Thursday, November 17, 2011

Chasing Growth

Long Term Challenges and Opportunities Inside the North Dakota Energy Boom

North Dakota and its economy have gotten a whole lot of good press in the past year. Though a sparsely populated state (it is the third least populous, with 672,591 residents according to the 2010 census) and relatively small economy in the greater scheme of things, the state has been a star economic performer in an anemic US economy hungry for stars. An oil boom has sprung up in the western part of North Dakota. The western part of the state is located over multi-state oil reservoirs known as the Bakken and Three Forks.

Almost overnight over 20,000 challenging, physical, good paying drilling-related jobs (with lots of overtime) arose in North Dakota. Over 40,000 jobs may have been added to the region in total due to the industry’s multiplier effect. Unemployed and opportunistic workers flocked to the upper Midwest. Official statistics have not caught up to tally and measure accurately the growth and many jobs in western North Dakota remain unfilled.

High oil wages have revived and re-inflated once sleepy locales. Support services and housing supply have lagged behind this huge surge in demand. Meanwhile local workers drawn into the industry have left a vacuum in the lower wage employment base of the state affecting, adversely, the economics of smaller businesses. Labor is short, there is no room at the inn. Real estate developers too have descended on the communities to try to capitalize on the boom and an address an extreme housing shortage.

Is This What 21st Century Growth Looks Like?

North Dakota oil exploration started in the early 50’s and experienced numerous booms (and busts). The biggest such expansion and sudden collapse occurred in the late 1970's and early 1980’s

New technology has energized the North Dakota oil industry once again (and this one many believe may have legs). Superior deep lateral drilling techniques and the ability to loosen up tight oil pockets in shale and recover once difficult to reach oil though the high pressure injection of specialized (and sometimes controversial) fluids means almost all wells yield and initial well production levels are high. North Dakota oil extraction is profitable at $50-60 per barrel prices even as North Dakota Sweet well head prices have been discounted for distance and transportation costs to refining locations. Rail and pipeline operators are re-configuring their systems to get Midwestern oil to market cost-effectively.

Daily production is exceeding 450,000 barrels per day. North Dakota is the fourth biggest oil producing state, rising fast and may surpass (number three) California soon.

Roughly 200 drilling rigs are operating in the state creating approximately 2000 new wells per year, a level that may soon surpass the levels established in the 1980’s boom.  The North Dakota well count will soon hit 7000. Estimates of recoverable oil (depending on who you talk to) are from 4 billion barrels on the low side to all the way up to 24 billion on the high in an extraction process that might span decades.  Again, depending on the point of view, anywhere from 20,000 to as many as 50,000 wells may be drilled ultimately in a field that could play out over 15 to 20 years or longer.

The immediate economic impact has been huge. Drilling wells is extremely resource and labor intensive and time sensitive. Each new well can cost up to $10 million to complete and is a costly race against the clock. But the tech advances of inventive, independent oil producers dominating the North Dakota play continue to make the process more and more efficient.

Each well needs a huge volume of supplies:

“Fresh water is needed to frac a well in order to create clean fractures which allow oil to best flow from the rock to the wellbore. Three million gallons of water and two to three million pounds of sand or proppant are needed per well."

Drilling-related truck traffic has spiked in the race to get drilling supplies in and product and waste materials out. Trucks have torn up North Dakota’s county road systems unprepared for the level of activity. Counties are racing to keep up with repairs and find sources to pay for upkeep of the overburdened road system. Road materials are in short supply. Further constraining the ability for infrastructure to catch up to demand is the region’s limited construction season. Road work and construction halt for at least half of the year. The winters on the plains are severe.

As many as 100 employees are required per drilling rig (or 20,000 in total on the 200) and temporary housing has sprung up for workers. Much of this housing has been constructed by logistics firms and paid for by oil companies. An estimated 20,000 workers are housed in “man camps” in 17 western North Dakota counties.  These dense camps provide high levels of service and convenience to workers working long hours in the field.  Yet the camps are straining rural infrastructure. In some cases large amounts of waste water had to be trucked to nearby cities for treatment. One resourceful logistics firm has constructed a regional waste water treatment plant to process and recycle camp waste water so that it can be reused in the "field" for fracking fluid or agriculture.

For hundreds of incoming workers not lucky enough to be housed in the company or private camps there are insufficient permanent housing solutions; temporary answers are found in RV and mobile home parks that have filled up as quickly as they were put into service though these alternatives may not be ideal given North Dakota’s extreme winter conditions. Some workers live in their cars.

Cities and counties are also dealing with the strains of explosive growth on medical, social and educational infrastructure. They are needing to staff up. It is hard to know where they should begin.

The effects of labor and resource scarcity are being felt in nearby and not so nearby MSA’s. Obviously Minot and Bismarck ND are in the line of fire but the cities of Fargo, Billings and Rapid City are feeling the effects of rapid growth occurring hundreds of miles away.

Housing Evolution

In the short run drilling occurs at a frenetic pace to establish productive leases and create long term units of production. Over time, as drilling activity matures and gradually winds down, drilling is replaced by the significantly less labor intensive resource extraction and maintenance.

The key for housing is to meet labor intensive short term needs and at the same time anticipate the evolution of the Bakken/Three Forks play as the extraction cycle matures. And word is that the workers want out of the man camp's constrictive spaces in the worst way. Employee retention is becoming a problem.

Staffing new construction is a chicken and egg problem as well. Imported construction labor needs housing too.

To aid cash strapped local communities North Dakota is facilitating residential development in the western part of the state by providing $100 million in impact grants that communities can use to fund extension of sewer and water services, street construction and the expansion of water treatment plants.

The residential development pipeline in western North Dakota has expanded dramatically. More than 2,300 new housing units will become available in Dickinson; the city is in the process of annexing additional land as well. In Williston more than 1,750 new housing units are in development.  An additional 2000 units are planned for smaller communities in the region bringing the total potential housing units (single and multifamily) to 6000-7000 to be delivered in the next 3-5 years. This may be enough supply to house 10-15,000 people. This is a good start.