Spotlight on Economics: New Challenges in Developing Projections of Employment, Housing and Population for Western N.D.
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By Dean A. Bangsund, Research Scientist
NDSU Agribusiness and Applied Economics Department
In an earlier column, my colleague Nancy Hodur highlighted the issues the state is facing with respect to housing or, more importantly, the lack of affordable housing. Part of the problem with housing is recognizing how much, where and what type is needed. All three are critically important.
Nowhere in the state has predicting housing demand been more challenging than in western North Dakota. The challenges are rooted in uncertainty about the pace of oil field development, the size of oil field development, and how the regional economy will respond through the long term to an economic climate much different than witnessed in previous generations.
To address these challenges, new models were developed to forecast regional estimates of petroleum-sector employment, expected secondary job creation and change in employment in other regional industries. Ultimately, employment forecasts were used to project future housing demand and use housing demand to estimate population potential.
While we produced forecasts of employment, housing and population a little more than a year ago, the dynamic economy and evolving understanding of shale oil development requires an updated set of projections. The big challenge at the beginning of 2012 was understanding what the petroleum industry might do after lease holds were secured. No one really knew what the new pace of development might be, yet the pace of development is a key metric in estimating employment change in the basin. Another challenge at that time was that most of the change in regional employment was associated with jobs in the petroleum industry and that traditional econometric models were suggesting those regions should be seeing much larger responses in secondary employment.
Moving forward to 2014, it is clear that the industry likely will pursue oil field development at a slower pace in the next several years than the pace observed during 2012. One of the more interesting new insights coming from the Williston Basin is that well densities (how many wells can be drilled effectively in a predetermined area) are increasing. Current research is showing that wells can be closer to each other without greatly altering the profitability of the individual wells than previously thought. Further, initial findings are suggesting that overall recovery rates for oil wells in place also are increasing.
Another interesting insight being gleaned from current industry activity and ongoing research in the basin is that the Three Forks formation, another shale formation positioned below the Bakken Formation, is a potentially larger reservoir than previously thought. The prevailing wisdom is that several benches or layers of the Three Forks formation are economical to develop. This was not widely understood just a few years ago.
So what does this all mean? It means the combined understanding of economics, technology and geology still is evolving. The near-term translation is that the state could end up having more wells than predicted just a few years ago. Shale oil development has no historical precedent, so the understanding of what current technologies can do to extract oil and gas from those formations is evolving.
Therefore, updated projections are required to incorporate the new information to provide a revised expectation for the duration and size of oil field development. To make the process even more challenging, the industry is becoming more efficient. Labor requirements are changing and the secondary job response is a much larger portion of the overall change in jobs than was the case just a few years ago.
So the challenges remain, the workforce is growing, oil field development is potentially larger and likely will take longer to develop than previously forecast, so infrastructure demands will continue to strain local and state governments. The ongoing activities pertaining to shale oil development truly are dynamic, so attempts to forecast the future will need to be updated on a frequent basis. New updates should be completed and available to the public by midsummer of this year.
Those new updates likely will reinforce the enormous challenges facing western North Dakota during the next 25 years. One of the first steps in meeting those challenges is understanding that projections of future activity for the industry do not exhibit the classic boom-and-bust cycles the state has experienced in the past and that solutions to development issues in the basin likely are to be nearly as long-term as the projected growth.
NDSU Agriculture Communication – March 14, 2014
Source: | Dean Bangsund, (701) 231-7471, d.bangsund@ndsu.edu |
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Editor: | Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu |