Global to local: Connecting global oil markets to local considerations
Oil development. Photo courtesy of Kyle Slaughter and Paul Moberly.
by Kyle Slaughter and Paul Moberly, Salt Lake City, Utah
Oil Communities
Unique challenges and opportunities exist for planners and city management in oil country. Many of the oil fields across the western United States are dotted by small communities, where city management is left to only a few individuals, making the prioritization of time and the management of city affairs exceptionally difficult. In 2015, the Rural Planning Group conducted a study of the oil industry’s impact on Utah’s Uintah Basin through interviews and surveys of residents, business owners, city and county officials, and local elected leaders. This resulted in a list of best practices that apply to planning and city management in oil country.
Oil Economics
When U.S. oil development exploded in 2010, it created tens of thousands of jobs across America’s heartland. Smaller oil producing communities in the East, West, and Midwest experienced population booms, healthy government coffers, and abounding job opportunities. The incredible production explosion from 2010–2014 was matched by a severe decline in late 2014 that continues today. Prices have fallen by more than 60 percent, resulting in layoffs, vacancies, and low municipal revenue.
Improvements in extractive technologies opened new oil fields that were previously uneconomic and enabled significantly more production in traditional oil fields than was previously possible. This meant significant growth for some towns that had never previously experienced a full-scale boom-and-bust, and an epic production boom for traditionally producing regions.
Today, while the rest of the country basks in the comfort of low gas prices at the pump, “oil communities” drudge through the gloom of curtailed production—driven by the forces of a global market completely outside their control. While some communities are accustomed to boom-and-bust cycles, the current supply glut and resulting bust caught many off-guard.
Established oil communities, like those found in the Uintah Basin of eastern Utah, have ridden the peaks and valleys of oil prices and production many times in the past, and will again in the future. Municipal leaders’ lack of control while managing communities in the midst of this cyclical industry, however, leaves persistent problems that make municipal management—particularly financial management and planning—extremely difficult.
Brent crude, WTI, and Utah crudes all have different prices based on their characteristics. Brent is considered a global benchmark, WTI is a US benchmark, and Utah oil is priced based on its variation from WTI. Between 2010 and fall of 2015, Utah crudes were discounted by over $21 on average, making production in low price periods for Utah producers difficult. Source: EIA First Purchase Prices (2010 – fall 2015 spot prices)
Uintah Basin Oil Study
These difficulties in management, combined with the 2014–15 price drop provided the impetus for the Uintah Basin Oil Study. The study intended to examine global, national, and regional production factors and increase understanding of how these factors impact local communities. To help leaders adopt best practices during the boom-and-bust cycle, the study also provided recommendations for planning and management within the boom-and-bust cycle.
Influential Factors
The diverse factors impacting the oil industry vary at the global, national, and regional level. Global factors affect both the U.S. and Utah industries—yet variations in national and regional factors typically have limited impact on the global market. “Typically” is an important word here because a significant shift for any factor can quickly turn it into a primary driver of the market. The fracking boom is a great example of improved technology altering global production capacity and altering the global production picture completely over the course of just a few years.
Utah’s Factors
“When you’re booming, you got all that money and you think you’re on top of the world. But if you don’t save up and prepare for it, when it busts—you’re screwed.”
Compounding these generally applicable issues, a large percentage of the Uintah Basin is on federal land (a relatively unique factor the Uintah Basin shares with Wyoming and a few other producing regions). According to local producers, federal restrictions, permitting times, and requirements make oil development on federal lands less attractive than development on private or state-owned properties. As a result, companies familiar with federal regulations have become the primary producers in the region. Additionally, Uintah Basin crude has a relatively high cost of production in part from regional geology, federal lands issues, and transportation difficulties arising from limited transportation routes to market and oil that solidifies quickly if it does not remain heated.
The nearest refineries in Salt Lake City also significantly discount crude prices for Basin producers. Consequently, low prices are exacerbated when compared with other oils across the country. This limits the economic feasibility of development in the Uintah Basin—especially when prices drop.
These factors have made the Uintah Basin a “light switch basin… a basin where a 30 percent decrease in the price of the commodity creates an 80 – 90 percent decrease in activity” (regional producing firm). The combination of these factors has impacted communities in the Uintah Basin severely, raising questions about funding capacity for key government services. Because most events at individual oil fields do not impact national or global markets, oil community leaders do not control the major components of their economic foundation. However, understanding these factors broadly is important for leaders as they address their community’s needs, wants, and vision for the future.
Opportunities & Difficulties
Communities connected to oil fields can reap great benefits from their proximity to oil: population growth, strong economic demand, diving unemployment, high median income, increased property values, and increased property and sales tax revenues. Busts provide opportunities to review and write plans, consider and shape how the next boom will alter the community, and acquire land for community purposes at significant discounts.
Conversely, these benefits also create many of the difficulties oil communities face. Swift growth can force hasty decisions, precluding adequate research; population booms strain city services, roads, and other infrastructure; housing affordability plummets; meeting air quality standards becomes increasingly difficult; residents won’t allow government saving during high times for an upcoming bust, and demand the funds be spent now, or their taxes be reduced. As a result, leaders may build and work on projects that are not financially advisable. Additionally, busts lead to decreased funding, population loss, and vacancies.
These opportunities and difficulties make the timing of asset development and conducting planning initiatives exceptionally important.
Best Practices
One purpose of the oil study was to establish a set of best practices, based on experience, as a reference for leaders in the Basin. Most communities do not have full-time planners, so city leaders frequently provide the planning services in these small towns. The Rural Planning Group contacted county planners, city managers, regional leaders, private sector companies, and residents throughout the Basin. This pool of respondents was interviewed or surveyed, and the responses were aggregated into a list of recommendations. Based on this research, the following best practices surfaced:
1. Know the industry.
Understanding the primary drivers of the industry at the regional, national, and global levels helps leaders anticipate the industry’s future direction.
2. Work together as a region.
Leaders in many Uintah Basin cities have been there for several decades. They have ridden many boom-and-bust cycles and have made mistakes they can help new leaders avoid. Similarly, as these communities seek to attract new businesses, it’s important to work with legislators to invest in the region and address regional issues; regional partnerships increase the likelihood of success. The success of one community does not preclude the success of another.
Community impacts. Graphic courtesy of the Rural Planning Group.
3. Develop processes and timelines for community management.
City and county management processes in oil basins require thinking about planning and carrying out projects in different ways. Planning during a boom is extremely difficult. Government employees and elected officials hardly have time to keep up with service demand, much less develop long-range strategic plans for the future. Coincidentally, boom times are when long-range plans are most important and needed to shape boom-time growth. Conversely, busts provide leaders the opportunity to look back at the development that occurred during the last boom, and then change plans and code to shape their next growth period. Leaders need to capitalize on the slow periods by reviewing the development of the last boom, determine how zoning and ordinances need to change to redirect undesired development patterns, and adopt these plans in time to shape the growth of the next boom.
4. Budget strategically.
If residents will allow it politically, saving during booms is key to maintaining city service levels during busts. If, after education and outreach, residents do not approve of saving, phasing projects into smaller components can protect the city from over-obligating itself on long-term loans. This may cost more in total dollars, but it does protect from obligations that can severely burden cities during low-revenue periods.
5. Diversify where possible.
Oil communities face unique difficulties diversifying their economies. When oil prices are high, it is difficult for other industries to keep employees and a transient workforce can lead to uncertain regional demand for goods. The recommendation includes three steps as descending priorities:
- Keep current businesses. Current businesses disrupt the community most when they leave; effective assistance for these businesses helps maintain stability.
- Assist local entrepreneurs. Local entrepreneurs are typically most invested in the local region. Supporting high school students, college students, and other local entrepreneurs is most likely to develop companies that are invested in the community. They will stick out the lows better than companies who are just looking to capitalize on a sudden boom but leave at the onset of a bust.
- Attract outside businesses. Finally, reaching out to businesses is key. When asked, leaders commented that the most successful transplant companies are typically owned by former residents who bring their companies back “home” for improved quality of life or to be close to family.
In addition, the oil industry provides skill sets in its workforce that can be attractive to industrial and manufacturing companies. Uintah Basin communities are attracting some of these businesses, but finding another industry that can fully counterbalance the oil industry is unlikely. Rather, developing industries that take advantage of oil and gas skill sets while improving educational and entrepreneurial opportunities in other industries will help communities stabilize over time.
Oil development. Photo courtesy of Kyle Slaughter and Paul Moberly.
The Future
Current global markets, politics, and conflicts make the immediate future of oil prices exceptionally foggy. Based on the tenor of OPEC, Russia, and US producers combined with sluggish global demand, prices don’t appear to be changing too significantly in the next few months. However, one disaster, conflict, or economic shift could alter the current picture completely.
Despite uncertainty in the near term, oil communities can be certain that oil prices will rise in the long run; they will have to manage and plan through future booms-and-busts. The recommendations found in the Uintah Basin Oil Study are intended as a starting point for developing and applying best practices across communities located in the midst of volatile boom-and-bust markets. This starting point requires critical feedback and additional research that will help leaders in communities facing recurring booms-and-busts.
Paul Moberly and Kyle Slaughter are Consultants with the Rural Planning Group. Moberly’s professional focus is on community and economic development. Slaughter’s background is in public administration and private sector consulting. Both serve on the Editorial Board for The Western Planner.
Resources
The Uintah Basin Oil Study can be accessed at www.ruralplanning.org/oil.
Rural Planning Group
The Rural Planning Group (RPG) is a creation of the State of Utah’s Community Impact Fund Board (CIB). The CIB obtains funding from mineral lease royalties on extractive industries operating on federal lands. These funds are collected by the federal government and then returned to the state, the State returns a portion to CIB for use in rural communities. The CIB disburses this funding to communities that are affected by mineral resource development on federal lands. Visit www.ruralplanning.org.
Published in the December 2016/January 2017 Issue