Some Minnesotans are chasing real estate opportunities driven by the oil boom in western North Dakota – and experts say the “Black Gold Rush” is just beginning
By Murray W. Wolf
By now, most Minnesotans have probably heard about the oil boom in western North Dakota. Who hasn’t? It’s a rare feel-good story of prosperity at a time when the economic recovery remains fragile in most areas. The explosion of energy development in our neighbor to the west has grabbed headlines everywhere from local media outlets including the Star Tribune and WCCO to national media including The New York Times, Forbes and CNBC, to name just a few. Some have dubbed oil-rich North Dakota “Kuwait on the Prairie.”
Here in almost oil-less Minnesota, at a time when the state and national economies remain sluggish, the boom across the border can look mighty tempting. During the past couple of years, hundreds – perhaps thousands – of Minnesotans have left this state for high-paying jobs associated with extracting oil from the so-called Bakken Formation in western North Dakota.
Likewise, some Gopher State real estate professionals are staking their own claims to this “Black Gold Rush” – chasing opportunities to develop single- and multi-family housing, hotels, restaurants, retail, and other commercial properties in our neighbor to the west.
But is what’s happening in North Dakota just another short-term oil boom similar to the one that took place in the 1970s, after which it took many years for the state to recover financially from the subsequent bust? Or is The Bakken worthy of all the hype? And if this oil boom really can be sustained, does it make sense for Minnesota real estate professionals to do business in North Dakota?
To try to answer some of those questions, the Minnesota Real Estate Journal on March 16 presented a daylong seminar: “Opportunities in North Dakota and The Bakken.” A capacity crowd of about 500 packed the ballroom at the DoubleTree Hotel in Bloomington to hear from an impressive array of speakers including North Dakota state and local government officials, and energy and real estate industry executives, as well as former North Dakota Gov. Ed Schafer and former Minnesota Gov. Tim Pawlenty.
How is North Dakota doing?
Setting an upbeat tone for the day’s discussion, the conference got under way with a presentation from North Dakota economist Ralph Kingsbury titled “North Dakota: The Land of Opportunity.” Kingsbury noted that North Dakota has historically been “a slow-moving state,” but the recent burst in energy development has changed all that.
“This is a new North Dakota,” he told the audience. “For better or for worse, it’s a new state.”
Mr. Kingsbury then rattled off numerous statistics documenting the recent surge in North Dakota’s economy:
■ North Dakota state sales and use tax revenues jumped more than 21 percent during the past two years.
■ Williston, a relatively small town, but one which happens to be in the heart of the oil patch, collected more in sales tax in February than any other city in North Dakota– even the much larger cities of Fargo, Bismarck, Grand Forks and Minot.
■ Despite reductions in individual income tax rates in both 2009 and 2011, total state income tax revenues increased almost 7 percent in two years.
■ Oil and gas tax revenues almost doubled during the past two years to $1.5 billion.
■ The state expects a budget surplus – yes, a surplus – of at least $1.5 billion when the next biennium ends in 2013.
■ Total North Dakota sales tax revenues statewide were 25 percent more than projected in February.
■ North Dakota has the lowest unemployment rate of any state, 3.8 percent in January, and it continues to decline.
“It’s just like the wild west in a lot of ways,” Kingsbury said. “We cannot get people out there quick enough.” But there isn’t enough housing and infrastructure to support the influx of new residents, he said, calling it “a terrible situation.”
Is this just a bubble?
The Bakken Formation was initially described by geologist J.W. Nordquist in 1953. It occupies about 200,000 square miles below the surface of the larger Williston Basin geological formation, underlying parts of western North Dakota, eastern Montana and southern Saskatchewan. It is named after Henry Bakken, a Williston-area farmer who happened to own the land where the formation was discovered.
After Kingsbury’s presentation opening, the “Opportunities in North Dakota” conference moved into a series of panel discussions featuring researchers, economic development officials, energy company executives and others.
“North Dakota has a miracle going on right now,” moderator Scott Hennen proclaimed at the start of the first panel discussion, titled “Bakken 101 and Oil 101.” Hennen is a North Dakota-based radio talk show host and president and CEO of Freedom Force Communications.
“We need more of everything in North Dakota,” he said. With rapidly rising production, North Dakota is about to overtake California as the nation’s No. 2 oil producer, he noted, second only to Texas.
One of the “Bakken 101” panelists, John Harju, is associate director for research at the University of North Dakota (UND) Energy and Environmental Research Center. Although oil was first discovered in The Bakken in 1951, Harju explained, it was too difficult and expensive to commercialize at that time even though the area had “proven reserves.”
By 2008, however, improved horizontal drilling techniques, coupled with breakthroughs in rock fracturing, or “fracking,” technologies to release the oil – not to mention record crude prices at that time – encouraged energy companies to reconsider.
It was also in 2008 that the United States Geological Survey (USGS) released a landmark study estimating that The Bakken contained 3.65 billion barrels of oil. Two years later, Continental Resources Inc. (NYSE: CLR), an Oklahoma-based oil and gas exploration and production company, arrived at an even more eye-popping estimate: 24 billion barrels.
By comparison, the Ghawar Field in Saudi Arabia, the world’s largest oil field, contains an estimated 70 billion barrels of oil in remaining reserves. New discoveries off the coast of Brazil contain an estimated 30 billion barrels of recoverable oil.
That “world class” opportunity in The Bakken, combined with viable technology and historically high oil prices launched a full-blown boom in 2008. Oil drilling has ramped up steadily since then, and there are now about 5,000 producing wells in North Dakota. Oil producers are adding about 2,100 wells per year and have a goal of 50,000 wells, Harju said. Thus The Bakken will remain an active and important oil field for at least the next 20 to 30 years, he predicted.
Panelist Jack Ekstrom of Whiting Petroleum Corp. (NYSE: WLL) agreed with that positive assessment. Even the oil and gas industry was skeptical at one point, he acknowledged, but it has become evident that the opportunity is “absolutely incredible.” The Bakken is the largest U.S. oil discovery since Alaska’s Prudhoe Bay.
“So we think it’s an industry, it’s not a boom,” UND’s Harju continued, and he invited the real estate professionals in the audience to provide the infrastructure and other development needed to capitalize on that resource, exhorting them to “Build, baby, build.”
“But if you do come out there, you better figure out where you’re going to sleep that night before you get there,” cautioned Tom Rolfstad, executive director of economic development in Williston, a once-quiet North Dakota town that has doubled in size to about 20,000 residents since oil development kicked into gear in 2008.
A housing shortage is a severe problem throughout The Bakken area, Rolfstad reiterated, but that is a great opportunity for real estate developers. The area also needs a massive expansion of infrastructure, he said, including: roads; electric power lines; oil, gas and water pipelines; water systems; rail transload facilities; natural gas plants; oil refineries; and much more.
The race is on
For those acquainted with The Bakken, the housing shortage has become a cliché. It is a place where workers sleep in their vehicles, dwell in RVs and travel trailers not meant to weather North Dakota winters, and occupy the infamous “man camps” of utilitarian, employer-provided modular housing. Housing demand has far outstripped supply and costs have quadrupled in some areas.
Some North Dakota and Minnesota investors and real estate professionals are already trying to capture their share of the market. Subsequent panels during the MREJ conference included several of these entrepreneurs, including private equity firm Stone Arch Capital and investment bank Dougherty & Co., both of Minneapolis, as well as real estate firms Stone Bridge Farms of Minot and Aspen Group of Bismarck.
A Minnesota developer who was one of first to recognize the opportunity in The Bakken is Dean Dovolis of Minneapolis-based DJR Architecture Inc. Through an entity called Annabelle Homes, Dovolis and his partners expect to be developing residential communities in up to 30 small towns in western North Dakota, including projects now under way in Stanley, Columbus, Tioga and Kenmare.
Although Annabelle Homes was created only 15 months ago, Dovolis told the audience, the firm’s first project is already complete – a fast track approval, permitting and development process that would be all but impossible in Minnesota. He said he is convinced that The Bakken is a long-term opportunity; not “boom-bust” but “boom-evolution.”
What’s the risk?
Given the room full of economic developers, real estate professionals and energy industry executives, it was not surprising that the vibe at the “Opportunities in North Dakota” conference was decidedly pro-business. Conference speakers and – judging from the audience response – attendees, were nearly unanimous in their sharp criticism of President Obama’s energy policy, particularly his recent refusal to approve the northern segment of the 1,170-mile Keystone XL pipeline, which would have made it easier and cheaper for producers to transport oil from The Bakken. In February, production in The Bakken outstripped existing pipeline capacity and local oil prices toppled, yet gasoline prices continue to rise.
Another risk to potential investors in The Bakken area is the possible future curtailment of fracking based on the outcome of ongoing environmental studies by the U.S. Environmental Protection Agency (EPA), USGS and other organizations. But those who spoke at the MREJ conference seemed to agree that fracking was not much of an environmental hazard in North Dakota, where the ground water is so deep that it will be largely unaffected.
Former governors Schafer of North Dakota and Pawlenty of Minnesota closed out the conference with a wide-ranging discussion touching on everything from the current presidential campaign to the UND-University of Minnesota hockey rivalry. But the two Republicans agreed that the oil boom represents a terrific opportunity for both states, assuming that North Dakota government remains pro-business and the federal government doesn’t stifle America’s entrepreneurial spirit.
The economic boom in North Dakota, “next door” to Minnesota, “creates opportunities for everybody,” Gov. Pawlenty concluded.
Murray W. Wolf is a North Dakota native and the managing principal of Wolf Marketing & Media, a Minnetonka-based firm that publishes several national newsletters covering the commercial real estate industry – although he says he is tempted to chuck it all to drive a truck in The Bakken for a six-figure salary. For more information on Wolf Marketing, please visit www.wolfmarketing.com.
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