Visions of Oil Busts Haunt Dalrymple’s North Dakota Budget Plan

Rancher Michael Brew can survey North Dakota’s oil boom from the saddle. As he checks on his cattle, he sees seven drill rigs, a dozen gas flares and convoys of trucks rumbling down the road.

“I used to ride out on my horse and not see anyone for hours,” Brew, 52, said at Nana Lil’s cafe in Killdeer. Now gas flares tint the night sky orange and obscure the stars. The staccato of air brakes and the slamming of drill pipes pierce the breeze. “There is no peace and quiet anymore.”

Oil has created a $1 billion budget surplus and presented Governor Jack Dalrymple with a question: How to keep up with the boom while keeping the money flowing. Only North Dakota and Montana have reported surpluses from 2009 to 2011, according to the Center on Budget and Policy Priorities. As states face what may be more than $112 billion in deficits in the coming fiscal year, Dalrymple’s dilemma is one many governors might envy.

“The number one priority is to keep up with the infrastructure,” Dalrymple said in a February interview in Bismarck. “That growth cannot continue if we do not keep up with all the impacts that happen on communities out there.”

Dalrymple, a 62-year-old Republican, was elected lieutenant governor in 2000 and moved up after his predecessor, John Hoeven, was elected to the U.S. Senate in November.

Amber Waves

North Dakota and its 672,591 residents grow more wheat, barley, sunflowers, canola and flaxseed than any other state, according to the U.S. Department of Agriculture. Wheat futures increased 47 percent last year, to $7.94 per bushel on the Chicago Board of Trade.

And then there’s the oil. The state sits atop the Bakken shale formation, one of the country’s largest reserves and the reason the state has vaulted to the nation’s fourth-largest producer from ninth in six years.

The spot price of light sweet crude oil like that in the Bakken rose 221.78 percent from Dec. 22, 2008 through March 18.

Gross state product increased 75 percent, to $31.9 billion from 2000 to 2009, compared with 42 percent nationally. Unemployment in January was 3.8 percent, the country’s lowest, as the national rate was 9 percent.

Disappearing Prosperity

North Dakota’s history is a chronicle of booms and busts. Grain prices have risen and fallen with droughts and floods, insects and crop diseases, recessions and wars. Residents recall when spot oil prices dropped 67 percent from November 1985 to March 1986, a bust that led to business failures and home foreclosures.

“All of a sudden it went one day,” said Kevin Candrian, a Killdeer rancher who worked on oil rigs. “Poof, it was gone.”

Mike Jacobs, publisher of the Grand Forks Herald, said the state can avert a repetition with good planning and policy.

“You can’t do anything about the weather,” Jacobs said in a telephone interview, “but you can do things about infrastructure and higher education and development.”

The Bakken shale spans western North Dakota, eastern Montana and parts of Canada. High quality, light sweet crude is trapped in dense rock two miles deep.

Traditional wells couldn’t extract much of it. Then, in 2006, Houston-based EOG Resources Inc. tried horizontal hydraulic fracturing near Parshall, 102 miles (164 kilometers) northwest of Bismarck, the capital. EOG drilled 10,000 feet, then tunneled horizontally and hit the hole with high-pressure water, sand and chemicals.

Sideways Gusher

A nearby vertical well drilled in 1981 was a dry hole. EOG’s well produced 1,883 barrels in seven days.

In 2008 the U.S. Geological Survey estimated that the Bakken could yield 3.65 billion barrels in North Dakota and Montana. That would make it the largest continuous U.S. oil reserve outside Alaska.

The state’s largest producer, Continental Resources Inc. of Enid, Oklahoma, puts the total at 20 billion barrels, including deeper formations. The U.S. Energy Information Administration estimated the proved oil reserves in the entire country in 2009 at 22.3 billion barrels.

Continental plans to spend $1.2 billion this year in the Bakken, said Brian Engel, vice president of public affairs. Other companies drawn to the state are Brigham Exploration Co. of Austin, Texas, Marathon Oil Corp. of Houston, Northern Oil and Gas Inc. of Wayzata, Minnesota, and Whiting Petroleum Corp. of Denver.

‘Nice Balance’

“Most businesses located in the state would say they have a good working relationship with state government,” said Terry D. Hildestad, president and CEO of MDU Resources Group Inc., based in Bismarck. “They’ve worked hard to have a nice balance” with industry.

MDU, a natural resources company, is expanding a natural gas pipeline in North Dakota and plans to spend $90 million this year drilling in the Bakken.

Nearly all wells in the region strike oil and 95 percent are profitable, according to the state Department of Mineral Resources. Last year, North Dakota produced 113 million barrels, less than only Texas, Alaska and California, and about 6 percent of the U.S. total.

“This is not the typical oil boom,” Dalrymple said. He described it more like mining than exploration.

Oil and gas taxes added $1.8 billion to state coffers in the past six fiscal years ended in June, and are expected to add $1.3 billion in the next two years, according to a Legislative Council report.

‘Rational Thought’

Dalrymple’s strategy is shaped by the “dark days of the 1980s,” he said. He is trying to diversify the economy, cut taxes and put research money into selective industries, he said.

“Job creation is really the goal,” Dalrymple said. “We can have the things we want and have reasonable taxes,” as long as spending is controlled. “You cannot allow the urge to say yes to every idea overwhelm your sense of rational thought.”

Dalrymple submitted to the Legislature a two-year, $9.3 billion spending plan, including a $1 billion surplus.

He wants to cut property and income taxes by $500 million. Meanwhile, his budget would increase general-fund spending on human services by $265 million, mostly to replace federal assistance; schools by $82 million; higher education by $55 million; and employee salaries and benefits by $36 million.

The plan sets aside $958 million for infrastructure in the 17 oil-producing counties.

“That’s our contribution to keeping the development of oil on track,” he said. “Without that, we know we’ll have a lot of local pushback.”

Out of Pocket

The construction would be paid for without state borrowing. North Dakota cities, counties and state have $4.2 billion in outstanding bond debt, according to data collected by Bloomberg. That is the second-lowest in the country, behind Wyoming. The state is rated Aa2 by Moody’s Investors Service, third from the top, and AA+ by Standard & Poor’s Rating Service, second highest.

Dalrymple governs a state in which he has deep roots. The governor lives in the 1880 homestead built by his great grandfather 20 miles west of Fargo in the Red River Valley. The farm was one of the first and largest of the “bonanza farms,” tracts of at least 3,000 acres that the Northern Pacific Railroad sold in the late 1800s for industrial farming.

He took over the family farm in 1971, after graduating from Yale University with a bachelor’s degree in American studies.

Using the Noodle

In 1991 he led 1,100 durum wheat farmers in organizing the Dakota Growers Pasta Cooperative. They built a $40 million mill and processing plant that converts semolina flour into pasta. The cooperative went public in 2002, and was sold last year to Viterra Inc for $197 million.

Dalrymple’s management of the boom will be felt keenly in Killdeer, a crossroads in western North Dakota that fancies itself the “Hub of Cowboy Country.” Its 751 residents make it Dunn County’s largest town, though cattle outnumber people 20 to one.

The typical well will produce about $1.5 million in salaries, according to the state Department of Mineral Resources. The state estimates that 2,400 will be drilled in the Killdeer area within seven years.

Police calls in the town have quadrupled to 1,000 a month, due largely to burglaries and bar fights. Houses that sold for $30,000 before the boom fetch $90,000. Rental apartments are scarce and the two motels are booked for months.

“It’s not as good as it was five or 10 years ago,” Brew said, “but this is a good place to live.”

John S. (Jack) Dalrymple III at a glance:

Born: Minneapolis, Oct. 16, 1948 (Age 62)

Party: Republican

Spouse: Betsy, formerly an elementary school teacher in Fargo, active in public service causes like early childhood education and youth volunteerism.

Children: Four daughters, ages 25, 27, 33 and 35.

Education: The Blake School, Hopkins, Minnesota, 1966. Yale University, bachelor of arts, American studies, 1970. Dalrymple graduated from Blake and Yale one year behind Minnesota Governor Mark Dayton.

Career: Farming, Dalrymple Farms near Casselton, 1971 to present.

1985 - 2000, North Dakota House of Representatives; 1992, lost to Kent Conrad in special election for U.S. Senate; 1991 - 2010, Chairman of Dakota Growers Pasta Company, which he helped found as a farmer-owned cooperative; 2000, 2004 and 2008, elected lieutenant governor; 2010, succeeded John Hoeven as governor.

Noteworthy: 1984, named outstanding young farmer in the United States by the U.S. Junior Chamber of Commerce. 2007, named entrepreneur of the year in Minnesota and the Dakotas, by Ernst & Young.

Editors: Stephen Merelman, William Glasgall.

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