Funding the Future With Fracking

North Dakota is socking away billions from its shale-oil boom.

WATFORD CITY, ND - JULY 30: An oil drilling rig is seen in an aerial view in the early morning hours of July 30, 2013 near Watford City, North Dakota. The state has seen a boom in oil production thanks to new drilling techniques including horizontal drilling and hydraulic fracturing. 
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Ben Geman
Feb. 24, 2014, midnight

North Dakota sits at the cen­ter of the shale-oil boom, and it’s a com­fort­able seat to be in.

The state has seen a ten­fold in­crease in oil pro­duc­tion in the past dec­ade, bring­ing its daily yield to 1 mil­lion bar­rels. And with pro­duc­tion up, job­less­ness has plunged: At less than 3 per­cent, un­em­ploy­ment is lower in North Dakota than any­where else in the na­tion. But the state has been on a mini­ature ver­sion of this ride be­fore, and its of­fi­cials know that the boom-and-bust nature of en­ergy de­vel­op­ment makes it a fickle eco­nom­ic main­stay. In­deed, North Dakota’s eco­nomy was hurt in the mid-1980s after oil pro­duc­tion dipped. The state is cur­rently pro­du­cing far more oil than it was 30 years ago, and that growth would make a sim­il­ar plunge all the more pain­ful. 

This time, however, of­fi­cials think they’ve found a way to make their oil wealth out­last their oil boom: The Le­gis­lature and voters in 2010 amended the state con­sti­tu­tion to cre­ate the North Dakota Leg­acy Fund.

Since Ju­ly 2011, 30 per­cent of state taxes on oil-and nat­ur­al gas pro­duc­tion and ex­trac­tion have been siphoned in­to a low-risk in­vest­ment fund. Not a dime of that can be spent un­til mid-2017 at the earli­est. Even then, spend­ing any­thing but the in­terest will re­quire a two-thirds vote of each branch of the Le­gis­lature. And even if le­gis­lat­ors au­thor­ize tap­ping in­to the fund, not more than 15 per­cent of the prin­cip­al can be spent dur­ing any two-year peri­od.

The fast-grow­ing fund had al­most $1.8 bil­lion as of late Janu­ary, and that’s fore­cast to grow to roughly $3 bil­lion by mid-June of 2015 and to keep climb­ing, ac­cord­ing to the Of­fice of the State Tax Com­mis­sion­er.

“There is a pretty com­mon view that we have an ob­lig­a­tion to hus­band this re­source for fu­ture gen­er­a­tions,” said Brad Crab­tree of the Great Plains In­sti­tute, a non­profit group that works on en­ergy policy.

The lock­box is an ac­know­ledg­ment that the re­source won’t last forever. “The Leg­acy Fund was cre­ated, in part, due to the re­cog­ni­tion that state rev­en­ue from the oil and gas in­dustry will be de­rived over a fi­nite time frame,” notes the fund de­scrip­tion that’s tucked in­to state re­ports.

North Dakota is hardly the only state with some kind of trust fund for en­ergy-de­vel­op­ment rev­en­ues. And its pool of money, in its in­fancy, isn’t the biggest either. State of­fi­cials have, however, at­trac­ted praise for how for­ward-look­ing the Leg­acy Fund and oth­er ef­forts are.

“North Dakota’s ap­proach to oil and gas rev­en­ue and its fisc­al po­s­i­tion­ing for the fu­ture com­pares with few oth­er states, in­clud­ing many that have reaped sub­stan­tially lar­ger oil and gas rev­en­ue over past dec­ades,” notes a story pub­lished by the Fed­er­al Re­serve Bank of Min­neapol­is’s in-house news­pa­per. “North Dakota’s per­man­ent trusts, par­tic­u­larly the Leg­acy Fund, are poised for ro­bust growth thanks to bal­loon­ing con­tri­bu­tions from rising en­ergy taxes coupled with a man­date for long-term sav­ings.”

Not every­body loves the idea. Uni­versity of North Dakota eco­nom­ics pro­fess­or Dav­id Flynn says the wind­fall from oil and gas taxes could in­stead be used to re­duce in­come- and prop­erty-tax bur­dens. “I would rather see more in the way of broad­er tax re­form at this time,” he said.

But he’s in the minor­ity in the state, where voters have wel­comed the idea of cre­at­ing a long-term trust.

The fund was cre­ated un­der the watch of then-Gov. John Ho­even, now a Re­pub­lic­an U.S. sen­at­or.

“Sen­at­or Ho­even be­lieves the Leg­acy Fund is a way to look pro­spect­ively at North Dakota’s suc­cess­ful oil and gas de­vel­op­ment, a way to po­s­i­tion the state to be­ne­fit the people of North Dakota for many years in­to the fu­ture,” said Ho­even spokes­man Don Can­ton.

As the bil­lions ac­cu­mu­late, so do ideas for how to spend the money, set­ting up a pos­sibly con­ten­tious de­bate in years to come.

The Great Plains In­sti­tute has con­vened a stake­hold­er group to de­vel­op re­com­mend­a­tions for the fu­ture uses of the fund. For Crab­tree, the in­sti­tute’s vice pres­id­ent for fossil en­ergy, what to do with the wind­fall is an open ques­tion, and he’s glad that res­id­ents are in a po­s­i­tion to ask.

“Any time you use a non­re­new­able re­source on a sig­ni­fic­ant scale,” he said, “no mat­ter how big a re­source or how long it might last, it is prudent to set some of that aside for the fu­ture.”

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