Thursday, February 4, 2016

Legislators Receive Updates on Revenue Forecast and Oil Activity

While legislators in one room were getting updated on the revised revenue forecast, just down the hall other legislators were getting an update on oil production trends and future estimates. Today, these two topics have everything to do with each other. Unfortunately for both areas, the budget and oil activity, there is no crystal ball to tell lawmakers, state officials or industry leaders when either will improve.

Director of the Department of Mineral Resources, Lynn Helms, did provide reassurance to members of the Interim Energy Development and Transmission Committee about the future of oil development in North Dakota. He said he believes oil prices have hit the bottom and will start to rebound. His reasoning is the lifting of sanctions with Iran. He told lawmakers the world supply and demand should come into balance by the end of 2016.

“Oil companies are pessimistic about prices in 2016, but more optimistic in 2017,” Helms said. 

According to Helms, there are 764 inactive wells (wells that are not pumping for various reasons). In addition, there are close to 1,000 wells waiting on completion (drilled but not fractured).  Those incomplete wells are a big reason why the state’s sales tax revenues have taken a big hit. A majority of the sales tax that is collected on a well is done so after completion. But Helms shed some light on the gloom by telling committee members to think of that sale tax revenue as sitting in the bank.

“It’s there, it’s just in the ground and it is in the state’s best interest, in oil companies’ best interest and the mineral right owner’s best interest to keep it in the bank until prices rise.”

While oil production has not been effected by low prices yet, Helms does expect production to drop in 2017. Currently, 1.1 million barrels of oil is produced a day in North Dakota. He is now forecasting 900,000 barrels of oil a day in 2017.  Helms described how even small changes in price will have a big impact on rig count. If oil stays below $30, Helms predicts 30 rigs will be operating in the state this year. If prices can climb to $40-50, he estimates 60 rigs will be operating in 2016 and 75 rigs in 2017.  While the state has seen a dramatic decrease in rigs–going from 143 rigs in February 2015 to 44 rigs one year later—Helms told the committee, “If prices rebound to $70 a barrel in 2017, we expect to see industry overcompensate to catch up. There could be 200 rigs back in North Dakota in 2020.”

Likewise, oil companies are continuing to plan ahead for a future in North Dakota. Nearly 2,000 permits have been issued. That’s about how many new wells were permitted in 2011. Helms says at the current rig rate, it would take 2.5 years to drill those new wells.

As mentioned earlier, the Interim Government Finance Committee also met on February 3rd to receive the revised revenue forecast and learn more about the plan to make up for a projected $1.074 billion revenue shortfall. State agencies have been ordered to cut their budgets by 4.05 percent. Reserve general fund revenues, along with nearly $500 million from the Budget Stabilization Fund, will also be used to offset the projected shortfall.  

In comparing revenue trends, the new forecast for 2015-2017 is similar to the level experienced during the 2011-2013 biennium.

Monday, February 1, 2016

Governor Orders Budget Cuts in Response to $1 Billion Revenue Shortfall

Gov. Dalrymple outlines revised revenue forecast

A revised revenue forecast shows the state’s general fund will have $1.074 billion less than predicted in March 2015.  To make up for the shortfall, Governor Jack Dalrymple is ordering state agencies to cut their budgets by 4.05 percent.  This allotment will equal $245 million. Additionally, $331 million in ending fund reserves along with $498 million from the Budget Stabilization Fund will be used to address the shortfall.

Dalrymple told the group made up of state agency leaders and legislators, “We did a lot of careful analysis and determined that 4.05 percent was the maximum reduction we could make without negatively impacting sensitive areas such as medical services and prison security.”

Dalrymple noted that the allotment is a short term adjustment in order to get to the next biennium. He told agency heads and legislators there will be ample time to make adjustments in the next budget which, will be delivered in December.

 “The goal of this allotment is to garner savings while minimizing impacts to services to the public, because of our strong reserves we can weather this downturn,” Dalrymple concluded.

Each agency will be informed of the dollar amount they are to cut from their budgets. They will have two weeks to notify Office of Management and Budget of where the cuts will be made. Salaries, operating expense, travel expenditures and one-time projects could be looked at. 

Counties will also see an impact from the budget allotment. The 4.05 percent reduction will also be applied to the one-time road funds counties are to receive for work in 2016. HB 1176 allocated $112 million to non-oil counties. That will now be approximately $107.5 million.  We anticipate NDDOT will shortly notify each county of their adjusted amount. 

The 4.05 percent allotment to general fund appropriations won’t affect the regular distributions of special funds to counties.  However, the State Highway Distribution Fund and the State Aid Distribution Fund are both seeing impacts due to the downturn in sales and motor fuels tax collections.  With the revised revenue projections now available, NDACo will be updating their county-level fund projections for counties.

Revised Revenue Forecast for February 1, 2016 can be found here: