Energy Day Open

Dean Bangsund RESEARCH SCIENTIST, NORTH DAKOTA STATE

Economic Effects of Petroleum Sector on North Dakota’s Economy Dean Bangsund Agribusiness and Applied Economics Dr. Nancy Hodur Center for Social Research North Dakota State University North Dakota’s economy continues to buck national trends Take a look at the most statistic Unemployment rates job growth export growth state’s fiscal situation—arguably the envy of the country While the macro forces at play in ND are numerous, perhaps none is larger than what is occurring in our energy sector Over this past year Dr. Nancy Hodur and myself have been working with Ron and his staff, along with many of you on the board, to gather data and assess the economic effects of the petroleum sector on North Dakota’s economy. I would like to bring everyone up to speed with the focus of our study, what is involved, present the high points of the study in combination with results from our past studies, and spend a few minutes to reflect on what this means for the state. North Dakota Energy Day March 7, 2015

Study Approach How do we measure size? Estimate in-state expenditures and other revenue streams, these are called direct effects Survey Data -- from industry sources Secondary Data -- from government agencies North Dakota Input-Output Model used for secondary economic effects Method to trace economic activity in an economy resulting from a direct effect in an economic sector

Methodology of Impact Assessment Input-Output Analysis ND I/O Model Indirect Effects Induced Direct Impacts HOW impacts are measured WHAT is being measured – metrics that are used to describe the size of an impact Personal Income Employment Business Volume Value-added (GSP) Government Revenues

North Dakota Oil Production

Drilling Activity, North Dakota, 2000-2015 Study Years Here’s a graph showing well completions as a metric to show the increase in well drilling and development in the state. Again, a similar pattern of growth regardless of how you want to measure the physical changes in industry output.

Industry divided into Exploration/Development, Production, Transportation and Processing, and Infrastructure Spending We break the industry in four components. Exploration or development—this is drilling, well completions, bringing new wells online Production—the processes and activities associated with producing oil and gas Transportation and processing -- primarily involves moving oil and gas from collection points to in-state and out-of-state markets, gas processing, and crude oil refining Infrastructure development—we added this segment this year in an attempt to better understand the scale of infrastructure being added in ND as a result of developing our oil resources.

Exploration/Development Key Metrics -- 2015 91 average monthly rig count 1,583 wells completed 657 wells with survey/financial data $6.9 million cost per well $10.95 billion in well development $5.3 billion in-state capture of costs

Exploration/Well Development Direct Impacts In-state Capture of Industry Expenditures $5.3 billion in 2015 31% decrease 2013 to 2015

Exploration/Development Gross Business Volume by Economic Sector Sum of gross receipts for direct, indirect, and induced economic effects $14.2 billion in 2015 Down 32% from 2013

Impact per Rig $58 million in-state expenditures $1.57 additional secondary business per $1 of direct $155 million direct and secondary impact $1.47 million --- sales and use, personal income, corporate taxes 182 direct and secondary jobs

Oil and Gas Production Key Metrics -- 2013 432,286,000 bbls oil 584,774,000 mcf of gas produced 451,924,000 mcf of gas sold $17,312,320,000 value of oil production ($40.05/bbl) $979,754,000 value of gas sold ($3.29/mcf) $18,292,074,000 value of oil and gas 12,799 average monthly producing wells

Oil and Gas Production Direct Effects In-state Capture of Industry Expenditures $6.7 billion in 2015 15% decrease 2013 to 2015

Oil and Gas Production Gross Business Volume by Economic Sector Sum of gross receipts for direct, indirect, and induced economic effects $13.1 billion in 2015 Down 17% from 2013

Impact per Well $523,000 in-state direct expenditures $1 additional secondary business per $1 of direct $1 million direct and secondary impact $11,200 --- sales and use, personal income, corporate taxes, and property taxes $149,000 severance taxes (net average) 1.9 direct and secondary jobs

Pipelines and Rail, Refining, & Gas Processing Direct Effects In-state Capture of Industry Expenditures $1.2 billion in 2015 23% increase 2013 to 2015

Transportation and Processing Gross Business Volume by Economic Sector Sum of gross receipts for direct, indirect, and induced economic effects $3.4 billion in 2015 20% increase from 2013

Petroleum Industry Investment in Infrastructure 2011 - 2015 2011 = $2.8 billion 2013 = $3.4 billion 2015 = $2.6 billion

Infrastructure Investment Key Values -- 2015 Petroleum Industry Infrastructure Outlays Incurred Retained (direct impacts) Average Gross Business Volume Category Low High ----------------------------- millions 2013 $ ----------------------------- Gas processing plants 904.7 946.4 392.1 410.1 Midstream (excluding above) 314.9 335.5 153.7 162.6 Crude oil pipelines/rail loading 707.3 757.4 315.1 336.8 Gathering systems 305.4 331.9 149.5 161.0 Water treatment 113.2 131.6 49.1 57.0 Housing and Lodging 19.5 22.6 9.4 10.9 Office and Related Facilities 150.0 174.3 72.5 84.3 Misc. 12.8 14.8 5.3 6.2 Total 2,527.8 2,714.6 1,146.6 1,228.9 3,556 Here is a listing of the types of infrastructure for which we have attempted to provide spending estimates. The expenses “incurred” are estimates of the actual expenditure made on the infrastructure, while the “retained” values represent the amount that were captured and circulated in the state. We can see here that we are estimating about 1.1 billion of in-state capture on infrastructure projects in the state in 2011. The total business activity associated with those direct impacts were estimated at about $3.6 billion

Petroleum Industry In-state Expenditures (Direct Impacts) 2005 - 2015

Business Volumes Category 2005 2007 2009 2011 2013 2015 Direct Impacts Percent Change Category 2005 2007 2009 2011 2013 2015 2005-2015 2013-2015 ----------------------------- millions 2015 $ ----------------------------- Direct Impacts 1,754 3,473 5,385 11,192 16,623 13,240 655 -20 Infrastructure -- 1,207 1,497 1,142 -24 Indirect and Induced Impacts 2,856 5,742 8,495 17,185 22,831 17,456 511 2,555 3,171 2,415 Gross Business Volume 4,610 9,225 13,879 28,378 39,454 30,696 566 -22 3,763 4,668 3,557 Grand Total 32,140 44,121 34,253

Government Revenues Paid by Petroleum Industry

All Employment North Dakota Petroleum Industry Percent Change Category 2005 2007 2009 2011 2013 2015 2005-2015 2013-2015 Direct Employment 5,051 11,813 18,328 40,856 55,137* 48,369* 860 -12 Secondary Employment 15,171 17,612 17,729 18,703 26,403 23,984 60 -9 Total Employment 20,223 29,424 36,056 59,559 81,450 72,353 260 -11 Direct employment is a statewide figure, that represents a broad definition of those employeed in the industry. This would represent jobs in other economic sectors that represent work in the oil and gas industry, e.g., transportation, mfg, construction, wholesale, and services. In other studies our figures would more closely represent a combination of direct and ‘indirect’ employment. The secondary employment we are estimating more closely would approximate ‘induced’ employment in the state—those are jobs added to related sectors primarily as a result of spending by workers in the petroleum sector. Our analysis of jobs added in the state since the development our shale resources shows that those types of jobs have not been added at near the rate that we have seen in jobs more directly related to the industry housing shortages, wage rate escalation, and labor force availability are a few of the primary reasons for this. * Source: Direct employment obtained from Job Service North Dakota.

Share of State 2015 Petroleum Industry State Totals Share of State Total Private Public Private & Public Employment Direct Indirect and Induced 48,369 23,984 367,144 437,078 13.2% 6.5% 11.1% 5.5% Salaries/Wages (billions $) $5.632 $18,937 $22,658 29.7% 25.4% GSP (billions $) $9.485 $55,860 17.3% Personal Income (billions $) $7.540 $42.350 17.8% Sources: U.S. Bureau of Economic Analysis; Job Service North Dakota; Bangsund and Hodur (2017).

Change and Percent Share Share of Growth 2005 - 2015 2005 2015 Change and Percent Share Private All Employment (QCEW) North Dakota 264,633 328,121 367,144 437,038 102,511 108,917 Oil and Gas (direct) 5,052 48,369 43,317 42.3% 39.8% Sources: Job Service North Dakota; Bangsund and Hodur (2017).

Share of Government Revenues 2005 - 2015 Change and Percent Share ---------------------- billions 2015 $ --------------------------- Total State and Local Government Revenue $6.994 $11.062 $4.068 Oil and Gas Industry $0.385 $3.060 $2.675 Percent Share 5.5% 27.7% 66% Source: U.S. GovernmentRevenue.com (2017).

Take Aways Petroleum industry remains among the largest drivers of change in the state Oil production, versus oil field development, is increasing in relative economic importance Even with low rig counts, some segments of the industry will be stable and grow in there economic contribution

Acknowledgments Funding provided by North Dakota Petroleum Council Extend our sincere appreciation to all the firms and individuals who provided information and data for the study Reports will be forthcoming http://ageconsearch.umn.edu Edie.Nelson@ndsu.edu 701-231-7441

Feel Free to Reach Out and Contact Us Dean Bangsund, 701-231-7471 d.bangsund@ndsu.edu Nancy Hodur, 701-231-7357 nancy.hodur@ndsu.edu

Change in Value of Oil and Gas Sold 2007 - 2016 Year Oil Production Value of Sales Period Percent Change in $ million bbls million 2016$ 2007 45.1 3,777 2006-07 24.7 2008 62.8 6,702 2007-08 77.5 2009 79.8 5,040 2008-09 -24.8 2010 113.0 9,000 2009-10 78.6 2011 153.0 14,866 2010-11 65.2 2012 243.3 22,350 2011-12 50.3 2013 313.8 30,028 2012-13 34.4 2014 397.0 33,901 2013-14 12.9 2015 432.3 18,569 2014-15 -45.2 2016* 376.9 14,500 2015-16 -21.6 2013-15 -38.2 Sources: ND Department of Mineral Resources, ND Office of State Tax Commissioner.

Survey Data Representation 45% of operating wells 47% of oil and gas output 42% of wells drilled 79% of gas processing volumes 35% of crude oil movements 24% of rail loading volumes

Government Revenues State and Local

Distribution of Direct Employment North Dakota Petroleum Industry The distribution of employment highlights the complexity of the industry, and how oil and gas industry employment crosses many sectors of the economy (12 of the 20) Sources: Job Service North Dakota; Bangsund and Hodur (2017).

Influence on Employment Growth All Wage/Salary Employment Oil and Gas Period Public & Private Private Direct Oil&Gas Non-oil Indirect & Induced Direct, Indirect, Induced % of Private 2011 379,433 312,525 40,856 271,669 18,703 59,559 19.1 2012 411,710 344,540 49,557 294,983 22,443 72,000 20.9 2013 427,109 359,415 55,137 304,278 26,270 81,407 22.6 2014 444,658 376,055 62,942 313,113 28,324 91,266 24.3 2015 437,078 367,144 48,369 318,775 23,984 72,353 19.7 -------------------------------------- Annual Changes ------------------------------------- 2011-12 32,277 32,015 8,701 23,314 3,741 12,441 38.9 2012-13 15,399 14,875 5,580 9,295 3,827 9,407 63.2 2013-14 17,549 16,640 7,805 8,835 2,054 9,859 59.3 2014-15 -7,580 -8,911 -14,573 5,662 -4,340 -18,913 ??? Sources: Job Service North Dakota; Bangsund and Hodur (2017).

Recall events of two years ago?

Expectations two years ago Authors’ View March of 2015 Results of changes from 2013 to 2015 Industry Segment Industry Expenditures and Revenue Streams Economic Impact Exploration and Development -) Fewer rigs -) Less industry spending Decline YES Extraction and Production -) Decline in severance tax -) Decline on royalties -) Add fewer but more productive wells Mixed Increases & decreases Transportation and Processing -) Focus on cost savings Linked primarily to oil and gas output Increases

Near-term Expectations Authors’ View March 2017 for 2017 Impacts Industry Segment Industry Expenditures and Revenue Streams Economic Impact Exploration and Development -) Modest increase in rigs -) Uptick in industry spending Higher Extraction and Production -) Improvement in severance tax -) Improvement in royalties -) General business spending unchanged Transportation and Processing -) Continue to be driven largely by oil and gas volumes Not much change

Long-term Perspective Shift in relative importance of industry expenditures from exploration/development to extraction/production Additional Insights Still have a huge resource -- need to add wells to retrieve oil in place Extend timeline to develop shale formations Continue to have economic opportunities Commodity prices will not be linear – up / down Current expectations are for economics to improve Industry will remain a key economic driver in the state

Brent Sanford LT. GOVERNOR OF NORTH DAKOTA

Kevin Black FOUNDER OF CREEDENCE ENERGY

with deep GRATITUDE we say THANK YOU

where the Creedence story started…

fast forward to 2014…the wild west

spring 2015 Creedence goes to work

Thank you!

Ryan Rauschenberger TAX COMMISSIONER OF NORTH DAKOTA

March 7, 2017 Ryan Rauschenberger Tax Commissioner ND Revenues March 7, 2017 Ryan Rauschenberger Tax Commissioner

Collections in Major Revenue Categories In $ millions Tax Type FY10 FY11 FY12 FY13 FY14 FY15 FY16 Sales & Use $684.1 $791.7 $1,254.1 $1,408.9 $1,470.1 $1,541.3 $1,134.0 Individual Income $304.3 $429.8 $432.1 $617.9 $516.1 $537.6 $355.5 Corporate Income $87.9 $146.5 $198.7 $187.1 $239.4 $195.8 $97.6 Oil $582.7 $986.7 $1,660.8 $2,407.8 $3,247.8 $2,801 $1,483.4 Coal $37.7 $34.4 $36.4 $35.9 $36.2 $38.5 Motor Fuel $151.7 $171.5 $205.2 $212.3 $228.7 $232.5 $197.2 Other $183.6 $221.3 $277.4 $300.6 $320.7 $343.4 $330.9 Total Net $2,032.0 $2,782.1 $4,064.1 $5,170.5 $6,059.0 $5,690.1 $3,636.3 The March 2015 forecast for the remaining months of the 2013-15 biennium (March through June) assumed sales tax collections of $384.162 million.  Actual collections were $363.372 million, a shortfall of $20.8 million, or -5.4%. % change over last 5 years (FY10 to FY14): Sales & Use: increase 116% Individual Income: increase 69.6% Corporate Income: increase 166.3% Oil: increase 456% Coal: decrease 4% Motor Fuel: increase 50.8% Other: increase 74.6% Total Net: increase 202.9% % change from FY13 to FY14: Sales & Use: increase 2.8% Individual Income: decrease 16.5% Corporate Income: increase 28% Oil: increase 35% Coal: increase .8% Motor Fuel: increase 7.7% Other: increase 6.7% Total Net: increase 17.5%

Collections in Major Revenue Categories *November 2016 Executive Forecast

TSP - Retail Trade Sector 2014 2015 2016 4th Quarter 2016 is preliminary data.

TSP - Accommodation & Food Services Sector 2014 2015 2016 4th Quarter 2016 is preliminary data.

TSP - Manufacturing Sector 2014 2015 2016 4th Quarter 2016 is preliminary data.

TSP - Wholesale Trade Sector 2014 2015 2016 4th Quarter 2016 is preliminary data.

TSP - Mining & Oil Extraction Sector 2014 2015 2016 4th Quarter 2016 is preliminary data.

Annual TSP Comparison 2007 · 2013 · 2016 2016 is preliminary data.

By the Numbers: ND vs TX 2016 Oil North Dakota Texas Gross Value of Oil $16,881,920,400 $52,428,850,800 ND TX Value of Oil per Capita $22,273 $1,882

March 7, 2017 Ryan Rauschenberger Tax Commissioner Questions? March 7, 2017 Ryan Rauschenberger Tax Commissioner

Kathy Neset PGERESIDENT OF NESET CONSULTING SERVICE

Presented by: Kathleen Neset ENERGY DAY Industry Basics and the Bakken Going Forward Presented by: Kathleen Neset

World Shale Map

Recoverable Shale Oil Reserves Russia 75 billion barrels US 58 billion barrels China 32 billion barrels Argentina 27 billion barrels

World Oil Production 2014 -2015 2016 US 14.1 million bbls/day Saudi (OPEC) 11.6 million bbls/day Russia 10.8 million bbls/day China 4.5 million bbls/day 2016 Russia 10.2 million bbls/day Saudi (OPEC) 10.0 million bbls/day US 8.7 million bbls/day

Permian Basin, TX Midland and Delaware Basins are 2 largest Subsidiary Basins within the Permian New USGS estimate states 20 Billion Barrels of undiscovered, technically recoverable oil in the Wolfcamp Shale (Midland Basin) Permian crude oil production has more than doubled since 2010 largely as a result of hydraulic fracturing in six low-permeability formations: Spraberry, Wolfcamp, Bone Spring, Glorieta, Yeso and Delaware

SCOOP & STACK, Oklahoma SCOOP Tends to be more liquids-rich Deeper than most other unconventional plays, 12,000’+ TVD Complex Geology Structure STACK Little to no produced formation water New Horizontal Wells potentially 50 times original vertical wells Operators utilizing Slickwater Fracs with up to 2000 Lbs/Ft

Wyoming Plays BASINS Powder River & Denver Basins are most active Most Drilled is Niobrara Formation Additional Formations include the Mowry, Shannon, Sussex Formations NEW Developments Horizontal Exploration in areas previously dominated by conventional drilling Multi-Stage completions Cross-link and Slickwater fracs

Active Drilling Rigs in ND Courtesy of the NDIC

North Dakota Stratigraphic Column Bakken Three Forks Bakken Formation ~360 Million Years Old Paleozoic Era Mississippian/Devonian Period ~110’ thick Three Forks/Sanish ~370 Million Years Old Devonian Period ~240’ thick Bakken Three Forks

Pelmatozoan limestone Stratigraphy Three Forks Formation Bakken Formation Lodgepole Formation lower middle upper Pelmatozoan limestone “False Bakken” Devonian Mississippian “Sanish”

Bakken Shale

Middle Bakken Siltstone

Mud Motors Drillpipe Non-magnetic Drill Collar Bent Sub Mud Motor Rotating Sub

Typical Horizontal Well

Conventional VS Horizontal Drilling

Lateral Length 2 Mile laterals are most common – most economical – highest ROI 3 Mile laterals still drilled in areas that are less accessible – topography, lakebed. Shale plays outside of the Bakken still drill 1 mile laterals until economics are proven for longer laterals

Hydraulic Fracturing & Completions 30 – 60 stages when completing 2 mile laterals Operators lean more toward higher volumes of regular frac sand vs ceramic proppant Wells are being pumped at greater rates(BBLs/Min) – faster than before Slickwater and hybrid frac fluid is a common practice Re-Fracing of old wells

Stage Frac

Geosteering Software Geosteering Software

Geosteering Software Geosteering Software

Drilling rig operator’s joystick control

Whiting Oil & Gas Geoscience Rock Lab

2017 Less Federal Regulation – State level New tax structure for business Keystone & DAPL

6 wells producing - drilling 7-12 - and 11-18 coming soon Near Ross, ND Vern Whitten Photography

Workforce Panel SCOTT HENNEN, TREY WILSON & JESSIE VEEDER

ONEOK LUNCH SPONSOR | REPRESENTED BY STEVE JOHNSON

Helen Currie SENIOR ECONOMIST AT CONOCOPHILLIPS

Energy Day Open