North Dakota is looking at a “structural” gap of $845 million in funding as it moves into its next legislative session, according to figures from North Dakota Tax Commissioner Ryan Rauschenberger shared during the annual East Meets West conference.
Held virtually this year, the event brought together legislators and state officials from around the state. Among the officials was Rauschenberger and North Dakota Director of Mineral Resources Lynn Helms, both of whom are very involved in developing the figures and projections for the state’s next budget.
The structural deficit last session was about 24 percent of what the state spent from its General Fund, all of which essentially comes from oil and gas tax revenues, Rauschenberger said.
Sen. Ray Holmberg, R-Grand Forks, meanwhile, said current estimates are showing a little extra cushion is still available in the ending fund balance.
“(This means” we should get through this biennium OK,” he said, adding that any “nips and tucks” along the way can be handled by the legislature when it returns in January.
Holmberg warned, however, that people looking at projections right now should consider them as if they are written with an “Etch a Sketch.”
“As Ryan said, there is something new or different every day that impacts what the plans are,” he said.
Much of the unpredictability centers around COVID-19 and what it’s going to do to the economy. Will there be a viable and safe vaccine in three or four months, or will it more likely be a couple of years? Does demand for fuel return in a year, two years, or more?
The answers to those questions will ultimately be controlling factors in the state’s future budgets.
Today, North Dakota has but 11 drilling rigs in play, and these are mainly working not on the economics of the moment, but out of fear of the future.
“People are extremely nervous about the first of November and what could happen on the other side of that in terms of federal policy,” Helms said. “So if they have a BLM permit in hand, a forest service right of way, or a BLM right of way, they have a rig on it. It’s not truly economic to be doing that right now. Economics would be much better to do it next year, or even in 2022. But federal policy and concerns surrounding that are what is driving that.”
These 11 rigs are churning out 20 to 25 wells a month, Helms said. That’s about one-third of what North Dakota would need to maintain oil and gas production.
“We are going to have to rely on the 900 uncompleted wells as the price begins to move back up into the territory where we have drilling rigs,” Helms said.
Helms said there are about five hydraulic fracturing crews going right now, each of which employs about 100 people. Drilling rigs each employ about 150 each.
Price projections from the EIA show the economics work in about a year for a return of hydraulic fracturing crews, and in about two years for the return of drilling rigs.
Nymex projections, however, are considerably more pessimistic than the EIA projections. They don’t actually show drilling rigs returning within their forecast period.
Helms said despite the loss of drilling rigs in the state — which represented about 6,600 jobs — the state is still adding some oil and gas jobs even right now, albeit very slowly.
“The thing is, if we are completing 20 to 25 wells per month, we are actually adding 10 North Dakota jobs every month,” he said. “It still takes two North Dakorta citizens to keep one of these wells producing. They work on the workover rigs, they work on well repairs and facility repairs, and at the gas plants. So we are still adding North Dakota jobs, just at a slow pace.”
That is born out, Helms said, by the fact that housing hasn’t emptied out in western North Dakota.
“You are just not seeing as big a demand for single-family housing,” he said. “We have seen apartment buildings at a pretty good occupancy rate.”
Helms said he expects that single-family homes will get a shot in the arm in about two years, as rigs and hydraulic fracturing crews return to the state, putting pressure once again on available housing.
“The resource is still as rock solid as it ever was,” Helms added. “We are still looking at a future with 65,000 wells. So over the next 20 years there will be a substantial amount of drilling and completion and production activity.”
Once these wells are in the ground, there will be long-term jobs tied to them for decades, Helms said. That will continue to fuel the need for school buildings, small businesses, and single-family dwellings far into the future.
On the natural gas side of the sector, things are looking a little more stable, Helms said.
Those businesses all converted gas processing contracts from a percent of proceeds to a fee-based system.
“When you look at the gas price down here, it is a net negative every where you turn,” Helms said. “Natural gas going into Northern Border, they are losing money on every cubic foot. Natural Gas Liquids going into Elk Creek, they are losing money on every gallon.”
But the fee-based system is insulating natural gas processing and takeaway from that reality.
“They did postpone about a billion dollars worth of infrastructure construction into 2021,” Helms said. “But it wasn’t cancelled, it was postponed.”
Helms estimated there is still about $18 billion dollars worth of infrastructure to build out over the next 20 years.
Meanwhile, the state continues efforts to attract petrochemicals that could help add value to North Dakota’s oil and gas in the short-term, and help insulate it from downturns in the long-term.
Helms said the state has a very solid lead from a foreign entity interested in some of the NGLs that have been heading down south to the Gulf of Mexico.
It’s also got several leads on converting ethanes to electricity, which could be used to supply communities in the east central North Dakota region, many of whom are still relying on propane for heat.
“The Industrial Commission is not backing off on its gas capture requirements,” Helms added.
That is being viewed as a necessary stick, to get these liquids captured for value-added products in North Dakota.
Other questions remain
Among other issues that face the next legislative session are questions about how best to proceed with the next legislative session given that the pandemic is likely to still be going then.
Will there be a mask requirement?
Some legislators have said they will never wear a mask.
Holmberg suggested one answer to that could be making it part of the dress code.
On the other hand, he added, he had heard recently that Virginia’s legislators removed a requirement for neckties, citing it as vector for disease.
“We have some folks in the legislature that have underlying health conditions,” Holmberg said. “It’s practically impossible for them to conduct business the normal way. So things are being looked at.”
This will likely include holding meetings in larger spaces. At the same time, Holmberg said, care is being taken to ensure that regular citizens have robust access to representatives.
The Legacy Fund’s earnings are a second big question mark. Holmberg noted that everyone had been sharpening knives and forks to carve into that.
A committee had gathered 172 different proposals from 118 different individuals for using the Legacy Fund’s earnings during the interim.
But the recent COVID-19 pandemic has forced some changes in thinking, Holmberg suggested, even as it has seemingly strengthened the resolve of North Dakotans he’s talking with to avoid touching the principal of that fund.
Prairie Dog, too, is on the minds of many legislators, some of whom campaigned on that initiative, which, so far, budget projections show will only partially fill.
“I know there is a great sense among a number of legislators that one of the first things we need to do is take care of that promise for infrastructure around the state,” Holmberg said.
Rep. Don Visegaa, R-Cooperstown, meanwhile, noted that recent volatility has lawmakers considering alternate procedures for budgeting.
By putting some of its earnings into a legacy earnings account, Visegaa said, the thinking is perhaps the state could move from trying to forecast roller coaster revenues to spending what it has actually earned instead.
A meeting is planned in September to develop the idea more fully, with an eye toward proposing legislation during the upcoming session.