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THE MAGAZINE OF CORPORATE REAL ESTATE STRATEGY & AREA ECONOMIC DEVELOPMENT
OIL & GAS
A Site Selection Web Exclusive, June 2010

When the Land Is Loud
oilwell
One of the 188 oil wells sprouting amid a welter of activity in North Dakota’s Bakken and Three Forks shale formations.
A gust of oil development sweeps across North Dakota, where people know what land is really worth.
P

ity the Peace Garden State. North Dakota is its own metaphor. Even when people are paying it compliments, they backhand it at the same time for its eternally intertwined scale, remoteness, weather and sparse population, as in "you can find success anywhere … even in North Dakota," or this recent missive from Penn State University Professor Frank Clemente, Ph.D.:

"An extensive study by major U.S. power pools found that for the Eastern U.S. just to get 5 percent of its power from wind will require over 10,000 miles of extra high voltage transmission lines. Considering that it takes about seven years to get one line approved and built, the prospects that wind will make a significant difference are about as remote as North Dakota."

In fact, North Dakota is one state where wind is making a significant difference in power generation, even with a mere 1 percent of its potential exploited. But then, it has all that empty land to cross as it builds up steam.

Oops, sorry.

North Dakotans know what they face, and they generally face it with equal helpings of humor and grit: "In North Dakota we say you have to drive two hours to get to someplace to leave from," says Daryl Hill, a spokesman for Basin Electric Power Cooperative.

Drive up to a highway intersection in the middle of the state capital of Bismarck, and you see a one-line directional sign at the bottom of the on-ramp going west: "Billings 415."

"It is a very, very big state," says humanities scholar Clay Jenkinson at the Lewis and Clark Interpretive Center in Washburn. He would know best: In 2006, the native North Dakotan and author of "Message on the Wind" hiked 173 miles (278 km.) in 17 days along the Little Missouri River. That's about a month more than Lewis and Clark spent in Mandan and Hidatsa tribal territory, by many accounts the happiest days of their legendary journey.

"I just drove the state the other day, and saw things I'd never seen in 50 years," Jenkinson says. "The badlands are really extraordinary … pristine. If Theodore Roosevelt could be airlifted back today, there are some places where you couldn't tell the difference."

And there are others where the difference is emerging, with every white plume of dust sent skyward by an oil truck. The state's layered energy assets bring people and business to the state at a pace as steady and powerful as the territory's famous wind (one of those assets). The newest rush to drill for oil in the Bakken and Three Forks shale formations is just the latest reminder of North Dakota's unique energy geology — and the unique character of the North Dakotans who know how to manage such rushes with an even hand.

Unshakeable Link

That character took its most resolute shape in the person of the late Gov. Art Link, who passed away at the age of 96 earlier this month.

A North Dakota native whose parents, like the forebears of many in the state, hailed from Germany, Link brought a farmstead mentality to the state capital of Bismarck, and later, during his time as U.S. Senator, to Washington, D.C., where, one apocryphal story insists, he once changed his own Impala's oil right on the street, filling the reservoir with the good stuff straight from the North Dakota Farmers Union.

In 1973, the energy crisis was in full bloom, and the state as a whole was being regarded by some as a reservoir: There was serious talk of North Dakota becoming a national sacrifice zone to meet the nation's energy demands. As recounted in the 2009 documentary "When the Landscape is Quiet Again," a flurry of new coal-fired power plants and 22 coal gasification plants loomed on the horizon. Some wanted to develop a coal slurry pipeline to Arkansas. Others look to a massive diversion of the waters of Lake Sakakawea, whose blue expanse, interrupting the Missouri River, punctuates the state's western half.

As industry and political pressure built, Gov. Link stepped to the microphone at a meeting of rural electric cooperatives and delivered remarks that still resonate:

"We do not want to halt progress. We do not plan to be selfish and say, 'North Dakota will not share its energy resource.' No, we simply want to insure the most efficient and environmentally sound method of utilizing our precious coal and water resources for the benefit of the broadest number of people possible."

"By and large, we are a pro-growth, pro-energy culture," says Kevin Cramer, president of the state's public service commission, while simultaneously touting the PSC's deep knowledge and long history in such matters as reclamation of coal lands. (At one time more than 300 coal mines dotted the state.) "We've taken the attitude of farming and applied it to energy," says Cramer.

Thus the state's farming heritage lends its ethos to the energy-industry culture, but there are other connections too between agricultural yields and power yields: Tiny incremental improvements — whether in the design of a seed, a drilling technology or a chemical process — can mean a lot when it comes to improving production. In oil's case, it has to do with horizontal drilling techniques that have gradually grown economical to pursue, especially as the price of oil has risen over the past few years. There's a more visceral connection to the viscous stuff too:

"If you're a farmer in western North Dakota and smell that, it smells like money," says Ron Ness, president of the North Dakota Petroleum Council. As is the case across numerous unconventional natural gas plays today across the country, the unconventional oil play has created "a new crop of millionaires," he says. "One of the biggest questions for North Dakota is what to do with all this wealth."

While most of the companies coming in to drill or to service drilling rigs are from such energy capitals as Houston and Denver, Helms points out one surprising statistic: Roughly 50 percent of the mineral rights owners are residents. "A lot of folks who homesteaded here, their families still live here," he says.

The Habit of Innovation

A common theme of extreme handiness runs through the industrial landscape of North Dakota, and finds its purest expression in the workshops of plants such as Great Plains Synfuels and Tesoro's Mandan Refinery. "Billings and Minneapolis are the closest refineries, so we have to be self-sufficient in all that we do," said Leif Peterson, manager of human resources for Tesoro. "Our shop can do anything with a hunk of metal."

That self-sufficiency translates into invention, innovation and discovery.

Owing in part to the lignite coal deposits that linger just below its surface, the state is home to many coal-fired power plants, many of a progressive, rather than regressive, mindset. Great River Energy's Coal Creek Station in Underwood, the state's largest power plant, is using DOE funding, among other capital, to develop a coal drying technology that increases coal burn efficiency while reducing carbon emissions. It's already attracted interest from around the world, as attested to by the globetrotting of Charlie Bullinger, senior principal engineer.

"We used to use 500 tons an hour and now we use 420," Bullinger explains. "Take out the water and you need less coal."

Next to another coal-fired power plant, Antelope Valley Station near Beulah, stands Basin Electric Power Cooperative subsidiary Dakota Gasification's Great Plains Synfuels plant, the only commercial-scale facility producing natural gas from lignite coal, as well as byproducts such as fertilizer, anhydrous ammonia and other chemical feedstock. Among its newest byproducts is carbon dioxide. Dakota Gasification in 1999 signed a contract with a major Canadian oil producer to pump the CO2 205 miles (330 km.) north to a site in Saskatchewan for use in enhanced oil recovery by Apache Oil and Encana. Nearly 18 million tons have been sent so far, and revenues approach $30 million a year.

In fact, the revenues from those byproducts represent between 40 and 50 percent of the plant's total revenues today. That's enough that, as plant manager Bob Fagerstrom puts it, "I just call them 'products.' "

But the hottest corner of a hot energy state is its Williston crude, derived from the shale formations that underlie the state. Lynn Helms, director of the Department of Mineral Resources, part of the North Dakota Industrial Commission, delivers the crib notes on the state's geological history: Bismarck was in the middle of a shallow sea 350 million years ago. Algae in the mud converted to oil, which is buried two miles deep, and heated to 200 to 250 degrees. "We're extracting 300-million-year-old cholesterol," he says.

"North Dakota crude production peaked at about 150,000 barrels a day in the late 1970s and early '80s," says John Berger, vice president of refining at Tesoro's Mandan Refinery in Bismarck, a 56-year-old complex that currently refines approximately 60,000 bpd. "It declined for some time, and we started bringing down Canadian crude. Then, in the last few years, with Bakken and now Three Forks, now we have 280,000 barrels per day [produced] in the state."

Outgoing State

Exporting both products and ideas from the state is strong and getting stronger, across a range of energy-related products. At Coal Creek Station, a large railyard ships out ethanol and distiller's grains from the $100-million Blue Flint ethanol plant, which opened in 2007 adjacent to the power plant. That yard also ships out quite a few cars full of fly ash, most of it destined for the concrete market. In fact, the concrete used to rebuild the collapsed bridge in Minneapolis-St. Paul was 70-percent composed of Coal Creek fly ash, whose lime, Bullinger explains, resists the corrosive effect that bird waste had on the former bridge's infrastructure.

Shane Goettle, commissioner of the North Dakota Dept. of Commerce, says international interest is strong, and describes several connections with Chinese investors and corporate interests in such areas as commercial-scale coal gasification and coal-to-liquids technology, as well as carbon sequestration. The new prospects build on a long-term relationship between the state and the People's Republic that is built on agricultural trade (only growing stronger as China's middle class grows) and a top-notch flight training school that has trained a large number of Chinese pilots.

The exporting of course applies to crude oil too, as attested to by a new facility from EOG Resources (formerly Enron Oil & Gas) in Stanley.

"It's been decades since a lot of crude moved on rails, but because we needed to catch up with pipeline infrastructure, EOG built a facility that can handle a unit train a day," says Helms. "It takes a train a day to Cushing, Oklahoma. Another one is being contemplated in Dickinson."

On the final day of 2009, the facility sent away its first full train, which arrived three days later in Cushing, Okla. Its activity in the Bakken is one reason EOG saw 23 percent growth in crude oil and condensate production in 2009, to over 55,000 barrels per day. And according to a May management discussion, EOG's 2010 budget for exploration, development and other plant, property and equipment expenditures is $5.1 billion, with crude oil projects leading the way.

In the Three Forks formation as of late May, there were 188 wells and more on the way. In an interview conducted then, just after the BP oil rig explosion in the Gulf of Mexico, Helms said, "We expect some of the capital that would have flowed to deepwater exploration in the Gulf to flow here."

Some North Dakota oil might flow the other way too. Earlier this month, Houston-based Quintana Capital Group said it wants to build a $250-million, 300-mile (483-km.) pipeline from western North Dakota to eastern Montana, where it would connect to TransCanada's proposed Keystone XL pipeline to ship oil to refineries in Oklahoma and along the Gulf of Mexico. TransCanada's 1,980-mile (3,186-km.) project would move some 700,000 barrels a day from Canada's oilsands, but officials in both Montana and North Dakota have suggested that permits will be hard to come by without TransCanada allowing U.S. crude some "on-ramps" to that pipeline.

Making History

That kind of capital investment would follow on some pretty significant capital already in-state. Interest was high at the Williston Basin Petroleum Conference and Expo hosted in May by the North Dakota Petroleum Council, North Dakota Department of Mineral Resources, and the Saskatchewan Ministry of Energy and Resources, with more than 2,700 attendees from 42 states, six Canadian provinces, Japan and Norway. The activity has borne great benefits for the state, which a U.S. Chamber of Commerce report in early May identified as having the highest income and job growth over the past decade. Unemployment hovers around 4 percent.

"Technology has uncracked the code," says Ness, and driven the state from the ninth-largest oil-producing state to the fourth-largest. The previous all-time record of 161,000 barrels was passed in May 2009. As states such as California are decreasing production by about 5,000 bpd every month, North Dakota is increasing it by approximately 15,000.

"What's amazing about the Bakken is over the last year, the success rate of wells has been over 99 percent, in terms of actually producing oil," continues Helms. "Economics wise, 88 to 90 percent are better than break even in terms of making a profit for the investors."

"There seems to be at this point no clear determination of how much oil we can produce out of this formation," he says, noting the $6 million apiece the wells require in initial investment, not to mention continuing investment in the drilling bit and all the transport and services infrastructure that surrounds the activity. "It's nothing short of an economic renaissance," he says. "You cannot believe the activity. It's almost incredible the amount of companies looking to come into this play. I can't keep up — it used to be salespeople from here or there, and now it's the CEOs. We're starting to see [such activity] in other areas of North Dakota, such as in the sand and gravel business — you have well paths … all those types of services. And the bigger companies, the Halliburtons of the world, are bringing in massive amounts of employees."

"Because we've been doing oil and gas for 60 years, we had the legacy operations — all those major service companies were here," adds Helms. But they're piling on the resources to go after the resources. "When Schlumberger closed their Casper, Wyoming, shop, they put all that stuff into trucks and took it to Williston."

EOG has a new office in Stanley in addition to its rail facility. Hess, which drilled the state's discovery well in 1951, has a big new building in Minot that's already filled with some 250 people. And that's just the oil side. Helms says there's been $450 million invested in natural gas gathering and processing over the past few years, "and in the last three weeks another $700 million announced."

Helms tosses in one more barometer, based on the sales at a Cenex coop where he knows the proprietor.

"His entire volume in 2005 was $1.5 million," he says. "In 2008 and this past year, $1 million in pizza will be sold, and the store volume is about $35 million."

Today's Needs, Tomorrow's Foundation

With an average wage of $82,000, the industry is seeing an unprecedented flow of work force to the state. As the oilsands territory in Alberta has experienced, such in-migration can create problems ranging from housing shortages to road deterioration to abnormally high wages for fast-food employees. Sleepy little towns turn into "man camps." In North Dakota's case, the lessons from Alberta are being acted on with solutions from elsewhere in Canada.

"Halliburton is bringing down Olympic Village housing from Vancouver to Williston," says Helms. "It's just starting to be rebuilt." Plans call for multiple crew camps in Stanley, Williston, Watford City and Dickinson. Ness notes that there are between 300 and 500 jobs unfilled on a daily basis at the state's job service department, many of them in housing.

Commerce Commissioner Shane Goettle says the state has actively promoted job postings to workers from out of state, and has funded a petroleum safety and technology training program at Williston State College that has trained more than 4,000 oil workers.

The state is in the midst of a water study to determine how the industry's water needs can be met from the Missouri River, and has substantially increased the amount of oil funds that flow back into the counties to help maintain roads, as the constant flow of heavy equipment and trucks involved with fracking operations ruts out roads in short order.

But it's the human infrastructure that is the most urgent need of all.

"We constantly meet with leaders in the oil industry, and are primarily concerned about two top issues — work force and housing," says Goettle. "We're working with the City of Williston right now on a housing initiative. We're one of the few places in the country where there is any potential for housing development. But, that said, the market is kind of broken right now."

The complexity arises from a mix of factors, says Goettle, notably the cyclical nature of the oil business and the indeterminate nature of U.S. energy policy today. Attracting developers to the region in the face of that uncertainty is a challenge.

"In Williston, it costs about $40,000 to develop a lot for a single family home," he says. So the state is floating the idea around the country that it would agree to a risk-sharing agreement with the city, and has dedicated $10 million in state-backed bonds to a two-phase effort that would help with up to 250 lots, including some for commercial projects. Goettle says the problem is most acute in Williston, "but Stanley, Watford City and Tioga are all experiencing the same issue."

Helms notes the "big task in front of us" if the wells continue to proliferate. "The real struggle is constructing permanent housing for these people. And the model we're following is the oilsands in Canada. Those folks recognized early on that if they tried to build a community that could permanently house all the construction workers, they would overbuild. Because not everybody stays, we want to have a mix of temporary housing, short term housing and long term housing, so the one out of five or so who end up staying have permanent housing."

That said, the boom feels longer term than most, at least according to Ron Ness.

"You always have that boom-bust fear, but the Bakken is so unique and covers such a large area, and not just trapped oil in the structure," he says. "They're starting to understand that the oil is here — the industry is moving past the exploration phase into a development phase. You're going to need the housing and the hotels decades into the future."

That stripe of optimism would be expected from a petroleum industry representative, and could legitimately be expected from most North Dakotans. But it will always be tempered with the conservation and stewardship ideals those citizens have inherited from their farming forebears, expressed in their purest form in the late Gov. Link's most potent words to his co-op friends 27 years ago:

"And when we are through with that and the landscape is quiet again, when the draglines, the blasting rigs, the power shovels and the huge gondolas cease to rip and roar … and when the last bulldozer has pushed the last spoil pile into place, and the last patch of barren earth has been seeded to grass or grain, let those who follow and repopulate the land be able to say, 'Our grandparents did their job well. The land is as good and, in some cases, better than before.' Only if they can say this will we be worthy of the rich heritage of our land and its resources."



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Oil & Gas: When the Land Is Loud: A gust of oil development sweeps across North Dakota, where people know what land is really worth.


“There was a time when renewable and traditional fuels were pitted against each other, and that’s all changed. Our attitude is we need a comprehensive energy policy that moves the ball forward on all of these energy fronts.”



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