Commodity price plunge puts pressure on local governments

May 30, 2016
Some rural US communities that grew dramatically as nearby unconventional oil and gas resources were developed are facing unexpected problems since commodity prices plunged and producers scaled operations back, two Duke University researchers told a Washington audience.

Some rural US communities that grew dramatically as nearby unconventional oil and gas resources were developed are facing unexpected problems since commodity prices plunged and producers scaled operations back, two Duke University researchers told a Washington audience.

The recent onshore US oil and gas development surge has been beneficial for most local governments in the vicinity, the researchers said in a series of reports on shale resources development’s local level impacts prepared as part of the university’s Energy Initiative.

But more rural communities struggled harder to keep up with growing demands for essential services because they had fewer resources to begin with and state laws sometimes limited their options, noted Richard G. Newell, Gendell professor of energy and environmental economics at Duke University’s Nicholas School of the Environment.

A local government can invest heavily in better roads and bridges, which then are not fully used because commodity prices drop and companies reduce their workforces and operations, he said during a May 18 presentation about the studies’ findings at Resources for the Future (RFF).

“Looking forward, these counties and communities are trying to figure out how they’re going to service debt to these major infrastructure projects when their populations have begun to fall,” said Daniel Raimi, a Research Associate in Duke University’s Energy Initiative who co-wrote the reports with Newell. “Grant programs are one positive way states can address local governments’ needs for more revenue. They’re not perfect, but they have provided some discretionary funding opportunities.”

The reports were developed as part of a 3-year research project funded by the Alfred P. Sloan Foundation. Between 2013 and 2015, Duke University researchers traveled to 21 oil and gas-producing regions in 16 states to interview more than 200 local government officials and gather data on local government finances. They also examined state tax policies in detail to understand how revenue flowed to the local level from oil and gas activity.

States feel pressure too

“The popular view tends to be that there are generally negative impacts on local governments as the rest of the country benefits from lower oil and gas prices from this new development. These studies show that these local governments feel both positive and negative impacts,” said discussion moderator Alan J. Krupnick, senior fellow and codirector of RFF’s Center for Energy and Climate Economics.

“We need to take a more comprehensive view of the full array of costs being borne at the state as well as local levels. All the regulatory oil and gas oversight gets borne by state governments,” said Aliza Wasserman, environment, energy, and transportation program director at the National Governors Association, who also participated in the discussion.

NGA’s Center for Best Practices formed a shale learning network in 2013 at Oklahoma Gov. Mary Fallin (R) and Colorado Gov. John W. Hickenlooper’s (D) request that has held annual events ever since, she told the RFF audience. “The political appetite for new oil and gas laws declines as the prices for these resources fall,” Wasserman said. “The number of new state laws which are enacted for taxes on oil, gas, and coal seems to follow this trend. But interest in learning more about the state-oil industry relationship and managing local infrastructure costs is still strong.”

Newell said there are six key oil and gas revenue resources available to local governments: local ad-valorem property taxes, which several states don’t allow; state severance taxes, some of which may be allocated to local governments; state or federal leasing revenue, some of which also may be allocated to localities; sales and use taxes, mostly collected by municipal governments; direct payments from leases on local government-owned land as well as fee-for-services activities; and in-kind contributions, where companies help pay private contractors to maintain roads and provide other essential services.

“Our research found that in Colorado, property taxes were the biggest single oil and gas revenue source for counties,” he said. “In North Dakota, which does not let counties impose property taxes, the biggest source was a share from the state’s severance tax.”

Raimi, who discussed community impacts on development of the Bakken formation in North Dakota and Montana, said that revenue from oil and gas activity there increased dramatically in 2013, but not as quickly as costs. “Revenue grew rapidly, but not as quickly as costs. Several local governments in North Dakota took on more than $100 million of debt for new road and water-wastewater infrastructure. The government workforce doubled, tripled, and quadrupled in many localities,” he said.

”Many things had changed when we returned in 2015,” Raimi said. “The rig count had dropped from around 200 to 50. At the same time, changes in government policy led to more revenue allocated for local governments. Watford City’s revenue grew from around $10 million to more than $50 million, largely from surge revenue from the state.”

Wasserman said now is a great time to conduct oil and gas impact studies at the state level. “Some governments which had hoped the industry would come to their states but didn’t are using this period to do research,” she said. “A lot of research is problem-oriented. When it’s focused on solutions, it becomes much more useful. I was particularly interested in the in-kind contributions of industry to local governments. I’d like to share success stories from North Dakota with governments in other states.”

About the Author

Nick Snow

NICK SNOW covered oil and gas in Washington for more than 30 years. He worked in several capacities for The Oil Daily and was founding editor of Petroleum Finance Week before joining OGJ as its Washington correspondent in September 2005 and becoming its full-time Washington editor in October 2007. He retired from OGJ in January 2020.