News
Concerns over oil and gas revenues
Scott Wagar
12/30/2014
With a continue drop in oil and gas prices, local governing bodies have concerns about what will take place with their budgets for 2015, and what could possibly happen to the local economy within Bottineau. However, one individual in Bottineau who deals in market futures has concerns about Bottineau and the county’s economies and feels that the worse is still to come to the area.
For the past month, news media throughout the world have reported on oil and gas prices dropping below the break even mark; cuts in the oil markets and its futures; suspension of production; and most recently, capex spending cuts in oil companies’ budgets that are in the millions of dollars.
However, oil companies plan to see a continued growth plan in 2015 through a sound hedge plan, companies’ net worth and cost production prices dropping in certain areas where oil companies are producing. But, even though companies expect growth in 2015, when compared to 2014 the growth inclines are going to be much lower in percentile.
Leland Severson, a trader in market futures, has been predicting for months that oil and gas prices would drop to a dangerous level in the nation, state and more specifically, in Bottineau County. To read the Courant’s first article on Severson’s oil concerns, read the front page article, “Oil production in Bottineau County could seize soon” in the Bottineau Courant’s Nov. 25 edition.
For some local governing bodies, who added oil and gas revenues to their budget this fall and passed them, there is now concern about where they will be with their budgets and the oil and gas revenues they placed into them.
CITY
Harley Getzlaff, president of the Bottineau City Council, stated that oil and gas prices have always concerned him because they are unpredictable at all times, which makes him nervous because the city budget does have some dependency on oil and gas revenues.
“I’ve always said that you can’t depend on oil and gas revenue,” Getzlaff said. “As for the 2015 budget, it has already passed and we can’t change it now. So, we will just have to wait and see how oil and gas revenues will have an effect on the budget.”
Alderman Tim Sanderson is a strong component of utilizing the money that is currently in the city budget so that tax payers do not have to pay interest on money in the budget.
“We have millions of dollars we are sitting on,” Sanderson said. “We should be using that money to improve Bottineau.
“By holding on to all that money it becomes a tax burden to the local residents.”
Sanderson added that certain state legislators have promised four million dollars in stimulus money to the city of Bottineau, but whether or not the promise is kept will depend on what state legislators decided when the general assembly begins in January.
COUNTY
Bottineau County Commissioner LeRoy Rude also has concerns about the 2015 county budget, which depends heavily on oil and gas revenue, especially in the area of roads, bridges and a future construction project in expanding the police department and its county jail.
“A pretty good size of our budget deals with oil and gas revenue,” Rude said. “There is a nice stimulus coming through the state, they are talking we could get 15 million out of that; but, the commissioners do not know how much it will be for us yet. The money is already in budget, but it now depends upon the legislators where the stimulus amount will be for us.”
SCHOOL DISTRICT
Paul Olson, Bottineau School Board member, stated that oil and gas revenue is always a concern for the school board. However, Olson stated the current school board members have always been cautious with oil and gas revenues, along with the taxpayers’ money in the school district.
“Our administration and board members are very careful as to how we budget oil and gas production tax revenue. In following prior board precedent, we only have budgeted $330,000 towards the general fund for operations. Any dollars over this amount is then transferred to our building fund to be used for future capital expenditures or building type of projects,” Olson said. “This is how we have built the building fund up over the years. The oil and gas revenue received is based on oil production within Bottineau County. These dollars are split among the school districts within the county, the cities, and the county itself. The actual dollars that are allocated are derived from a formula set by the last session of the North Dakota legislature. Once we have the formula we use it for the next budget cycle.
“The budgeted amount of oil and gas revenue that is applied towards our general fund is less than 4 percent of our total budget,” Olson added. “Any amounts greater than the budgeted amount is transferred to our building fund.”
Olson added that the board and their future plans for renovation projects, like a new school and other items on their agenda list, they do take the financial cost seriously and have planned accordingly to protect the school and taxpayers of the district.
“The school district budget cycle follows our fiscal year which is July 1, 2014 to June 30, 2015. We had already accounted for the formula changes made by the last legislative session. The decrease in oil and gas revenue this year is a result of a downward change in the formula made by the legislature not allocating as large a percent of dollars to the school district, not a reduction in tax revenue generated from oil and gas production,” Olson said.
“In the last bond referendum that fell 13 votes shy of passing the hard dollars that the School Board allocated towards the new school and renovations are already on hand; and, we have that cash on hand.
“The two million dollars that were part of the project represented a state mandated loan repayment clause which required that districts receiving dollars generated from oil and gas production revenue must use the first $100,000 in receipts toward the loan repayment,” Olson said. “This was the special 10 million dollar loan through the Bank of North Dakota at approximately 1.75 percent interest. We lost this opportunity when the referendum was defeated.
“We do not know what the next session will make available yet. If there is a similar program we would certainly review it and determine if the loan parameters were in the best interest of the district vs bonding for the entire amount,” Olson said. “Again, what happens in this upcoming legislative session will determine how we propose to fund future building and renovation projects.”
SEVERSON
With current barrel prices below $60, Severson stated that local leaderships and economic entities need to take a more serious look at what is taking place with oil and gas prices, and take even more heed as they plan the economic future of the area.
“Crude just went below $60, which will generate a lot of headlines. But more importantly for Bottineau is the capex budgets getting slashed,” Severson said. “This is what it takes to halt slide and get a little bounce. I think the market is finally getting the industries’ attention that drill, drill, drill has to stop.
“The 20 to 50 percent drilling cuts; with some companies being at 100 percent cuts as they go out of business, doesn’t get it back to $100, it just stops the slide and puts oil in $60 to $75 range,” Severson said. “Now, the big problem in North Dakota is catching up to reality. The legislature has to change from spend, spend, spend to cut some of the new projects.
“The same with local governments, say one-third less drilling, North Dakota is going to have an unemployment issue real soon,” Severson said. “The Bottineau housing shortage is over; real estate value is going to drop; manufacturers’ new orders are going to drop drastically; water trucking for drilling and gravel needs are going to drop, hotel occupancy is going to be pathetic, especially with the new capacity both in hotel space and housing, etc, etc…
“Oil lease activities (for potential to drill vs already producing) will dry up. Renewals will drop drastically,” Severson said. “In our area, the 20 to 50 percent cuts are closer to 70 to 90 percent because we are in the marginal area.
“There is an initial reaction of denial and then they say its ok we are hedged. But, they only hedge actual wells,” Severson said. “And, new wells today, the hedge contracts available are at the market, not $100.
“This is still a huge story greatly impacting Bottineau and its county,” Severson said. “I don’t mean to sensationalize it, but people have to realize and not go into denial.”
What will take place in the next months with oil and gas revenue, and its influence on Bottineau, seems to be uncertain. But in the end, time will tell.