The Sage Grouse

A debate about oil field social responsibility

Hey fellow travelers:

How often does a conversation with one of your oldest friends include these invectives:  “You are a *&%$$$# socialist,” followed by “What!! You ****, you sound just like Mitt Romney!!”

I would be the one accused of sounding like Mitt.

That does not happen often.

My friend called to raise issues about explosive boomtown oil and gas activity in North Dakota. He wants state regulators to delay drilling permits so that counties and cities (uh, don’t you mean towns) can catch up. Highways are rutted, seniors are forced from apartments, meth flows freely in the streets, mancamps  are sprouting like leafy spurge. Law enforcement is overwhelmed. It’s all crazy.

These facts, as we lawyers say, are undisputed.

What’s next?

Oil companies are paying $3,500 per acre for oil leases. The typical Bakken or Three Forks well is spaced on 1,280 acres (two square miles). The lease rights alone for one well are $4.5 million. Does that lessee want to start getting return on that investment? The answer is obvious. Do the landowner-lessors want money from royalties on production? The answer is obvious.

The problem: local governments have to absorb huge increases in demands for services: roads, law enforcement, permits, parks. But the revenue comes later. It’s hard to pay a deputy sheriff today when the tax revenues are 18 months down the line. Hello, tax authorities: the answer is obvious. Collect the taxes monthly. Oil and gas operators pay royalties, surface use payments and operating expenses monthly; they have computers that can handle this. Repeat:  every oil and gas operator has a computerized “pay deck” which computes the amounts needed to pay royalties and taxes every month. The companies just hold the taxes until they are due many months later; this is the fault of legislation, not the companies. Pay county and state taxes monthly. That will help.

My phone will be ringing tomorrow and the callers will not be happy with me.

Another idea contemplated by the accused Mitt-clone (that would be me in case you lost your place in my Marx vs Mitt drama) derives from the Wyoming Industrial Siting Act, enacted in 1975. This act requires that companies proposing large power plants, huge uranium mines, etc., must study the local communities and provide a plan to handle influx of workers and related effects. This grouse participated in many hearings regarding these matters in the late 1970s.

This grouse then suffered a Rip Van Winkle episode, otherwise known as a long nap, until awakened two years ago by Rone Tempest and Anne MacKinnon to once again reflect upon energy and natural resource social and environmental issues.

Back to industrial impact. My friend suggested that the North Dakota oil and gas regulators deny drilling permits until the communities catch up. This was about the time we traded harsh accusations. Government shutdown of drilling would cause its own set of catastrophic problems, including massive economic dislocation and bankruptcies.

This grouse is uncomfortable with the idea that regulatory agencies which protect mineral owners and oil and gas operators from injury by other operators should be newly tasked with protecting county commissioners from road expenses. This sentiment was the genesis of the epithet: “You sound like Mitt Romney.” Oil and gas commissions are charged with protecting hydrocarbon reservoirs from waste, which involves technical engineering issues beyond the scope of a Sage Grouse column, and making sure that operators post bonds sufficient to clean up abandoned well sites.

The problem with government regulation is the regulators. People whose full-time jobs involve perception of problems and invention of solutions often lack  understanding borne of experience. They are not interested in practicality. Maybe this is a too-broad generalization, but I have witnessed many examples of regulators deploying penalties, fines and punishment when a little helpful coaching would have accomplished the same result.

With this jaundiced view of regulations in mind, what makes sense to protect North Dakota local governments, just like eastern Wyoming local governments, from oil and gas boom stresses?

How about some suggestions in lieu of regulations, an approach which should be favored because enactment of legislation followed by adoption of rules takes years and engenders litigation and hard feelings.

Suggestions for oil and gas operators:

  1. Pay taxes monthly instead of annually.
  2. Volunteer to improve roads used for oil field hauling; this approach worked well in Johnson County (Wyoming) during the methane boom. This would involve cooperation among oil and gas operators, local road officials and contractors.
  3. Create a voluntary local housing task force with oil and gas operators, local officials and housing developers, to exchange information about expected housing needs and solutions. Funding ideas could be exchanged as well.
  4. Create a voluntary local recreational task force to identify methods of creating recreational facilities to let workers blow off steam, socialize and get fit instead of deteriorating into pool hall lizards.
  5. Create local safety committees. Rig crews in a hurry are predestined to experience horrific accidents. Remember Deepwater Horizon?
  6. Create a task force for water issues. Horizontal oil wells require millions of gallons of water. Private well owners make gazillions of dollars selling water. Maybe there is a way to identify sources of water which generate revenue for local governments, or tribes. (Using tribal water would require a quick resolution of tribal-state arguments about ownership of water.)

These ideas are germinal, not mature. They might work in any state. If industry takes the initiative to put up some ideas, some cooperation and some bucks, then maybe over-regulation won’t need to happen.

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  1. “Oil companies are paying $3,500 per acre for oil leases. The typical Bakken or Three Forks well is spaced on 1,280 acres (two square miles). The lease rights alone for one well are $4.5 million. Does that lessee want to start getting return on that investment? The answer is obvious. Do the landowner-lessors want money from royalties on production? The answer is obvious.”

    One problem with this argument is that most of the leases being drilled in a frenzy right now were leased closer to $200 an acre for 3-5 years. If these drilling companies don’t get a hole in the ground promptly, they may have to negotiate a new lease at closer to price you quote. Big loss of money for oil companies. On the other hand the greatest output from these wells is during the first 2 or 3 years, which is an incentive for the leaser to hustle as well. There are solutions other than earlier taxation to this problem, although that’s not a bad idea. This is a far more complex discussion than we can have on a blog, but I’m glad you are paying attention to the issue. We are too, and expect to have some more material on our website soon. Best, John

  2. I think it is generally unfair to privatize the profit from industrial activity but socialize the burdens and costs. Monies needed for roads, schools, rec centers and other infrastructure should be borne (primarily) by those benefitting monetarily, especially when the development is on such a huge scale. For example, it is my understanding that North Dakota roads are in poor condition because there is no pipeline space available to transport oil, so trucks are required–something like 7000 truckloads a day. Terrible on roads. Wikipedia says that the Bakken is producing 450,000 Bbls per day. Why not institute a severance tax on oil to pay for needed infrastructure? AT $100 oil, a 2.5% increase in ST could generate nearly $400 million per year, all to state and local governments. That amount would go a long way toward improving infrastructure.