September 8, 2008

Schweitzer Defends His Record on Oil Production

By Dennison, Mike

HELENA - In western North Dakota, oil production has been steadily increasing the past 18 months, and new drilling permits may hit record highs this year.

Yet just across the border in Montana, despite sky-high prices for oil and natural gas, oil production has flattened, and the number of new drilling permits declined 20 percent last year.

State Sen. Roy Brown, the Republican challenging Democratic Gov. Brian Schweitzer this year, said this contrast indicates Montana is slipping when it comes to capitalizing on an oil and gas boom.

He also believes it shows that while Schweitzer talks up energy development, the reality doesn't always track.

"The business-friendly environment (Schweitzer) always talks about just does not exist in Montana," said Brown, a petroleum engineer and former owner of an oil production company.

Schweitzer tells a different story, and said the numbers back him up. Oil production in Montana, while falling off slightly the past 18 months, is up 40 percent since he took office in 2005, and natural gas production has steadily increased.

In fact, Montana ranks second nationally only to North Dakota in the percentage increase of oil production since 2004.

Leasing of state and federal lands in Montana for oil and gas exploration also has increased during the Schweitzer administration, indicating a healthy interest by the industry, he said.

"Clearly, when you increase the leasing by a great deal, you're nowhere near anti-business." the governor said in a recent interview "You've done something to bring business here."

Regulatory climate OK

Folks in the industry also say that while Montana has some strict environmental laws and an active environmental community that sometimes Fights development, the tax and regulatory climate is pretty good.

"We don't see big permitting problems or regulatory problems," said Jenny Brumley, chief executive officer for Encore Operating, a Texas firm and the largest oil producer in Montana. "We're able to get our work done in an orderly manner."

Oil and gas production in Montana has increased greatly since Schweitzer took office in 2005, driven in large part by the run-up in price for both commodities.

In 2004, wells in Montana cranked out 25 million barrels of oil and 87 million mcf (thousand cubic feet) of natural gas. By 2007, those annual amounts had increased to 35 million barrels and 95 million mcf.

State and local tax revenue from oil and gas production has jumped as well, from $92 million in 2004 to a projected $324 million this year.

Reaching the potential?

The question framed by Brown is whether these numbers could and should be better - and whether policies promoted (or not) by Schweitzer are preventing an even bigger oil and gas boom in Montana.

Brown answers yes to both questions, and notes some other figures:

In Wyoming and North Dakota, natural gas production has increased at a greater rate than in Montana since 2004, as has oil production in North Dakota. The number of oil and gas drilling permits in Montana also has declined 40 percent from a record high in 2005, while the number of permits in North Dakota has shot up during that time.

Oil production in Montana also declined slightly from 2006 to 2007, and has been relatively flat this year - while production in North Dakota is going up.

One reason for Montana's oil production decline is simple geology, industry insiders say. Wells drilled in the Montana portion of the Bakken oil field, which straddles the Montana-North Dakota border, are older and leveling off, while strikes in North Dakota are more recent and coming in strong.

Yet Brown said if he's elected governor, he'll do more to encourage oil and gas development. He criticizes Schweitzer for opposing elimination of Montana's property tax on business equipment, said workers' compensation insurance is too expensive in Montana, and claims that state agencies and boards sometimes work against development.

One example he and others point to is a 2006 decision by the state Board of Environmental Review, whose members are appointed by Schweitzer.

The board, in response to a petition from irrigators in the Tongue River Valley, created new stricter standards for water discharged by operators of coalbed natural gas wells.

Restrictive standards

Mike Caskey, executive vice president and chief operating officer for Fidelity Exploration and Production Co, the largest producer of natural gas in Montana, said the company is "making every effort to meet the most restrictive standards of any Western state." But they don't exactly encourage development of new wells in Montana, he said.

Schweitzer doesn't apologize for the tougher standards.

The standards protect downstream water users, like irrigated farms, and with natural gas prices at record levels, production companies can well afford to treat water from wells so it doesn't harm other water users, he said.

"I do not believe that we should take from Peter to pay Paul," Schweitzer said. "Peter is a ranch family that has lived along the Tongue or the Powder River for 130 years. Paul is a coalbed methane company that comes in and proposes to dump salty water into the river and walk away."

Industry officials also note that state fish and game officials in 2007 officially protested some federal oil and gas leases in Montana. The protests said oil and- gas development could hurt sage grouse breeding, and suggested bigger buffer zones around breeding areas.

Industry officials feared the larger buffer zones could halt oil and gas development in large areas of the state.


Again, Schweitzer sees no problem here. He said the Department of Fish, Wildlife and Parks wants to ensure that sage grouse do not become an endangered species, which would mean more restrictions on all types of business activity, including oil and gas, farming and ranching.

As for Montana's tax structure, Schweitzer rejects the notion that the property tax on business equipment deters oil and gas development. The tax rate dropped by two-thirds earlier this decade, and Montana's overall tax structure doesn't penalize oil and gas producers, he said.

North Dakota and Wyoming both have sales taxes, while Montana does not, he adds.

"North Dakota's sales and use tax and Montana's business equipment tax basically cancel each other out," he said. "And complete repeal of the business equipment tax would shift aneven larger share of (property) taxes to homeowners and Main Street businesses."

Brumley, the CEO for Encore, agrees that Montana's tax burden for oil and gas producers is on a par with other states - which he regards as a good thing.

Who gets the credit?

Brown and industry officials, however, note that the major changes in Montana's oil and gas tax structure occurred in 1999, long before Schweitzer was governor.

Drilling in Montana started to increase after that change, and Schweitzer can't truly take credit for the boom in the past several years, which is a product of rising prices and policies put into place by Republicans before him, Brown said.

If Republicans had been in control since 2005, enacting more industry-friendly policies, Montana wouldn't be seeing a drop-off in production right now, Brown said.

Schweitzer said Brown can talk all he wants, but oil production during his administration is higher than under administrations of three prior Republican governors - and Montana is one of only several states where oil production has increased since 2004.

Schweitzer believes production will continue to be fairly strong in Montana, and that he deserves some credit for the increase under his administration Leasing of state lands for oil and gas has doubled under his administration, he said, and he's traveled to Canada to entice producers, put on seminars for producers about Montana's tax and regulatory structure, and pressed for more pipeline capacity to move Montana products.

"I love oil production, and I'm bragging about it," Schweitzer said. "If I was on the other side, I wouldn't bring this issue up."

Copyright Billings Gazette Aug 3, 2008

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