The North Dakota oil boom gives the state new funds. Lots of them. Lots and lots of them. Starr Spencer, in this week’s Oilgram News column At the Wellhead, discusses how the state is dealing with that cash.
It’s an enviable position for a state’s government — not only to be rolling in dough but having more dough to roll in than your wildest dreams.
The state of North Dakota, which began contributing to its newly-created Legacy Trust Fund from oil and gas taxes in July 2011, has already exceeded by 63% its initial target of having $618 million in its coffers by mid-2013 — thanks to the state’s seemingly bottomless Bakken Shale oil field.
The Fund, which collects 30% of the state’s oil and gas revenues, is now tilting toward a revised target of $1.2 billion by this July. As of February 28, the Fund contained $1,005,676,512, Darren Schulz, interim chief investment officer of the North Dakota Retirement and Investment Office, said.
“Our cup runneth full right now,” Schulz said. “It’s a good problem to have.”
Although companies seem to want nothing more than to continue drilling and producing oil from the Bakken, where the gift that keeps on giving registered 779,000 b/d of production for February, the state’s revised revenue target stems from a slightly raised oil price forecast, Joe Morrissette, management and fiscal analyst at the North Dakota Office of Management and Budget, said.
“There’s a commission on revenue forecasting and they’re pretty conservative,” Morrissette said. “They’d rather have revenues come in higher than be short.”
From the projected $1.2 billion target as of June 30, 2013, state officials now project the Fund to contain $2.983 billion exactly two years later, he said.
Commission forecasters based the original $618 million target on $67/barrel oil for July 2011 and targeted a price of $75/b by June 30, 2013, at the end of the biennium, Morrissette said. For the next two years, “our new forecast is still pretty conservative—about $75/b for the first year and ends the next biennium at $80/b” on June 30, 2015, he said.
That is the North Dakota crude price, which Morrissette said is a “little lower” than the West Texas Intermediate price. The Bakken Ex-Clearbrook price was $91.42/b on May 9, while WTI was $95.96/b, according to Platts assessments.
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What’s a state to do with all that money? North Dakota officials say the fund cannot be touched until 2017, after which its interest can be tapped each year, along with up to 15% of the principal if the state legislature permits.
The state in recent years has seen a huge revenue boon from the Bakken Shale, one of the US’ largest oil deposits, and the Legacy Fund should continue to grow in lockstep with Bakken production, state officials say.
However, a bill has been passed to have a state legislative team study an assortment of proposals for spending the money, said Schulz. “It’s currently undefined,” he said. “There’s an initiative underway to try to develop a formal target for spending in the future.”
He said the team will likely look at how other states with similar “rainy day funds” have used their monies, such as devoting it to higher education, public works projects or social programs.
From its inception until now, Schulz said, the Legacy Fund has earned annualized return of 1.62% on its money, which is invested in short-term bonds with JP Morgan and Babson Capital as managers. But last month, Schulz’ office approved a new asset allocation policy, based on the recommendation of an independent consultant, that should bring in a higher yield.
Now the investments will be split between fixed income assets, domestic and non-US equities, diversified real assets like infrastructure and timber and Treasury Inflation Protected Securities and real estate. The Retirement and Investment Office will start phasing that in during the next month, said Schulz.
“Given the long-term nature of the fund, it’s a sensible…allocation that would protect and grow” it, he said.
North Dakota’s 779,000 b/d of oil on average in February 2013 was a 39% jump from its 559,000 b/d of average production in the same month in 2012, according to the US Energy Information Administration, the research and statistics arm of the US Department of Energy.
The state’s oil production should be at 1 million b/d by April 2014, and by January 2020 should be at 1.553 million b/d, according to projections supplied by Bentek, a unit of Platts.
Meanwhile, for trivia-lovers, here are some fun facts on North Dakota’s Bakken Shale, straight from the state’s Department of Mineral Resources.
A typical 2012 Bakken well will produce for 45 years. In those years the well will:
- Produce about 665,000 barrels of oil
- Generate over $23 million net profit
- Pay nearly $4.3 million in taxes
- Pay royalties of $8.2 million to mineral owners
- Pay salaries and wages of $2.1 million
- Pay operating expenses of $2.3 million
- Cost about $9 million to drill and complete
–Starr Spencer in Houston