In North Dakota, the gritty side of an oil boom

Donny Nelson is the epitome of old-time North Dakota. A lean, sharp-featured man sporting a thick goatee, jeans and dirty boots, Nelson is the grandson of homesteaders. Over the past century his family has collected 8,000 acres of prime cattle-grazing acreage and cropland.

But now Nelson has some unwanted company: oil prospectors.

This remote corner of North Dakota is the site of the biggest U.S. oil rush in decades. It is pumping new supplies into oil markets and swelling state coffers; advocates say it could help reduce U.S. dependence on foreign oil. But the boom is also spreading a degree of chaos across the rural towns and gently undulating pasturelands here.

Two towering oil rigs are drilling holes on Nelson’s property. One of the rigs, alongside two rows of 25-foot storage tanks, is planted on a red dirt pad, or clearing, right below a majestic butte that Native Americans over the ages have visited for ceremonial fasts. When they were kids, Donny and his brother climbed up and carved their names on the flat-topped butte next to others going back to 1880.

This is Nelson’s land, but he won’t see any money from those wells, or nearly a dozen others that firms are planning to drill. The mineral rights were sold years ago, starting in the 1950s, when oil was discovered in North Dakota. Nelson and his family have leased out rights they do own, and his share of the royalties from four wells comes to about $8,000 a month.

It’s a modest sum, he said, for the headaches that come with it. He’s squabbled with oil companies over drilling waste, a saltwater spill and decades-old storage tanks eaten away by chemicals.

“I’d give it all back if I could for all the trouble it’s been,” said Nelson, 48.

Above all, he misses a time when people didn’t lock their doors and knew all their neighbors.

“I don’t like what it’s done to our communities and lifestyle,” he said. “We had a good life, and now it’s gone forever, or at least for my lifetime.”

Across this stretch of western North Dakota, an oil boom is in full swing, kicking up dust and controversy among longtime residents.

About seven years ago, oil companies figured out how to use horizontal drilling and hydraulic fracturing to extract unconventional oil resources trapped in a geological formation called the Bakken, which was previously too difficult and expensive to tap. This is not a conventional reservoir, but the source rock for oil up to 15,000 feet deep, spanning parts of Montana, North Dakota and Saskatchewan. Technological advances have enabled companies to unlock that oil. With petroleum fetching record prices over the past year and a half, North Dakota is the scene of an old-fashioned oil rush.

This isn’t entirely new. North Dakotans experienced drilling booms in the 1950s, when oil was found, and in the early 1980s, when prices soared. But this boom is the biggest yet and may be the longest-lasting.

More than 200 rigs are at work in North Dakota, and because the entire geological formation holds oil, the rigs hardly ever hit a dry hole. Oil output has more than doubled in two years and jumped fivefold since 2006, to 609,503 barrels a day in April, providing about 3 percent of U.S. oil consumption and accounting for about 10 percent of U.S. crude production.

What to do with all that oil? Pipeline capacity is limited, and companies are loading it onto trucks or trains, which move it to refineries that turn it into gasoline, diesel and other products in other parts of the country. The Keystone XL pipeline that TransCanada has proposed to build would carry 100,000 barrels a day to refineries on the Gulf of Mexico coast.

While other states have barely held on through the recession, North Dakota’s boom has brought a windfall of state tax revenue and jobs; the state’s 3 percent unemployment rate is the lowest in the nation, and conservatives tried — without success — to repeal the state property tax because of high oil tax receipts.

But the oil rush has also brought soaring home prices, makeshift camps for workers, overbooked hotels, and an explosion of heavy truck traffic and crime. Towns are gritty and cheerless. Stacks of pipe lie along the roads, waiting to be buried.

Consider a few recent news items:

The number of oversize and overweight trucks using roads and bridges in the Oil Patch more than doubled over the past three years; the state issued 236,530 such permits in 2011. McKenzie County, with about 7,000 residents, needed nearly $200 million to repair roads damaged by the truck traffic. It is one of four North Dakota counties that rank among the nation’s 10 fastest-growing counties, according to a May 15 Wells Fargo Securities economic report.

Williston public schools are trying to figure out how to cope with 1,200 additional students expected next year. The Bakken Breakout Weekly, which the Bismarck Tribune launched in print and online last year to keep up with and get ads from the boom, reported that the 43 day-care centers in Williams County stopped taking names for waiting lists and in some cases stopped answering phones.

Construction contractor permits have doubled since mid-2011. Dickinson, a town with fewer than 20,000 people, just approved the construction of work camps for 3,000 people.

Felony cases in the Southwest Judicial District soared 85 percent from 2006 to 2011.

A treasure trove of oil

For many energy and national security policymakers, the Bakken boom is welcome news. North Dakota has overtaken Alaska as the nation’s second-biggest oil producer. Some oil executives believe North Dakota sits atop more than 25 billion barrels of recoverable oil, as much as the proven reserves under the rest of the nation. In 2008, after boosting previous estimates 25-fold, the U.S. Geological Survey said the Bakken formation held 3 billion to 4.3 billion barrels of technically recoverable reserves. Last year, however, the USGS said new technical information called for a revision, which might ratchet the estimate higher.

“I tend to look at the big picture, that’s what I do,” said Harold Hamm, chief executive of Continental Resources, the biggest holder of oil-exploration prospects in North Dakota. “The Bakken is the biggest field found in over 40 years in the world. Certainly the largest found in America.”

Higher production here and in similar geological formations elsewhere, such as in Texas, could sharply curtail oil imports, reducing U.S. reliance on foreign sources, even if it does not bring oil independence, as many of its boosters claim it can. And while oil prices are set globally and might remain high, an increase in domestic production could help keep more of the money Americans pay for petroleum at home. The oil output from North Dakota kept roughly $15 billion from pouring out of the country over the past year.

The biggest winners have been the few small to medium-size companies that bought up acreage in the Bakken formation over the past decade and hit pay dirt while the oil giants looked elsewhere. Even after tumbling over the past three months, the stock price of Oklahoma-based Continental Resources, the biggest leaseholder in the Bakken region, has tripled over the past five years; the company is worth $11.5 billion and holds mineral rights for more than 900,000 acres.

Whiting Petroleum, an even smaller independent company, holds mineral rights for more than 700,000 acres. In 2003, when Whiting went public, it had just eight employees in North Dakota. Today it has more than 200 workers here, not counting all the contractors with drilling and construction companies. It had 20 rigs drilling wells in June.

State services overwhelmed

Even as the oil industry has rushed into a new era here, the state’s infrastructure — housing, roads, schools and pipelines — is better suited to 1985.

“We find ourselves being constantly behind the eight ball instead of planning for more services and water,” says Shirley Meyer, a state legislator from the Dickinson area. Meyer says that the state, which collects a 5 percent production tax and a 6.5 percent extraction tax from producers, should give its western counties more money. “There is just not enough money to deal with the impacts,” she says.

Consider the plight of Katie and Randy Spurgeon. They are from Marcus, Wash., where Randy says “work just dried up” and they were in danger of losing their house. Katie found a job in the social services department of Watford City, N.D., then found a listing on Craigslist that advertised new trailer homes for $1,550 a month plus utilities. If the steep price were not bad enough, when she and her husband and two children arrived, they were stuck in a used unit badly in need of cleaning, Katie said. Even with the higher wages they make, they have just enough to cover the trailer rent and their mortgage back home.

“The shower was nasty,” Katie said of the trailer. “It was kind of a shock.” The communal gym had a broken treadmill, and the pool table had no sticks.

Initially unable to find day care for the children, the Spurgeons brought Katie’s mother in from Washington to watch them after Randy found work, too, for an insulation business. All five of them crammed into an 8-by-26-foot trailer in a camp of more than 400 identical units. The ground was covered with gravel, without a single bench, tree or blade of grass. The oldest child, 4-year-old Lily, played with her toy dog in the shade of the trailer on a folding chair. Katie’s mother slept in a tiny alcove, and Katie and Randy shared the bed with their children. When Randy’s brother joined them, Katie’s mother slept on a hard couch between the Spurgeons’ bed and the kitchen sink.

“They’re trying to get every dime they can,” Randy said. Recently, the trailer park owner raised the price of using the communal bathhouse to $5 for a five-minute shower. It was the last straw. Randy’s new employer, Donny Nelson, offered him a place to live on the nearby ranch, and the family packed up.

Desperate hunt for housing

Housing is a much-discussed topic. In Williston, median home prices have doubled in four years. Whiting Petroleum promised to lease every room in a hotel if a developer bought and managed it.

In New Town, United Prairie Cooperative bought the litter-strewn and dilapidated Prairie Winds trailer park south of the train tracks. About 90 families, mostly Native Americans from the Three Affiliated Tribes, have called this home for decades. The new owner doubled the rents, according to residents, and then issued eviction orders to make way for new housing for oil workers.

Residents, who protested in the streets of New Town in April, must leave by Aug. 31. Tribal authorities from the Fort Berthold reservation belatedly stepped in. They helped secure a new spot three miles outside town, but many of the mobile homes are too decrepit to move and people will be forced to buy new ones; one resident said they could buy FEMA trailers, but even those are going for $20,000, which they might not be able to afford.

“It’s nothing fancy, but it’s home,” said Mark Skibsrud, standing in front of an old trailer with a spongy floor, an attached entryway, a rusting motorcycle and piles of discarded household goods outside. He has lived there since 1997 but has found a new place to stay. “I understand that the workers need a place to live, but so do the workers here,” he said.

Criminals have also hitched themselves to the boom. In January, Sherry Arnold, a schoolteacher and mother of two, went jogging near her home in Sidney, Mont., and was killed by two men believed to have come north to work. One was arrested in Williston, at the center of the oil rush.

Longtime residents of Montana and North Dakota are now locking their doors. Nelson keeps a rifle handy in his kitchen, and his wife, who often goes to work before sunrise, has a concealed-weapon permit. Stores in Dickinson, a town of nearly 19,000 where the average annual number of assaults from 2008 to 2010 was more than five times the average from 1999 through 2007, ran out of Tasers, pepper spray and handguns.

Finding workers is a challenge, too. A billboard for Precision Drilling says the company is “looking for a few toughnecks,” a play on the term “roughneck,” for oil worker. Whiting Petroleum has 180 openings in the area. “You can’t find the warm trained bodies that you need. We are in full-time recruiting mode,” said Jack Ekstrom, Whiting’s vice president of government and corporate relations.

The McDonald’s in Dickinson is offering a $300 bonus to any worker who stays three months. “Are you Mac enough?” its recruiting flier asks.

Down the road, Jack and Carrie Wand­ler run a restaurant famous for its borscht soup and chicken, which they’ve been making for 41 years. (Their delivery truck’s license plate says “Borscht.” They prepare 35 or 40 gallons of it every morning.) Their business is up 15 to 20 percent because of the oil boom, Jack said. But they sometimes make do with two waitresses working split shifts instead of four or five. Or they draft their sons and daughters-in-law to wait tables. They have trimmed their hours, closing at 7 p.m., two hours earlier than before.

Pollution problems

State regulators cannot keep up, either. While not as strict as those in many states, North Dakota’s regulations do set guidelines for the disposal of waste, for example. But there aren’t enough inspectors to keep watch, and residents frequently complain of waste disposal, flaring, and small spills or leaks.

Each well, when first drilled, shoots water into the Bakken, fracturing the rock so that oil flows back. Unlike the water used to fracture Pennsylvania shale, the water here can’t be recycled because of its high chloride content, says Rick A. Ross, vice president for operations at Whiting Petroleum. But whereas Pennsylvania wastewater gets dumped in approved wells, wastewater here is pumped into another geological formation. Ross says its capacity is not a problem.

“Environmentally, the industry is very responsible up here,” Ross said. “We’re state of the art if you look at how operations work here.” He said the industry is working with the North Dakota Industrial Commission on new guidelines for pits where drilling waste is dumped.

Oil and saline water spills, while usually small, are frequent, and the state lacks the manpower, and perhaps the inclination, to crack down. ProPublica compiled data from the North Dakota Department of Mineral Resources and reported that 716,518 barrels of oil and 1.7 million gallons of brine were spilled between March and July in 2011.

“It’s like a steamroller coming at you,” said Wayde Schafer, head of the Sierra Club in North Dakota. “We are trying to see what we can do about changing regulations, but it’s here and it’s kind of a mess.”

“We all need the oil. We all drive cars. We all heat our homes,” said Nelson, the rancher, explaining that he doesn’t oppose all development. But, he said, “the state is letting us down. They all have dollar signs in their eyes. They have the regulations on the books, but they are not enforcing them.”

Wasting natural gas

Even the oil industry can’t keep pace with itself. While oil companies have rushed to drill, pipeline companies haven’t been able to install enough lines to get the oil out of the area or capture the natural gas found, too.

Now the producers are getting gouged. Burlington Northern Santa Fe, owned by Warren Buffett’s Berkshire Hathaway, carries three-quarters of the oil transported by rail, often extracting steep fees. Ekstrom of Whiting Petroleum estimates that transportation has been costing North Dakota petroleum producers $13 to $19 a barrel, much more than normal.

“Keystone would not relieve all of that,” he said, “but it would have eased that number down greatly.”

At New Town, tanker trucks were pulling up to three tracks, each with a train of tank cars stretching far into the distance. Nelson, who serves on the North Dakota Wheat Commission, worries that the oil trains will interfere with trains carrying the harvest. Last year, he said, the harvest was weak, but if this year’s crop is normal there could be delays. His wife took a train across the state in June and was four hours late because of congestion on the rails.

Natural gas pipelines are needed just as badly as oil pipelines.

There aren’t enough pipelines or gas-gathering stations to capture the natural gas that is found along with the oil. So oil companies in North Dakota are simply burning — flaring — the gas. Decades ago, that was common, but today in the United States it’s virtually unheard of. Nationwide, the amount of natural gas being flared is well under 1 percent. But North Dakota is flaring 34 percent of its gas.

Ross says it’s hard to build plants to separate natural gas from its liquid components as fast as new wells are going in. Moreover, gas-separation plants and gathering systems are expensive. A small plant next to Whiting’s office in Belfield cost the company $200 million. Whiting beats the North Dakota average, but it is still flaring about 20 percent of its gas.

On July 3, the World Bank issued a report on gas flaring that called North Dakota one of the world’s worst offenders. It is responsible for a more than a threefold increase in U.S. gas flaring. If North Dakota were a country, it would rank fifth in the world in flaring, behind Russia, Nigeria, Iran and Iraq. The greenhouse gas emissions from North Dakota’s flares are equivalent to those produced by 2.5 million cars.

The gas flares can be seen almost everywhere, most easily in the evening. Drive the gentle curves of scenic Highway 1804, named for the year Lewis and Clark traveled through the area’s buttes and camped along Antelope Creek, and one can see dozens of gas flares, some of them 25 feet high, lighting up the valley like industrial campfires.

Steven Mufson covers energy and other financial news.
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