Letter from the Williston Oil Patch

Joan Sammon26 Mar, 2020 3 Min Read

[Editor's note: Williston, N.D., is the center of the oil industry in that state; Doug Burgum is the Republican governor.]

Dear Governor Burgum,

Over the last few weeks, the markets have pummeled investors across all sectors. Oil was right in the middle of the row, getting shanked by not one but two assailants. The initial 30 percent price decline across the O&G sector and continuing volatility has left prices barely above $20 a barrel. This is a situation reminiscent of 2016, and one the industry longs to forget. The decrease in demand from China due to the fallout of the coronavirus, plus the Saudi Arabia-Russia spat over production levels, are the culprits of this market discord.

While hedges are in place that will soften the immediate impact of the market’s volatility for a short time, producers will not and cannot stand flat-footed. They will be forced to respond quickly with a variety of measures, including layoffs, adjusted drilling and completions schedules, and prioritization of maintenance and service. If low prices linger, some wells may even be shut in—a move most would agree is onerous, undesirable, and extreme. Nonetheless, all options must be on the table when such unforeseen global realities collide with domestic desires.

These global events offer your administration and the legislature the opportunity to partner with the oil and gas industry in a bold, unprecedented way. The dedication and innovation of the men and women that make up this industry has changed the geopolitical landscape of the entire world by making the U.S. a net exporter of oil and gas. The state should now stand steadfastly with the industry so the residents of this state understand that your administration and the legislature are partners with producers, interested in continuing to grow and benefit from the tax revenues that so profoundly fuel the services and educational opportunities of this great state.

North Dakota was already laden with market challenges: its very location, far north relative to other US production; a drilling "season" shortened by long winters; and one of the highest production taxes of all oil producing states in the Union. Obviously, the realities of latitude, longitude, and weather cycles subordinate our desires for different geography. Tax rates however are not sacrosanct in the face of current global events. Tax rates are tools for revenue generation and should be viewed through that lens. If economic decisions are not made with an understanding that the market has alternatives to Bakken crude, then we will suffer more profoundly and longer than our brothers and sisters in other domestic plays. Remember that our competition is not only Saudi Arabia and Russia, but also Texas, Oklahoma, and New Mexico. Investors and producers have a choice to exploit their assets in other places. When that decision exists in the face of these unprecedented events, we want producers to make their North Dakota assets the ones they lean into while the market recovers. Absent decisive action now from North Dakota leadership, other domestic plays will experience a shorter, more shallow market softening than will North Dakota.

My call to you, Gov. Burgum is to immediately call for a special session of the legislature with the purpose of reducing the extraction tax rate. This will incentivize producers to continue working their drilling and completions schedules in North Dakota even in the face of these unprecedented global events. Your bold leadership on this front will communicate to the industry that the state is truly their partner and that your office is unwavering in its understanding of the importance of the industry to state revenue. It is essential that you communicate to the leadership in the legislature that North Dakota understands the age-old, Reagan-tested reality that lower tax rates increase overall revenue. The state needs to communicate that it comprehends the economics of global supply and demand—and that it understands the economic implications to the thousands of workers and hundreds of millions of dollars that will not be realized if North Dakota is not freed from the confiscatory cuffs of some of the highest tax rates in the industry. If you do not lead, producers will make microeconomic decisions that will inevitably deepen and lengthen this market softening and hurt the workers whose treasure produces 49 percent of the state’s total revenue.

You have been a visionary on many fronts in this state, both as governor and in the private sector before you took office. This bold action would demonstrate your understanding of—and unbending dedication to—unconstrained markets and the importance of the private sector to every citizen of North Dakota.

Be legendary.

Joan Sammon is the founder of a boutique oil and gas business advisory firm and technology incubator, working with oil producers, investors and service providers.

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