Shale Power: The Modern Day Industrial Revolution

How North Dakota’s shale play sparked a modern day economic revolution. By Jason Spiess Ward Koeser recently ended a 20-year run as mayor of Williston, N.D. Looking back, Koeser could see the evolution of the Bakken’s global appeal. Koeser recalls at first when the national media arrived on the scene – it was something to note. However, when the international reporters began showing up, Koeser knew the Bakken was even more of a special place than he could have ever imagined.

“After the year of national media, the world media began showing up – China, Japan, Germany, France, the Netherlands, Switzerland, you go right on down the line, Norway,” Koeser said.

The intrigue displayed by the international media proved to be enough evidence to Koeser that this oil play was indeed special. Koeser recalled a moment in time with a German reporter that became etched in his memory as an indicator of how important Williston was.

“I would sometimes ask them, ‘Why do you come to Williston?’” Koeser said. “The one I distinctly remember was a female reporter from Germany, and she said, ‘Because in Germany we look at what’s happening in Williston as how it impacts the U.S. economy.’ That really was an eye-opener for me.”

This type of activity must be pretty unique or special since the majority of the shale plays across the country are seeing people and businesses going, not coming. Brian Hymel, partner in Five Diamonds Fund Managers based in Salt Lake City, believes what is happening in the U.S. is so special it will one day be read about in history classes.

“I think the Bakken has sparked the beginning of another Industrial Revolution,” Hymel said. “That’s the level of growth and expansion happening in western North Dakota and the Bakken. This play is impacting so many different industries, it’s scary. You’ve got MDU’s new refinery going up, and that’s the first refinery that will have been built in the United States since 1976. In North Dakota, that’s huge. I think it is something in the long run that will help change our dependence on foreign oil.”

In addition to projects and investments into projects across the U.S., Hymel is also a founder of the Rocky Mountain Economic Summit and the Rocky Mountain Energy and Infrastructure Summit, both held in Jackson Hole, Wyo., and delivering some of the top minds in the industry. According to Hymel, the change in technology for oil and gas over the last seven years has been a catalyst to the economic surge and “there is still an astonishing amount of innovation and efficiencies yet to be had.”

Ed Schafer, former North Dakota governor and current Board of Directors member for Continental Resources, also believes this shale revolution is powered by technology.

“This Bakken boom is really more of a technology boom,” Schafer said. “Companies are developing cutting-edge technologies to capture North Dakota resources, and I think it is important to look at where and how this play started in North Dakota,” Schafer said. “In the mid 1990s you could see the Bakken start to develop, but all the drilling and all of the activity was in Saskatchewan.”

Through work in the legislature, Schafer led the charge to lower the extraction tax in order to make the state more attractive to the oil companies. This tax-themed attraction was coupled with the advancements in horizontal drilling.

“Horizontal drilling is what really unlocked the potential for the natural resources in the Bakken play,” Schafer said. “So we proved that lowering the taxes at the time caused a shift in activity to move into North Dakota – that was across our borders previously.”

Schafer was quick to point out that the “North Dakota technology of marrying horizontal drilling and hydraulic fracturing” is being used in other states, such as Colorado, Texas, California, Wyoming and Oklahoma, and if the numbers work better in those states, the drilling may end up there.

“Once the mineral rights are secured, you have no need to drill for oil in that mineral patch right away,” Schafer said. “So instead of drilling the second, fifth or tenth well on that same pressure field, you may go drill in Montana or Wyoming. Then 15, 20 years later you come back and drill in North Dakota. In a capitalistic system, you are going to drill where you have the least amount of cost.”

After former Governor Schafer set up the groundwork for oil and gas companies to extract the natural resources from the state, current U.S. Senator John Hoeven was elected governor and recalls being handed the baton from Schafer and overseeing the oil and gas development “trying to crack the code.”

“I can remember as governor, meeting with the top executives of companies who were trying to crack the code,” Hoeven said. “Prior to then, companies – if they were in North Dakota – were leaving to go elsewhere.”

Hoeven added that he worked with companies, such as Marathon Oil, Continental, Brigham and EOG, to create “the right business climate and develop the technologies that made producing oil in the Bakken very economical.”

“Because of all that hard work, communication, and patience, we’ve seen amazing results,” Hoeven said. “North Dakota is the fastest growing state in the country. We are now the second largest oil producing state in the country, but none of it would have happened without the technology development.”

Hoeven believes small business values create the core structure for a business to keep up with the evolving industries.

“Business is the engine that drives this country, and small business is the backbone of our country,” Hoeven said. “Whether its agriculture, energy, technology or any of our other healthy industries. What we are working to do is build a business climate that will continue to empower our great entrepreneurs, companies, and small businesses to invest and make new and exciting things happen. That’s why everyone is asking about North Dakota and what’s going on up here.”

Oklahoma-based ONEOK is one of those companies. It has been an active participant in the Bakken play, recently announcing another North Dakota project and bringing their investment in the state to $3.6 billion out of a total $7 billion. More than 40% of ONEOK’s investments through 2016 will be in North Dakota. John Gibson, former chief executive officer of ONEOK and non-executive chairman of the board for ONEOK Partners, sees the Bakken as a game changer for multiple industries.

“This whole natural gas shale play has changed the country’s view on natural gas as a sustainable reliable energy source – really it has changed the entire dynamic of the U.S.,” Gibson said. “In particular, when you figure a lot of this, if not all of this, the Williston Basin is being driven by crude oil, which is also changing the entire industry structure as it relates to crude oil.”

Investments into oil and gas technologies are creating new micro-economies in areas like frac sand, fluids, construction, and distribution. In addition to major distribution investments into roads, bridges, and buildings, the railroad as a whole has felt the Bakken ripple.

While some say oil plays like the Bakken are filled with new opportunity, others go a step further and indicate there is a change in the way oil and gas looks at the energy industry. One of those reasons is value-added products. The emergence of this sub-industry has not only North Dakota talking, but the rest of the planet.

“I think the gas market globally is certainly getting more liquid than it ever has been,” said Lee Tillman, president and chief executive officer, Marathon Oil. “LNG does have the ability to connect. It used to be pipeline gas was very much a domestic local market play. Now with the advent of LNG technologies, the scale that’s been generated in some of the projects like in the Middle East, you know those molecules can be competitive around the world.”

This idea is where the shale play’s school of capitalism offers an advance degree. There is a supply and a demand, now another leg, known as economics, comes into play.

“What I will tell you though is that it is still very expensive to land that molecule in Southeast Asia,” Tillman said. “When you look at the cost of basically the wellhead, the upstream cost, you look at the cost of liquefaction, transportation, and regasification, you can very quickly get into a cost of supply that is in the $10 to $11 mark.”

Currently, that price is hovering at about $4.50. Geography, conversion costs, and Henry Hub pricing have all played a factor in the role of natural gas in the economy. However, the term “wet gas” seems to put this resource over the edge and into the next level of capitalism. Extracting the layers, or molecules, can become complex and specific quite quickly, but the overall concept is something the average person can grasp.

“You don’t need to review your chemistry to understand it, but the way to think about it is in a cubic- foot of natural gas produced in the Williston Basin, you will find somewhere around 8-12 gallons of raw natural gas liquids (NGLs),” Gibson said. “That’s ethane, propane, and butanes all mixed up. If you go down into Oklahoma or Texas in the Panhandle, that same cubic foot will have say, three gallons per MCF. As you can tell by the numbers, there is a whole lot of NGLs in the Williston Basin.”

Reports from the Energy Information Agency reinforce Gibson’s testimony that Bakken offers some of the richest NGLs in the country. Breaking down the NGL market even further, each well drilled contains a great deal of ethane, propane, butane, and natural gasoline, which can be stripped out,  fractionated and put into the gas pipeline network. This process is not necessarily new in oil and gas, but it is relatively new to North Dakota.

North Dakota state representative and western North Dakota native Vicky Steiner has been traveling across the U.S. communicating with government and private industries for the past five years and is amazed at the investment being attributed to natural gas.

“What they’re really interested in is building more chemical plants with the gas that’s coming,” Steiner said after returning from a speaking engagement on in Louisiana. “More plastics – they have tremendous amounts of chemical plants down there in Louisiana. It’s almost like a chemical row.”

Ken DeCubellis, chief executive officers of Minnesota-based Black Ridge Oil and Gas and former Exxon executive, believes the natural gas slice of the shale play is contributing and will continue to contribute to this modern industrial revolution.

“So you hear people talking about NGLs – that’s things like ethane, propane, and butane,” DeCubellis said. “The petrochemical industry itself is forecast to add about $30 billion of capacity expansion here in the U.S. to get access to that natural gas and convert it into plastics. So it’s a big deal.”

Another individual who knows how this modern day shale revolution is impacting the economy is Matt Rose. As former chief executive officer and current executive chairman of BNSF Railway, Rose has the unique ability to have a pulse on the economy. In addition to investing millions into the development of natural gas powered engines, Rose said BNSF’s business in North Dakota has increased beyond comprehension.

“Petroleum growth has been huge, agriculture growth has been huge,” Rose said. “Let me give you a stat that will put this into context. Over the last five-and-a-half-years, our business inbound and out of [North Dakota] has grown by 144%. North Dakota has accounted for 24% of all the volume growth within BNSF. We operate in 28 states, and we have one state – North Dakota – that accounts for 24%.”

To contextualize further, Rose said in 2013, industry-wide North Dakota accounted for 20%, all rail units grew by 800,000, and BSNF accounted for half of that business.

“For the entire industry, I think this is even more interesting,” Rose said. “The growth in 2013 was accounted for 20% just by North Dakota.”

Bill Dunkelberg, chief economist, National Federation Independent Business, agrees this shale boom is real and that we are out of “Jed Clampett” oil. He added it is a two-fold shale boom.

“The first is the technology to retrieve the oil through hydraulic fracturing and horizontal drilling,” Dunkelberg said. “They’ve been around for a while, but have been refined. The second is the investment going into the technology. Once there’s money in it, it moves to solve problems. Markets solve problems. Finding out how to get the gas out of the ground and into the market cheaper, faster, and more environmentally sound are problems worth solving.”

Talk about a revolution. If North Dakota is any indication on what other shale plays will see, the path to energy and economic security is real. Over the past decade, western North Dakota went from a pop culture punchline to an economic epicenter of activity. As shale plays in other parts of the country continue to bring people, money, and opportunity, no community will be the same, as the economic evolution ripples throughout the U.S.

BNSF Rail.  Photo by Paul Flessland