For North Dakota Petroleum Council President Ron Ness and his staff, legislative sessions can be long and difficult, not only because of all of the oil and gas-related legislation he and his staff track throughout the session, but also because of all the committee hearings in which the council testifies on behalf of its members. The recently adjourned 63rd North Dakota legislative session was no exception, with the NDPC tracking some 150 individual bills and testifying more than 60 times during the 85-day session which ended in the early morning hours of May 4. In a May 13 interview, Ness shared his thoughts with Petroleum News Bakken on some of the oil and gas-related issues that North Dakota legislators dealt with.
Biggest issues?
Petroleum News Bakken: Literally scores of oil and gas-related bills were introduced in the session, many of which failed while many others passed, but most of those that did pass were amended to some degree. From the NDPC’s standpoint, what were the most important issues specific to the North Dakota oil and gas industry in the session?
Ness: Our number one objective going into the legislature was to try to get more oil tax revenues returned back to the communities where the activity and impacts are taking place. There are a number of things that make it our number one issue, but anybody that’s spent some time here understands that the growth that’s occurring in these communities is phenomenal. The entire state benefits from the oil production tax, and it all goes into the state’s coffers, so getting that money back to those communities is a tremendous challenge, and it always seems to be lagging. In the absence of having enough funds back in there, there’s a tremendous amount of pressure also being placed upon the industry to essentially do the road work themselves (on county and township roads), hire the contractors for that type of work, and it creates a stressful situation for everybody.
I think in the end House Bill 1358 was just one of the bills that provide money back to the counties. In the first weeks of the session they passed a bill that put, I think, about $620 million into the western oil-related counties for state highway funds. And then of course HB 1358 is about $1.2 billion, and the list from there goes on and on. There are 15 new police officers in the highway patrol bill, and the oil impact fund is now about $240 million. Many of these are all one-time expenditures.
If there’s one thing you wanted to come out of the session with, it is the core of HB 1358. If you’re a large producing county, your funds essentially cap and you get 10 percent of the money after you’ve reached $18 million. So for a county like Mountrail County, that $18 million was essentially one month’s payment or one quarter’s payment out of the two years, so after their first check they’re down to getting 10 percent. HB 1358 increased that formula from 10 to 25 percent, which will make a huge difference for them.
The $1.2 billion is a projection. The budget numbers are always conservative. Production is probably going to quickly reach where the budget ends two years from now and price is conservative, so those communities are going to get a lot more money than just what that bill says because now they’re going to get 25 percent of the gross production tax on a continual basis, not just for the first several months or several quarters for some of them. That will make a big difference in the long-run.
Petroleum News Bakken: With the money appropriated, do you think that over the next two years there will be enough infrastructure improvements to make a real difference in terms of the impacts the oil counties are now experiencing?
Ness: There have already been a number of things that have changed, and we have had a tremendous build-out of infrastructure. They’ve done things to help improve the roads and highways with turnoff lanes and all those things, but you’ve seen a somewhat precipitous leveling of the activity for a number of reasons. You can just do more with less today because you’re drilling on pads, and you’re not racing around drilling wells to cover your leasehold.
One of the bills that’s really pretty amazing deals with the Western Area Water System that was created in 2011. Watford City and other communities have never had rural water before, and they didn’t have demand to fund a rural water system. Had the state not funded and built this system, there would be no rural water for the additional apartments going up around Watford City and other communities. There was no rural water to do that with. Now that system is funded by sales to the oil industry for frack water. Essentially with the legislation passed this year the state paid off the entire water system for these communities.
Landowner issues
Petroleum News Bakken: Numerous bills were introduced to address landowner issues, some of which passed and some of which did not. Does the NDPC believe that landowner issues were adequately addressed by the legislature?
Ness: There were a fair number of landowner issues. In regard to the pipeline issue, we’ve got a lot of fatigue out there amongst landowners, and we put together with a Dunn County landowner group HB 1333 which really did about eight different things, all of them for landowners. Number one it created a $75 million reserve cleanup fund, something we’ve only had for the pad and location before but now will apply to pipelines and really all issues related to oil and gas development and production. In addition, during the hearings legislators heard from the landowners about produced water and spills, and HB 1333 directs the Department of Mineral Resources to develop administrative rules that will provide the regulations for saltwater disposal systems, wells, location — all those things they’ve never really had the authority for. So that’s going to be a significant change.
And owners wanted to know where those gathering systems were, so we’re going to create a map file for them. And it allows for remediation on the pipeline systems. So quite a few different things in that bill help remove impediments to landowners when considering easements.
I think essentially what you had were a whole bunch of bills and the legislature came out with several compromises. I think the landowner groups and industry were pretty much in agreement on all of them when the final bills were passed. I spent a lot of time with the landowners, and I think there was some excellent legislation and compromise put together, and those bills were unanimous.
Flaring bills
Petroleum News Bakken: Several bills were introduced which addressed flaring. Does the NDPC believe that the legislature was aggressive enough in addressing the ongoing flaring issue?
Ness: I think legislators learned a lot about flaring. There were so many discussions about flaring in different bills. It’s amazing how many of these issues came back to flaring, whether it was all of the different pipeline bills or all of the surface owner bills, people hate that flare. And so does the oil operator.
And one thing they learned, it was termed by one of the senators as “kicking the wrong dog.” You can beat up the producer all you want, but essentially the producer sells the gas to a processor at the edge of their spacing unit. So what the legislators learned is that those gas processors are putting $4 billion into gathering that gas, and the pressure is on them to get the wells connected. The oil operator is typically not in that business.
I think we’re going to be surprised at the value of HB 1134 that incentivizes remote capture. The business model has a margin that is skinny. Just in the last several weeks since the bill passed there has been a lot of new discussion by bigger players that can scale up the remote capture technologies. We’ve seen a lot of great ideas and a lot of technologies in the past being discussed, but to have an impact needs to have someone who can scale this up, somebody that’s already engaged on the well sites with the operators that adds this as another business component.
The legislature passed three other bills that people don’t hear much about. HB 1410 was a sales tax exemption to construct liquefied natural gas facilities and agricultural natural gas processing. BNSF is talking about building a liquefied natural gas facility to use LNG in their trains. Other companies like MDU are talking about utilizing it for LNG in some agricultural processes. HB 3016 was a legislative study to look at LNG and CNG and natural gas to diesel fuel. The legislature also put $5 million into the oil and gas research council in SB 2014 to really encourage research into value-added opportunities of natural gas and to continue to evaluate flare capture techniques and solutions.
Oil tax reduction bills
Petroleum News Bakken: A reduction in the production/extraction tax was brought up several times in the session, but in the end the tax did not change. How does the council feel about that looking into the next biennium?
Ness: We’ve never really asked for a straight reduction in the tax, what we’ve asked for is a simplified, fair oil tax structure that’s predictable moving forward. North Dakota does not have that; they have a very complex cobbled together oil tax structure. In the end there were some changes made in HB 1198 on the last day of the legislature which did do one critical thing — it created a non-Bakken incentive for producers to look at some of those other formations outside of the Bakken and addressed the tribal tax issue to share more of the tax revenues with the tribal government to eliminate the concern that they will add their own tax on top of the state tax. We’re extremely pleased with that as the reservation is a critical piece of the Bakken.
