COLUMN-North Dakota's oil boom poses political dilemma: Kemp

Tue Nov 1, 2011 2:19pm EDT

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By John Kemp

LONDON Nov 1 (Reuters) - If North Dakota's oil industry is helping transform North American and global energy markets, then oil is having just as big an impact on the state itself.

But the extent of the state's success poses awkward questions for political leaders in Washington and the rest of the country.

North Dakota has seen the fastest income growth of any state over the past five years, and almost all the gains are due to the boom sparked by drilling into the Bakken shale. Only the District of Columbia -- dominated by government, contracting and lobbying jobs -- has seen incomes rise more dramatically, according to the U.S. Census Bureau.

North Dakota's median real income has risen over $4,250 per household (9 percent) since 2005, according to Census data, compared with a decline of almost $2,300 (4 percent) for the country as whole.

While income stagnates or falls across much of the United States, North Dakota's is being propelled higher by royalties and fees from oil and gas leases, well-paid jobs in exploration and production, and all the services needed to cater for an influx of drillers from out of state (everything from food and lodging to entertainment).

In 2010, the state ranked 19th nationwide in terms of median income, up from 40th in 2000 and 38th in 1990. No other state has seen such a dramatic improvement (or fall) in its ranking over the last 10 or 20 years .

The state also benefits from the farming boom triggered by the ethanol mandate and increases in world food consumption. But the surge in median incomes between 2007 and 2010 leaves little doubt that the massive increase in oil drilling has been primarily responsible for its dramatic prosperity.

The state's 3.5 unemployment rate is the lowest in the union, according to an analysis published in the Financial Times, far below the nationwide average of 9.1 percent ("American oil independence: the pendulum swings", Nov 1).

There are reported shortages of drivers to move both equipment and tankers from well heads and gathering stations to the pipeline network . While the country suffers, North Dakota is unquestionably booming.

BOUNTIFUL ENERGY SUPPLY IN REACH

But North Dakota's boom poses increasingly awkward questions for policymakers at both state and federal levels.

The twin technologies of hydraulic fracturing and horizontal drilling pioneered in the state to extract oil from previously inaccessible "tight" rock formations, and which were earlier used to prize natural gas from Texas' Barnett shale, could be widely applicable to rock formations in other areas of the country.

North Dakota's boom has contributed to the first upturn in U.S. oil output since the mid 1980s. If the same technologies were widely employed, rising domestic production could significantly lessen the country's dependence on imports. The fear of physical shortages would ease, even if the economy was still be exposed to price shocks since international oil and products markets are integrated.

Crucially, rising domestic oil production would improve the balance of payments position. Net oil and product imports ($265 billion) accounted for more than a third of the U.S. trade deficit in 2010 ($645 billion), according to customs data. Reducing the need to import foreign crude is probably the easiest way for the U.S. to cut its trade deficit on a sustained basis.

NEGATIVE ENVIRONMENTAL IMPACT

But there are problems. Production from tight formations is by its nature an extensive rather than intensive form of oil output, relying on a large number of wells to maximise contact with the reservoir rocks, rather than a few traditional gushers. The surface environmental footprint is therefore large.

While drilling has been broadly welcomed in traditional mining and energy-producing states like North Dakota and Texas for the economic benefits, the issue is far more divisive in the more built up areas and diversified economies of the north-east, which overlay formations like the Marcellus and Utica shales.

The development of tight oil and gas fields has been plagued by concern about ground water contamination, the chemical composition of fracking fluids and proppants, as well as the impact of hydrocarbon leases on real estate values and mortgages, and the impact of surface facilities and heavy traffic movements on quality of life.

Some of those may be presentation problems. It is not obvious hydraulic fracturing is more damaging for the environment than other extractive process. As Shell Chief Executive Peter Voser admitted in September, the industry has not always embraced openness about its operations. It may need to be more transparent in future to reassure important stakeholders and obtain a political "licence to operate".

AN ENERGY REVOLUTION -- BUT WHICH ONE?

The bigger political problem is the challenge that more plentiful oil and gas supplies would pose to the clean energy agenda strongly promoted by environmental lobbying groups, clean technology companies, as well as parts of the Obama administration and the congressional Democratic Party.

In theory, increasing domestic oil and gas supplies can be seen as complementary to the roll out of zero emission forms of energy (wind, solar, nuclear) and efforts to cut consumption by improving efficiency (fuel economy standards, product and building codes).

Rising demand for energy domestically and worldwide arguably means all these forms of technology will be needed just to supply increasing consumption let alone stem the rise in greenhouse gas emissions in the coming decades.

But many lobbyists see hydraulic fracturing and other technologies to boost domestic oil output such as deepwater drilling as a mortal threat to the clean energy agenda.

They fear rising oil production would relieve upward pressure on prices and remove the threat of energy insecurity. In turn it would undercut economic incentives and the political momentum to undertake the expensive investments needed to switch to a cleaner energy system.

The National Resources Defense Council (NDRC), one of the most prominent groups lobbying on behalf of the environment in the United States, has launched a high-profile campaign to block regulatory approval of the Keystone XL pipeline that would take crude oil from the midcontinent around Cushing (Oklahoma) to the major refining centres along the U.S. Gulf Coast.

In one blog post, NRDC argued "Keystone XL is at odds with millions of clean energy jobs" ().

The blog takes aim at the "Canadian tar sands lobby" in a political appeal to nativism. The pipeline extension could just as easily carry high quality light crudes from tight rock formations in North Dakota.

Many of the employment statistics it cites are implausible to anyone familiar with payroll numbers published by the official Bureau of Labor Statistics.

But the NRDC sees the extension as a threat because any project which boosts oil and gas output would undercut clean technology industries, in its view.

"Building Keystone XL will entrench interests that oppose policies that would create millions of jobs for Americans in the clean energy sector," says NRDC.

Intense lobbying is underway to block Keystone XL in Washington as well as in state legislatures like Nebraska . Similar lobbying will be deployed in a bid to defeat field development and other pipeline infrastructure.

It is far from clear how the debate will play out. The oil reserves and the technology needed to extract them are there, but whether the oil stays in the ground or is brought to the surface and used is essentially a political decision.

In a Manichean struggle, leaders in Washington and state capitals across the United States are being pressed to decide between embracing the job and income gains that come with drilling, or restrict them and focus on clean technology investments and employment instead.

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