Lessons from the Bakken

North Dakota shoots up the list of top energy-producing states thanks to sound regulatory, legislative framework – will Pennsylvania follow its lead in the Marcellus?

Quick: What’s the first thing that comes to mind when the subject of North Dakota comes up? Well, assuming it ever does, there’s that famous Coen brothers film of the mid-90s, its status as home and birthplace of Yankee-legend Roger Maris, and of course, the majesty and mystique of the American treasure known as Mt. Rushmore (oops, wrong state).

But those notwithstanding, you know what else North Dakota is known for these days? Energy. Lots and lots of energy. In fact, thanks to the state’s prolific Bakken Shale formation, North Dakota surged past Oklahoma and Louisiana this year to become the nation’s fourth-biggest producer of petroleum. And if the current production trajectories hold steady, the Peace Garden state is expected to climb another spot or two on that list before the decade is out.

So how did a state with a total population roughly equivalent to Bucks County, PA pull this thing off? Well, for starters, it helps to be situated above a shale formation that geologists believe holds more than four billion barrels of recoverable oil.

But as folks in Pennsylvania have started to figure out, it takes more than the right geology to convert American energy resources into jobs, revenue and opportunity for those who need them. It takes a commitment by policymakers 10,000-feet above the formation to put the right kind of legislative and regulatory framework in place. And among the many policies that are helping North Dakota right now edge out the competition, the state’s fair pooling protection statute stands out as something that’s done as much as anything to ensure the rapid influx of capital to the Bakken continues.

Here’s how the North Dakota statute on fair pooling (section 38-08-08) reads:

In the absence of voluntary pooling, the commission upon the application of any interested person shall enter an order pooling all interests in the spacing unit for the development and operations thereof. Each such pooling order must be made after notice and hearing, and must be upon terms and conditions that are just and reasonable, and that afford to the owner of each tract or interest in the spacing unit the opportunity to recover or receive, without unnecessary expense, his just and equitable share.

New to the fair pooling debate? Here’s how it works: Thanks to advancements in technologies such as directional and horizontal exploration, shale producers today have the ability to tap thousands of feet (even a few miles) of lateral, energy-bearing formations from a single cluster of wells situated on a single drilling pad. We’re talking about the ability to access 10 times the amount of oil and natural gas by drilling one-tenth (or fewer) the number of wells.

But what happens if several individual landowners lease their land to several different energy companies? What happens if one or two landowners out of 50 or 60 decide not to lease to anyone at all? Enter fair pooling protection: a tool used by the states to organize scattered parcels of land into units that can be efficiently developed for the benefit of all. North Dakota’s got it. So does New York, Ohio, Oklahoma and Arkansas. And Pennsylvania’s got some version of it on the books too — but unfortunately, not a version that’s up-to-date with the realities involved in modern-day shale gas exploration.

Of course, on at least one critical issue facing shale producers across the country right now, regulators in North Dakota stand shoulder-to-shoulder with their counterparts in Pennsylvania: They both believe the authority to regulate key shale technologies such as hydraulic fracturing should remain with the states. Here’s how the North Dakota governor handled the question when it was brought up earlier this month in a series of state meetings with EPA:

Gov. John Hoeven has had a series of meetings with Environmental Protection Agency leaders as the agency moves forward with a process that could end in its regulation of an oil drilling process known as [hydraulic] fracturing. … The message Hoeven wants to send to the EPA is “we can regulate fracturing very well, thank you very much.

And just so you have it handy, here’s how Scott Perry, director of DEP’s Bureau of Oil and Gas Management, described the situation in a column he authored for the Ft. Worth Oil & Gas Basin magazine last month (subscription required):

Nothing being done to produce the Marcellus is new to Pennsylvania. It certainly isn’t the deepest formation to be developed …. And , despite popular opinion it certainly isn’t the first formation that needed to be hydraulically fractured to stimulate production. … The [PA DEP] has a successful history of overseeing the environmentally protective development of the commonwealth’s oil and gas resources.”

So, sure: The excitement in North Dakota right now may be focused on oil, and the opportunities in Pennsylvania may be focused on natural gas. But both states find themselves today well-positioned to leverage the promise and potential of homegrown shale resources into thousands of jobs for their residents, and billions and billions in taxes, revenues and royalties for state governments and local landowners.

So maybe we’ve got more in common with our friends from the Peace Garden state than we thought. And especially as it relates to the implementation of fair pooling protections relevant to shale, here’s to hoping we find a way to have even more in common in the future.