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.
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