ever-growing network of pipelines, many into Canada.
“Some of this country around these wells is pretty rugged and it’s hard to run pipeline into them,” Bob Humann, senior vice president of lending for the Bank of North Dakota, said. “Besides, a lot of the production companies use natural gas generators on site to power the pumps.”
Patten said gas directly from the wells is extremely hot, which makes it difficult to use in these generators.
“There are people out there trying to find ways to make that work,” Patten said. “It’s become quite entrepreneurial.”
With all that oil and gas development comes economic development issues that continue to challenge community leaders.
It’s not the first time these leaders have met some challenges. Take Humann, for instance. He recalls how agriculture in the area had its trends, such as value-added production—and how he had to meet them.
“I started my career back in 1992 and we were looking to diversify farmer income. We started financing bison operations, so I ended up getting the nickname ‘Buffalo Bob,’” Humann said. “I later started working on financing ethanol and biodiesel plants, so I got a new nickname in ‘Biofuels Bob.’ The way things have taken off since 2006 I’m now known as ‘Bakken Bob.’ These changes make you stay current.”
Another lender is squarely in the bull’s-eye of the Bakken formation.
“This boom has brought in a lot of people to the area,” Patten said. “Many of them come up to work two weeks on then two weeks off in the fields. They work 12-hour shifts, sitting in a skid shack to work, then going to another skid shack on location for 12 hours to eat and rest. Then they go back home.”
Currently 185 rigs are working in the Bakken. This massive uptick in the area has created more than 22,000 temporary drilling jobs, along with 13,000 permanent jobs in other service sectors of the economy, with upwards of 3,000 permanent jobs created each year.
In McKenzie County, the heart of the Bakken, 65 rigs are operating, Patten said.
“That’s $1 billion being spent in the county every six weeks,” Patten said. “They can drill a well in about 16 days, then spend another 60 days getting it into production. In that time they’ll spend another $8 million to $10 million and have roughly 150 people on that location.
“Those people needed to operate at a very high level. Some were very good. Some didn’t know what they were doing. When you have mistakes it can be expensive and dangerous as well.”
While oil-drilling activities are company-financed, local banks are financing the oil field service industry—especially trucking and backhoe companies, Humann said.
“For years, you really knew who was coming into the bank all the time,” Patten said. “This goes all the way back to Grandpa. Practically every deal we now work is a new customer. He may come in from California or Texas or Chicago. You have to start building new relationships.
“Some are coming in with great ideas. Some are coming in with capital. Some are coming in with a great work ethic. Some are coming in without a drivers’ license. The real challenge is know who is going to be a good person to you. I found one guy from Illinois who, when I did his financial statement, discovered he had more than 60 LLCs, LLPs and sole proprietorships.
“Meanwhile, I had one guy just wanting to buy a backhoe a couple of years ago. He now has a $700,000 line of credit because of all the equipment he runs. His net income last year was just under $1 million.”
That kind of growth is typical of the boomtown that Watford City has become. The farmers and ranchers who are landowners with leases, who used to finance high-horsepower tractors over the course of years, now finance in terms of months.
“One of the questions we ask ourselves is how long is this all going to last,” Patten said. “First, we built hotels. Then, the apartments started coming up. Now, it’s single- and multi-family housing. Single-family homes present our biggest challenge because the infrastructure costs are such that it creates expensive lots. You end up with pretty high-priced properties. There is a huge pent-up demand for housing.”
Lutheran Social Services teamed with a local oilfield service company to finance a 140-unit low-income apartment complex. Last July, Cash Wise Foods opened a 47,000-square-foot store.
“The deli was expected to do about $30,000 a week. It actually does about $80,000 a week,” Patten said. “It’s open 24 hours a day and the parking lot is always full..”
Other challenges include infrastructure, particularly building roads that can handle the growing amount of truck traffic.
“A semi loaded to capacity has the same impact as 60,000 cars,” Patten said. We have to fix our roads quite often at $1 million per mile. Our gravel roads are just pounded. That’s about $50 million to repair in the last year.”
A $13 million addition to the elementary school has just been completed to handle the jump in K-12 enrollment from 825 students in 2008 to 1,300 in 2012.
“We have a bond election coming up in January for a new $55 million high school,” Patten said. “We are adding lots of new teachers. My wife is a first-grade teacher. We had two first-grade classes, now we’re up to five.”
Medical services and child care also rank high in needs. Plans are in the works to break ground on a $50 million hospital in March. One-fifth of the state’s highway deaths this year occurred in McKenzie County.
“We need more emergency responders and we have lots of hard-working people who fall asleep at the wheel from working too many hours. Usually, it’s someone in a pickup who goes too fast trying to pass a semi,” Patten said.
As it is, Patten thinks the boomtown of Watford City will stabilize a bit as wells are completed and production sets in. Because of this, farmland that used to be priced by the acre now is priced by the square foot. There’s also one other interesting change.
“In 2000, five babies were born in McKenzie County,” Patten said. “I think there was that many conceived last weekend.”
Larry Dreiling can be reached by phone at 785-628-1117 or by email at email@example.com.