North Dakota has made headlines lately as the Saudi Arabia of
the Midwest.
Oil production in the state’s now-famous Bakken formation has
reached stratospheric levels, approaching 600,000 barrels per day.
Companies have been forced to create “man camps” to house the
massive influx of workers. While truck drivers
making six figures and strippers
pulling down $3,000 per night (more than in Vegas) have made
for the flashiest headlines, the real story is that the boom has
created high paying jobs in every sector of the state’s
economy.
But cross the border into Montana, and the commotion stills. The
Bakken formation lies under both states, and the first wells
drilled were actually in Montana. Yet oil production in Montana
peaked in 2006, when both states pumped about 100,000 barrels per
day, and that figure has since dropped to 68,000 barrels per day.
Stagnation in new drilling accounts for much of the decline. There
are 210 active drilling rigs in North Dakota at present, compared
to only 20 in Montana. Active drilling is essential for maintaining
oil production, since wells in the Bakken are most productive in
their first year.
Here’s the bottom line: North Dakota’s proven oil reserves are
only about 3 times that of Montana’s, but it has 10 times the
drilling and production. Unsurprisingly, the reasons for this have
been a source of contention.
IT IS TEMPTING TO ASSUME that the differences stem entirely from
the states’ public policies, but part of the disparity comes from
factors beyond anyone’s control. One of these is geology: The oil
shale layer is generally thicker in North Dakota, so as producers
rush to begin drilling before leases expire, they drill first in
the most productive areas. Another is land ownership: Montana has a
higher percentage of federal land, which is more difficult to
drill. Regardless of how much President Obama may boast about
increased domestic oil production during his term in office, the
dirty secret is that most is taking place on private property,
where it can’t be blocked by the federal government.
Those matters aside, Montana’s business, regulatory, and legal
climate is still unfavorable compared to neighboring states like
North Dakota. We’ve been down this road before. In spite of the
fact that Montana sits on the nation’s largest coal reserves, its
coal production is vastly out-stripped by its historically
business-friendly neighbor to the south, Wyoming, which has
capitalized on much smaller reserves.
Likewise, North Dakota spent the 1990s working on
across-the-board changes in taxation and regulation — all before
the Bakken’s potential was known. By the time oil was found, North
Dakota already had in place a favorable climate that encouraged
business development, oil-related or otherwise. For evidence that
the changes were broad-based, one need only look at Fargo — as far
away from the oil fields as one can be in North Dakota — where
Microsoft now has its second largest American campus and where
companies like Amazon and Caterpillar have established and expanded
operations.
Rather than looking to the future, Montana seems to be consumed
by the past. Nothing exemplifies this more clearly than the
challenge to the U.S. Supreme Court’s Citizen’s United
campaign finance ruling recently mounted by Attorney General Steve
Bullock (now running for governor against former GOP Congressman
Rick Hill). The days when corrupt Montana politicians openly sold
themselves to the highest bidding “copper king” ended
more than a century ago, but listening to Bullock’s arguments,
you’d never know it.
THERE ARE CHANGES that can be made to boost business in the Big
Sky State:
First, Montana’s business equipment tax — which affects
everything from computers and office furniture to bulldozers and
drilling rigs — is antiquated and needs to go. While it has been
reduced over the last decade, most states, including North Dakota,
no longer have such a tax at all.
Second, the state must bring workers’ compensation premiums
under control. In 2010, North Dakota was ranked as having the
lowest workers’ compensation costs in the country, while Montana
had the dubious distinction of topping the list. A GOP legislative
majority elected in 2010 forced Democratic Governor Brian
Schweitzer into a compromise that cut costs somewhat, but a
veritable chasm remains between what employers pay in Montana and
in North Dakota.
Third, state legislators should work toward a bipartisan
commitment to keep oil and gas taxes competitive. The Democratic
caucus in the statehouse has repeatedly proposed to jack those
taxes up. Producers need certainty.
Fourth, the state should improve its unfavorable litigation
climate. Part of the problem stems from a clause in the Montana
Constitution (a “progressive” document written in the 1970s) that
proclaims the right to a “clean and healthful environment.” The key
is how that clause is interpreted, and, unfortunately, the state’s
trial lawyer lobby, which expends large sums electing
plaintiff-friendly justices, has long dominated the Montana Supreme
Court. State Sen. Jeff Essmann aptly states, “We won’t have a
favorable business climate in the state of Montana until we have a
Montana Supreme Court that isn’t captive to interests hostile to
business in this state.”
Fifth, Montana should make its regulatory culture less
adversarial. The difference in how oil producers are treated by
Montana and North Dakota is clear, according to industry consultant
and former GOP state Senator Roy Brown. In North Dakota, he says,
regulators work in collaboration with oil producers. In Montana,
not so much. Since Montana law limits a governor’s control over the
state’s bureaucratic structure, any changes in regulatory climate
will require both strong gubernatorial leadership and legislative
reforms.
Should 2012 prove to be a good year for Republicans in Montana,
the GOP may be tempted to look for “magic bullet” solutions in
their attempt to catch up on the Bakken oil play. North Dakota’s
experience has shown, however, that there is no substitute for a
comprehensive strategy to improve a state’s entire business
climate. Such reforms as Montana does arrive at probably won’t
happen soon enough to spur oil development in the Bakken, but if a
sound structure does fall into place, the state will be ready to
capitalize when another opportunity — oil or otherwise —
knocks.
