The energy sector is strong across the Upper Midwest but remains constrained by a shortage of workers and the volatility of the oil and gas extraction industry.
Statewide, North Dakota has an estimated shortage of 10,000 oil and gas employees, as many who moved to the state more than a decade ago to work the Bakken Formation in the then-booming industry have since left as production slowed, noted Bravera Bank Executive Vice President Jared Bullinger.
The $2.4 billion Bravera Bank is headquartered approximately 130 miles east of the Bakken Formation, a 200,000-square-mile region of Montana, North Dakota and Canada with an estimated 4.3 billion barrels of untapped oil and 4.9 trillion cubic feet of natural gas. Though Bravera Bank doesn’t lend directly to oil and gas extraction companies, it finances supporting firms — welders, hauling companies and oil well maintenance companies.
“Every one of the companies that we finance today could do more business if they found more people to work,” Bullinger added. “There’s not a lack of work in the Bakken; there’s just a lack of people willing to do the work.”
The total number of North Dakota oil rigs in use has fallen to approximately 40 from more than 200 in 2012, said Curtis Skaley, senior vice president of Fargo, N.D.-based Cornerstone Bank, which finances support companies in oil, gas and ethanol industries. Oil and gas production fell 25 percent statewide from 2019 to 2021 amid the worker shortage and a global drop in oil prices as demand fell during the pandemic.
Still, the state depends heavily on the energy-intensive oil and natural gas extraction industry. North Dakota is producing more than one million barrels of oil per day this year, according to the Energy Information Administration and there are still a number of wells that need to be developed. Crude oil accounts for a majority of North Dakota’s total primary energy production.
To Skaley, the dropoff in oil production shows the market has stabilized. “It’s changed, but it’s matured,” he noted. “At the same time the boom was happening, the rest of the country was kind of in a lull, and there were a lot of employment opportunities. And so it drew some really nice wages up here; it brought an influx of folks. As that energy boom played itself out, now we’re mature. We have some infrastructure things set up.”
Bullinger also sees reasons for optimism: During the last 12 to 18 months, oil-extraction support companies in the Bakken have generally focused more on completing work than controlling expenses, which indicates market expansion. By the time the state’s oil wells are completely drilled, Bullinger expects those tapped long ago will once again have crude oil and natural gas.
Clean energy transition already underway
During the height of the Bakken oil boom, Miles City-based Stockman Bank of Montana financed dozens of companies that served the oil and gas industry. Though the $6.1 billion bank still has an energy portfolio, it now includes fewer service providers, as a considerable number that once served the Bakken have left for other energy production hotspots such as Texas and Oklahoma, noted Chief of Branch Supervision Jeremy Morgret.
As the number of regional oil rigs has dropped, Montana’s wind energy industry has grown exponentially in recent years. A recently-completed 750-megawatt wind farm north of Miles City is the state’s largest and provided a major economic boon to the region during construction, drawing in 200 to 350 workers at a time.
The wind project signifies the rapid growth of the renewable energy industry in recent years — wind, solar, biofuels, biomass and waste and other sectors. Last year, such investments increased 31 percent from 2021 to $1.1 trillion, nearly surpassing fossil fuel investments for the first time, according to RSM’s April 2023 energy industry outlook. The push for renewable energy has been accelerated by the worsening energy crisis caused by the Russia-Ukraine war and the resulting focus on domestic energy security.
Manufacturers are expected to prioritize decarbonization initiatives over the next decade. Solar added the most generating capacity to the energy grid each of the last four years, according to the Solar Energy Industries Association. More than half of new U.S. generating capacity this year is expected to be solar power, according to the U.S. Energy Information Administration. The solar industry is projected to nearly triple in cumulative deployment by 2028.
Cornerstone Advisors Senior Director John Meyer called wind energy a strong potential growth source for community banks with locations in regions with consistently strong gusts and major temperature fluctuations. The presence of wind and solar incentives, along with a drop in technology development costs, is expected to support strong competition for natural gas as a source for electricity generation, with shares of coal and nuclear power decreasing in the electricity mix, according to the US EIA.
“While many industrial manufacturers have made the switch from coal to natural gas, the rising investment in renewable sources of energy indicates that companies need to consider how these sources can play a role in their future energy portfolio,” RSM stated.
Global demand for biofuels is expected to grow by 28 percent from 2021 to 2026, according to the International Energy Agency. Minnesota was the first state to mandate the use of ethanol in its fuel supply and requires that all gasoline sold in-state contain 10 percent of the product. Last year, the industry generated $8 billion of economic activity in Minnesota alone through sales, according to the University of Minnesota.
“The recovery to pre-COVID-19 demand levels accounts for one-fifth of this demand growth,” IEA stated. “Government policies are the principal driver of the remaining expansion, but other factors such as overall transport fuel demand, costs and specific policy design influence where growth occurs and which fuels grow quickest.”
Despite the growth in renewable energy sources, U.S. energy consumption is still expected to rise over the next three decades as population and economic growth outpace efficiency gains, according to US EIA projections. Renewable energy is projected to be the fastest-growing source of energy through 2050, but petroleum and liquid fuels are expected to remain the most-consumed energy source amid strong global demand.
Oil prices are expected to average $86 dollars per barrel in the second half of this year, according to the US EIA. U.S. crude oil production is expected to increase by 850,000 barrels a day this year to reach a record 12.8 million.
ESG debates continue
The widespread adoption of clean energy comes as the status of domestic oil and gas extraction faces uncertainty amid domestic and internal political pressure.
OPEC member countries produce approximately 40 percent of the world’s crude oil, and exports consist of a majority of the total petroleum traded internationally. Last October, OPEC and non-OPEC allies opted to reduce production by 2 million barrels per day to spur a recovery in oil prices, despite the United States calling for an increase in output.
“There’s a lot of volatility in oil and gas,” Skaley noted. “Anytime you have the OPEC nations come together and say they are going to reduce output or they are going to do something of that nature, it really throws a wrench into everything.”
Oil and gas drilling has been scrutinized as part of environmental and social governance portfolios. Wells Fargo has committed to reducing oil and gas financing by 26 percent by 2030 as part of a push to reach net-zero financed emissions. Other industry giants, including JPMorgan Chase, Morgan Stanley, Citigroup, Bank of America and Goldman Sachs, have also pledged to reduce emissions.
ESG considerations remain a politically divisive topic. Supporters see it as a crucial consideration for investors as they address future environmental risks. Pushback has come from critics who say that moving the United States away from fossil fuels reduces earnings for investors and weakens the finances of public pensions and oil and gas producers who depend on the sector. Top Republicans have said that ESG requirements circumvent the free market because they force consideration of non-financial factors in investment decisions.
More than a half-dozen states, including North Dakota, Montana, Wyoming, Indiana, Arkansas, Oklahoma and Texas, have enacted anti-ESG laws in the past two years. In some state governments, anti-ESG pushback has weakened after backlash from business groups and concerns that state pension systems could see major losses. In Kansas and Indiana, bankers associations and state chambers of commerce criticized strong versions of proposed anti-ESG legislation. The North Dakota House of Representatives, which has a Republican supermajority, voted 90-3 against legislation which would have required the state treasurer to boycott investment firms with ESG policies.
“This bill, though well-intended, had too many unintended consequences that would have hurt our own Bank of North Dakota and other local main street banks that do support our state’s ag and energy businesses,” said Rep. Mitch Ostlie, a sponsor of the bill.
In late July, House Financial Services Committee Republicans released four bills taking aim at ESG initiatives, including one which would eliminate the Federal Reserve’s vice chair for supervision.
President Joe Biden has faced stinging criticism from Republicans for pausing new oil and gas leases on federal lands — a decision later overturned by a federal judge — and for delaying finalization of a new offshore leasing plan. Despite those moves, Biden’s administration still approved nearly 6,500 drilling applications during his first two years in office, more than the approximately 6,300 approved under former President Donald Trump during the same time, according to the Bureau of Land Management.
Meyer doesn’t expect bank regulators to extensively scrutinize oil and gas lending in the immediate future. Instead, he expects them to prioritize strengthening bank liquidity standards following the high-profile failures of Silicon Valley Bank, Signature Bank and First Republic Bank.
Environmental policies are not top-of-mind for the public when deciding where to do business, according to a recent Cornerstone Advisors survey of 3,000 consumers. Only 16 percent regularly investigated the environmental records of businesses they worked with, according to the report. That number jumps to nearly four-in-10 millennials and three-in-10 Gen Zers. Baby Boomers, who hold a disproportionate share of the country’s wealth, are much less likely to consider environmental policies.
Those numbers support the prevailing view of bankers and energy experts: While oil and gas extraction remains a politically divisive topic, the country remains far from a transition to other, cleaner forms of energy. “With our footprint and where we are at, it’s going to be a part of our business for a long time,” Bullinger said.