Sunday, January 20, 2008

"Montana's Black Gold" by Zach Dundas

"Montana's Black Gold"

Drilling into the oil boom on the Big Sky’s eastern frontier

By: Zach Dundas

At the end of November, a farmer named John Mercer drove me out on the vast expanse of dryland pasture along the banks of the Yellowstone River that his grandfather homesteaded over 100 years ago. At one point, we stopped at the top of a rise, looking out over dimpled, rusty hills sweeping to the stick-straight horizon.

“The other side of that butte is North Dakota,” Mercer said. When his grandfather settled the place, there was nothing to mark the state line. Ranchers claimed as much ground as their herds could use, and the family spread extended deep into the state next door. We sat in Mercer’s truck, just about on top of Montana’s eastern frontier, not far from Sidney.

In the foreground, a single oil well—like a gawky stork slowly dipping, then rising, with a hypnotic rhythm—operated next to a wavering flame burning the well’s natural-gas by-products, brought up along with the crude oil from a layer of dolomite two miles beneath the surface. Mercer told me that not long ago, it was possible to drive out of Sidney headed northwest, come to the first hilltop beyond the edge of town and look out over a huge, eerily illuminated valley of fire lit by hundreds of wells.

“During the winter time, boy, the snow would reflect all the gas fires, and it looked pretty amazing,” he said.

Now, most of the oil wells clustered around Sidney are hooked into natural gas pipelines. Pipeline construction crews have been busy up and down the border region (the local term, on both sides of the line, is “MonDak”), and so have exploration crews, drilling crews, “frac” crews and industry operatives. Mega-multinationals like Halliburton and ConocoPhillips have the prominent presence, but locally owned supply companies and small drilling outfits are hard at it too. Tanker trucks rumble over MonDak’s two-lane highways and gravel farm roads day and night.

Everywhere you go in and around Sidney, it’s all about oil. Jobs in the oil fields are so plentiful that unemployment in Richland County, which Sidney anchors, is effectively zero; they’re so lucrative that other businesses have a tough time hiring. The owner of Sidney’s KFC franchise, Rory Carda, says he had to shut down in the afternoons and kill the chain’s signature all-you-can-eat buffet. He couldn’t find anyone to work the shifts.

“In the past, we’d wait for the oil jobs to fill up, then take the people who were still looking for work,” Carda says. “Now, that’s not really possible any more.”

Photo courtesy of Deniece Schwab, Sidney Herald

A workover rig crew handles maintenance on a producing well. The ready availability of high-paying jobs in the oil industry has made it difficult for other Richland County businesses to retain employees.
Mercer, a 58-year-old who has been scratching a living out of cattle and alfalfa since he took over the family operation in the ’70s, now has 11 wells on or around his land. (His far-flung family owns majority stakes in seven of them.) With oil hovering around $100 a barrel, there is a lot of talk around town about the windfall landing in the laps of old-line farmers and ranchers who own mineral rights. One story, circulated in eastern Montana newspapers to both amusement and amazement in Sidney, concerns a nameless rancher who received his first royalty check, looked at the total and sent it back. It seems he figured $1.1 million just couldn’t be right.

Mercer, like most Sidney natives, is pretty circumspect about his oil money. “The big change for us so far is that we no longer have the daily concern about over-drawing our checking account,” he says. “We haven’t really had time to process the idea that, well, I’ve been dreaming of having a log cabin somewhere since I watched Bonanza as a kid. I’ve never been able to quite get there, but now it looks like we should be able to do that.

“It is interesting that we are still so busy coping with daily concerns that we haven’t had time to finalize the plans.”

But Mercer’s personal modesty belies the enormous scale of the MonDak oil industry, which has taken on historic proportions. Underneath eastern Montana and western North Dakota lies a thin (in some places, just five feet thick) stratum called the Bakken Formation, which holds a mother lode of Jurassic goo. Pick a statistic or a superlative: The Bakken is the biggest inland oil find in the United States in 50 years or so; it might contain 200 billion barrels of oil, far more than the Alaska National Wildlife Refuge reserve politicians fight about; last year, Montana pumped about 3 million barrels a month out of its side of the Bakken—about 45 times more than the field produced in 2002.

Montana’s role in the global scramble for oil is modest, so far. Bakken production covers only a small percentage of U.S. oil consumption. It’s not big enough to make us bosom pals with Saudi sheiks (though there are some wild, as-yet-unsubstantiated geological estimates that it could well be). It has yet to equal the tar-sands jackpot that would make the Province of Alberta the world’s second-richest nation per capita (after Luxembourg) if it seceded from Canada. But it is of unquestionable national importance: In the last few years, Montana and North Dakota are the only states to increase oil-production.

I sat in Mercer’s truck—a bitter wind kept us in the cab—checking out the beautiful, forbidding desolation around me. Abundant oil makes this remote, sparsely settled country arguably far more important to Montana’s future than any ski hill, resort development, downtown revitalization plan, big-box strip, high-tech startup, educational initiative or celebrity-owned ranchette imaginable. Richland County—a place inhabited by fewer than 10,000 people—has quietly transformed Montana into a petro-state.

“It’s a good, old-fashioned oil boom,” says Dr. Paul Polzin, a University of Montana economist. “As long as the price of oil remains high, you’ll see Richland County playing a big role in the state of Montana.”


Photo courtesy of Zach Dundas

Underneath eastern Montana and western North Dakota lies a thin stratum called the Bakken Formation, which holds a mother lode of Jurassic goo. The Bakken rocks contain the biggest inland oil find in the United States in 50 years or so, and it might include 200 billion barrels of oil, far more than the Alaska National Wildlife Refuge reserve.
People in western Montana tend to take a dismissive view of everything east of Bozeman. In part, that’s just a matter of distance: To drive from Missoula to Sidney, you have to go to Miles City (a mere seven hours or so), keep going, hit Glendive (which is closer to Chicago than to Seattle) and then head north for another 50 miles on Highway 16. Part of the blind spot is pure prejudice; when I told a Flathead Valley native I was headed to Sidney, she scrunched up her face and said, “That’s not really Montana. More like West Dakota.”

But Montana’s far east possesses a grandeur of its own, a sense that the American frontier never really capitulated to white settlement. Significant history played out around Sidney, from Lewis and Clark’s arrival at the Yellowstone to Sitting Bull’s surrender at Fort Buford, an epically forlorn place just a short hop over the border. Towns like Sidney and Fairview look and feel like most of Montana did before the advent of the latte and Target.

Nature, aesthetics and heritage aside, though, Montanans of late have had a pretty good reason to wish the state encompassed a little more of West Dakota. Unloved, unglamorous places like Richland County are, in some sense, subsidizing Montana’s more fashionable quadrants.

“The money is falling off the trucks as they pull into the state treasury,” says UM’s Polzin.

It’s hard to figure the exact value of an oil field. As everyone who drives knows, the price of a barrel of oil fluctuates subject to supply, demand and the whims of mercurial characters like Hugo Chavez and Vladimir Putin. Not all oil in a field will be extracted, either for technical or economic reasons. In fact, technology needed to tap the Bakken came along only in the last few years, and only the advent of high prices made drilling it worthwhile. Still, the Bakken represents a game-changing windfall for the state of Montana. Just one measure: During the last fiscal year, taxes on oil and gas production brought in $209.9 million, compared to $177.5 million in corporate income taxes. (Back in 2000, state oil and gas tax revenues amounted to just $43.8 million.)

The massive oil money presents Montana with a historic opportunity knotted up in a quandary: what to do with a crazy-lucrative revenue stream that may one day disappear.

For the moment, the Bakken is boosting the state at every turn. The various oil enterprises all pay corporate taxes, in addition to excise taxes on the crude itself. Workers flock to oil-field jobs despite the brutal hours—think 60 to 70 hours a week, 4 a.m. wake-up calls, no holidays—because of generous (taxable) pay. Inflated oil field wages indirectly boost pay (and income taxes) for other workers, too. In recent years, average wages in Richland County jumped 50 percent.

Then there are the oil wells on state-owned land, which pay royalties straight into the treasury. And the federal government kicks a portion of earnings from its lands back to the state—a projected $36.2 million in for 2007. Private landowners like John Mercer pay taxes on their royalties as well.

In and around Sidney, the cash infusion pays off with concrete benefits. Richland County collected $35.5 million in its own oil taxes in 2006 (that would be about $3,500 per resident man, woman and child), on top of its cut from the state. As a result, the county is making huge investments in schools, ambulances, road maintenance and other infrastructure. At one end of downtown, a farm field is giving way to a new jail complex. The library and the museum both got makeovers.

Over 500 miles away in Helena, the oil effect has been less visible and immediate, but more tantalizing and potentially far-reaching.

Photo courtesy of Duane Norby, Sidney Herald

The Sidney Area Chamber of Commerce and Agriculture’s leadership class tours an oil rig. Everywhere you go in and around Sidney, it’s all about oil. Jobs in the oil fields are so plentiful that unemployment in Richland County, which Sidney anchors, is effectively zero.
“When I first briefed legislators on this, you could practically see their jaws hit the floor,” says Terry Johnson, the Legislature’s financial analyst. “They had no idea.”

Johnson may as well have delivered news of a heroin giveaway to a methadone clinic. The big Bakken oil revenues started flowing into state coffers at a time when the Legislature had grown accustomed to dealing with fiscal nightmares, like 2003’s $200-million deficit. The oil boom reversed the state’s financial polarity, creating enormous budget surpluses for a change.

Montanans who could stomach the disappointment watched in sick fascination as the ’07 Legislative session devolved into partisan warfare, in no small part because of the $1-billion surplus built on Bakken oil and the many ancillary streams of revenue spun off of it. That kind of cash, presented to an evenly split Legislature in a perennially strapped place like Montana, set up perfect-storm conditions for bad political behavior.

But if you step back—from the bickering, the special session, the Republican leader telling the governor to “stick it up your ass”—there’s a remarkably free-and-easy feel in the state Capitol lately. Just lob $125 million to broke pension funds here; slide $400 to every residential homeowner there. The state wrote a $20-million check to settle old water-rights issues and froze tuition at flagship universities. State employees got a raise. Education, health care and corrections: up; taxes: not.

“Look what we’ve seen in Montana over the last few years,” Polzin says. “You’ve got the governor talking about the state having one of the lowest unemployment rates in the country. You’ve got companies struggling to find qualified workers. And you’ve got the Legislature arguing about what to do with a surplus.”

Photo courtesy of Wade VanEvery

Downtown Sidney’s main drag, Central Avenue, features sleepy traditional businesses, taverns and a number of empty spaces. “You could say it’s pulled the town both ways,” Wade VanEvery of Sidney’s Chamber of Commerce and Agriculture says of the oil boom. “It’s pulled people out of the regular jobs in town. There are help-wanted signs in every window on our main street. At the same time, it’s bringing in all these people who do need services while they’re here.”
Human sacrifice to the darkest gods of politics couldn’t buy an elected official this kind of luck. While his tenure has obviously seen more than its share of turmoil, in some ways Gov. Brian Schweitzer has gotten a free ride. There’s more to the story than oil, of course, but Bakken crude plays a crucial part. It may be tough to battle with obstinate Republicans over how to cut up a $1-billion pie. But given the often-grim realities of politics, choosing between bigger tax cuts or more spending seems like a pretty agreeable predicament, if you can call it that at all.

Montanans are already veterans of the battles oil brings: from the donnybrook inspired by oil companies’ lust to drill on the Rocky Mountain Front to larger concerns over global warming’s influence on the state’s snow pack and fire seasons. Those fights will continue. In the meantime, Montana must choose what to do with the oil money generated over the next decade—to say nothing of the more nebulous social effects of petroleum addiction across the state.


I hitched a ride to Sidney with Jason, a friend of mine who recently got a decidedly liberal-arts master’s degree from the University of Montana. He now works for Halliburton on a “frac” crew, one of the true monster operations of the oil fields. Frac crews roll into well sites with enormous mobile complexes of semi-trucks, shipping-container-sized tanks and snaking hoses. There, they inject a mixture of water, chemicals and sand into the earth at 8,000 pounds per square inch to blow apart the rock formation holding the Bakken oil. That clears the way for the horizontal drilling technique—oil bores go sideways through the rock foundation rather than straight down—that allows a single pump to drain a wide swathe of land.

I watched a frac crew work on John Mercer’s land. The process doesn’t look like much—crewmembers, wearing cover-alls and hard-hats, were dwarfed by the phalanx of unmoving trucks and tanks. The sound, however, is something else. The low, loud, guttural grind made conversation inside Mercer’s truck impossible.

It’s hard, somewhat dangerous work, and my friend gets paid well for it. He makes the drive from Missoula to his base on the North Dakota side, works two weeks straight, and then drives back to Missoula for a week off. In a town where an advanced degree famously vaults you to the front of the line for bartending jobs, his oil-field wages enabled him to buy a house not far from downtown.

He’s hardly alone—in fact, he’s symptomatic of one of the Bakken boom’s most striking effects. There aren’t enough people in the wide-open MonDak counties to staff the oil fields, so workers are pouring in from all over the place. However, they do not appear to be putting down roots. While rental properties in Sidney are tough to find nowadays, school enrollment hasn’t budged.

A Sidney real estate agent named Leif Anderson says that average prices for rental units have about doubled and that long-empty houses now rent for about $1,000 a month. “Our trailer courts had really emptied out,” he says. “Now they’re full.”

Photo courtesy of Duane Norby, Sidney Herald

Oil companies provide housing, like these mobile homes near a well site, for company hands and roughnecks when needed. The cost of rental housing near Sidney has soared during the boom. “Our trailer courts had really emptied out,” says Sidney real estate agent Leif Anderson. “Now they’re full.”
But those rentals aren’t full of new Sidney citizens. They’re full of transient roughnecks.

“You could say it’s pulled the town both ways,” says Wade VanEvery of Sidney’s Chamber of Commerce and Agriculture. “It’s pulled people out of the regular jobs in town. There are help-wanted signs in every window on our main street. At the same time, it’s bringing in all these people who do need services while they’re here. In my own family, I’ve seen it—people driving here from Billings for work.”

Sidney doesn’t really have the feel of a boomtown. The town’s main drag, Central Avenue, a strip of old one- and two-story buildings dusted with snow and scoured by a freezing wind during my visit, features sleepy traditional businesses, taverns and a number of gaping holes. The town’s movie house is shut down. The Yellowstone Mercantile, the go-to source for clothes and sundries for over 100 years, has gone out of business. The lot that once held the LaLonde, one of the classic hotels of the West, still sits vacant; the hotel burnt down in a catastrophic fire years ago. The bars and casinos do well, but the influx of oil wealth and jobs has not generated any visible sense of prosperity.

If anything, the businesses that sustained Sidney before the boom are under strain—for example, Sidney Millworks, a finish-carpentry firm based in the austere industrial park at the northern edge of town. In the pre-Bakken era, Sidney Millworks jobs must have been among the best gigs around. They paid a living wage, plus benefits, offering a chance for travel, advancement and life-long stability. “Then oil hit,” owner Dolph Harris says.

Harris has lost almost half his employee base to jobs in the oil fields or related service industries. Sales have fallen as a result—and Harris, who has spent decades building his business, said he doesn’t know what more he can do aside from hold tight and try to ride out the boom.

“There’s no way in God’s world we can go out and offer anything remotely like what oil companies can for salaries,” he says. “They’ve decimated the territory.”

Oil’s distortion effect ripples out from Richland County. Enrollment at MSU-Northern in Havre is down 10 percent, a drop one state education official attributed to the ready availability of high-paying jobs. (Meanwhile, Halliburton gave Montana Tech in Butte a $350,000 check to help build its new Natural Resources Building.) ConocoPhillips just announced plans to expand its refinery in Billings. Across the border, North Dakota’s Mandan, Hidatsa and Akikara tribes plan to build a brand-new refinery.

How Sidney and the rest of the MonDak region endure the stresses and dislocations of the boom won’t ultimately matter to most Montanans. But those localized issues lead quickly to bigger questions for a state suddenly awash in petro-dollars: What should be done to cushion the inevitable end?

“Has it been good for some?” the Millwork’s Harris asked rhetorically. “No doubt. Has it been good for the community? I don’t think so. I’m skeptical about what happens when oil relaxes. What happens when the spigot turns off?”

His question might be more urgent than he realizes. The most recent data suggest that production on Montana’s side of the Bakken field is already in decline.


By now, Dick Findley has told his story everywhere from The Wall Street Journal to The Great Falls Tribune: how a struggling freelance oil man, hunting for crude in a place where most people wouldn’t bother, touched off the Bakken boom. Findley figured out which layer of rock hid the oil, and worked with Halliburton and others to develop the technical innovations necessary to pump it out.

Findley had the good fortune to make his discoveries right about the time oil prices went through the roof. Now, the Billings-based wildcatter (his company, fittingly enough, is called Prospector) embodies an archetype as crucial to Montana’s self-image as it is rare in practice: the self-made lone gun, flush from the strike of a lifetime.

“It’s been a heck of a ride,” he says. “My dream was always to be a true independent, and I’ve done it. I look back at past years now and realize that what I was doing was just a mode of survival. At the same time, as hard as it sometimes was, I loved every minute of it. You look at the excitement of waking up every morning knowing that it could be the day you make the big find, and that’s pretty hard to beat. I remember the morning on the Bakken very well. It makes up for all the survival years.”

Findley’s made it. As for the rest of us, he doesn’t sound so sure.

Photo courtesy of Deniece Schwab, Sidney Herald

A crew prepares to “workover” an existing well to keep it producing oil. Montana pumped about 3 million barrels a month from the Bakken shale formation last year—about 45 times more than the field produced in 2002.
“The big controversy is about when so-called ‘peak oil’ will occur,” he says. “Everyone agrees that we’re going to get there at some point. In my mind, it doesn’t matter if it’s now, or in 10 years, or in 20 years. We need to look at everything we can think of both to get us through that challenge and beyond it.”

To Findley, that means developing alternative energy—wind, solar, everything—and drilling as much oil as we can find in the meantime. You don’t have to agree with that exact formulation, though, to recognize that the Bakken is a mixed and likely temporary blessing.

“The biggest debate in the world right now is about how our use of carbon resources is going to affect our climate,” says Bob Brown, the former Republican legislator and gubernatorial candidate now at the think tank Center for the Rocky Mountain West. “The oil in Richland County is great for us today, but I don’t think it will have the same importance in 50 years. At least I hope it won’t.”

This is oil’s black magic: It pits potential future global meltdown—environmental, economic, or a fun-filled Mad Max mixture of the two—against immediate prosperity. Every day, we learn more about why we must stop using it. In the meantime, it seems to be the one guaranteed ticket to geopolitical independence and power. Oil is the reason the Norwegians live so well; the reason Scotland’s nationalist government can indulge in speculation about splitting from the U.K.; and the reason Russia sent a submarine to the bottom of the Arctic Sea to plant its flag.

Montana likes to think of itself as a wide-open state for independent souls, and on an individual level, it is. As a government, though, it’s deeply dependent on the federal dole.

“Half our state government budget comes from the Feds,” Brown says. “Montana is one of the most dependent states, in fact. Now, with the federal government running such an enormous deficit, and with most of our national debt being held by foreign interests, it’s not hard to imagine a time when the federal government is forced to get it’s fiscal house in order.

“We just increased the amount of money we spent as a state, depending on how you measure it, about 22 percent. We had a big surge in income, and that was a wonderful opportunity. But is it sustainable?”

In a brighter political world, Montana’s Bakken oil would be part of an aggressive national strategy to kick foreign oil and reduce overall consumption. Yes, that would be nice. Even so, there is a chance for Montana to make sure its Bakken millions (and future billions) serve a purpose that outlives the oil itself.

In 1975, Montana slapped the highest severance tax in the nation on coal. Half the state’s revenue from the dirty black rock goes into the Permanent Coal Trust Fund, a nest egg that now totals nearly $1 billion. The fund’s principal can’t be touched without a three-quarter vote of the Legislature.

In contrast, oil and gas companies have it easy. To give them incentive to produce more, Montana implemented a series of tax reductions in recent years. According to figures released last week by the Policy Institute, a Helena think tank, those tax breaks totaled a staggering $471.4 million since 2001, compared to what the state would have collected under the old rates.

The Policy Institute proposes a modest increase in oil taxes to create a state Office of Energy Conservation. Sounds like a decent idea—or at least a good place to begin a larger conversation. Could the money from the Bakken insulate the state against federal cutbacks? Or to guarantee more Montanans access to health care, or higher education, or any other 21st century necessities? Could oil, in short, be used to make Montana more independent—not in the zany-speculative-fiction sense of getting a seat at the United Nations, launching a navy on the Fort Peck Reservoir and opening a consulate in Spokane, but in the sense of being able to pay its own way to guarantee the welfare of its citizens.

These are questions only politicians can answer. Thus, the prospect of a grown-up discussion about oil revenue seems unlikely.

“Politicians understandably want to use money in ways that gets them re-elected,” Brown said. “Each of the parties can please their constituencies in a situation like this—Democrats can build public services, Republicans can talk about cutting taxes. There is no constituency out there that says, why don’t we think about saving some of this for the future? That will never get you a single vote.”

Unless, of course, voters themselves choose to make future oil revenues a focal point of the state’s elections in 2008. At the very least, it would serve all Montanans to remember Richland County, even if they’ll never go there. Out on the very lonely edge of Big Sky Country, a certain kind of history is being made by oil wells tucked into the badlands and high plains.

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