Some North Dakota towns in the Bakken Shale used to be like Mayberry. Now they have a definite Wild West feel.
The rapid influx of oil-field workers has strained the capabilities and effectiveness of community services.
The bad news is that the crime rate has tripled. The good news is that North Dakota has the nation's lowest unemployment rate (3.3% as of December 2011).
And the really good news is that the boom has extended far beyond northwest North Dakota to companies that areleasing and renting tank trailers to handle the demands of what is now one of the largest oil-producing areas in America.
“Three or four years ago, the notion that we would have equipment based in the Dakotas would be like me telling you we'd have equipment on the moon,” says Ralph Nappi Jr, president of Matawan, New Jersey-based Transport Resources Inc. “There was no industry out there. Now we have quite a bit of activity and phone calls from large oil-field service providers to small mom-and-pop truckers looking for equipment. It's very dynamic. Literally, I don't think a week goes by that the phone doesn't ring at least once from somebody out there looking for hydrochloric acid equipment.
“It looks like it's pretty well timed. Manufacturers are responding. This is a boon, I'd think, for fiberglass reinforced plastic (FRP) tank manufacturers. I think there is only one manufacturer, Polar (Tank Trailer Inc), that manufactures carbon-steel tanks that can be lined. But I wouldn't be surprised if stainless steel trailers were being lined for this activity and demand, putting rubber linings on a tank interior to protect it and then to get it out there. We're not doing that, but it wouldn't surprise me if that was happening, because the demand is far outpacing supply.”
Phil Klein, vice-president of sales and marketing for Elkhorn, Wisconsin-based Stuart Tank Sales Corp, says the Bakken — and in particular, the Williston area — is one of the primary driving forces behind the company's success.
“Things are going very well,” he says. “North Dakota is one of the primary areas we deal with. That has gone quite well in terms of not only the crude market, but frack sand and water. If it weren't for that market, it'd probably be average at best for the last year and a half. We're dealing with aluminum crude oil tanks, aluminum frack sand and dry-bulk, steel and aluminum vacuum tanks, and stainless-steel water tanks.”
He says 2009 was a “really bad” year for the company, 2010 “picked up,” and 2011 “picked up considerably.”
“In North Dakota, customers range from individuals to large corporations,” he says. “We're seeing the trend going to larger companies taking over. Instead of having 100 different drivers sending in bills and getting loads paid for, you have one company that comes in and takes over the entire operation and does all the trucking and, putting it in simple terms, one bill: ‘We'll come in and make your life easier.’ Instead of having all these 100 guys calling you every day, wondering where the loads are, ‘We'll be the logistics people and handle that.’ So one company will take over. Six guys may have two, three, 10 trucks apiece, buy them out, buy up some of the little guys and handle all the trucking themselves.
“It makes it easier to deal with one company as opposed to 25 individuals, much the same way it does going the opposite way for dealing with actual shippers, the oil people.”
Spanning 200,000 square miles, the Bakken actually underlies not only North Dakota, but also large sections of Montana and Saskatchewan. It is currently the largest known reserve of light sweet crude in North America. Oil was first discovered there in 1951, but technical limitations meant that a significant amount of oil was not recovered until recently. Hydraulic fracturing, or “fracking,” has had the most significant impact.
Production went from 3,000 barrels a day in 2005 to 225,000 in 2010, according to the Energy Information Administration (EIA), which believes 350,000 barrels a day is likely by 2035 — an estimate most analysts believe is far too low.
In 2011, Continental Resources — one of the main drilling players in the Bakken — said that it could be one of the largest discoveries of the last 30-40 years. Continental developed a technology that allows the drilling rigs themselves to move hundreds of yards under their own power, increasing the rate of well drilling. Company president Harold Hamm said the Bakken could produce one million barrels a day by 2020.
Nationwide, there are a handful of shale oil fields that could contain as much as 17 billion barrels of oil — more than the country's largest oil field, Alaska's Prudhoe Bay — according to a recent study from IHS CERA.
Nappi says Transport Resources has equipment wherever these shale formations are being explored — the Dakotas, northern and western Pennsylvania (Marcellus Shale), Texas (Eagle Ford Shale and Barnett Shale), and Wyoming (Niobrara Shale, and Washakie and Green River Basins).
“It's been incredibly strong — unprecedented,” Nappi says of Transport Resources' increased business due to the energy sector. “There's been a demand for equipment for transportation of primarily hydrochloric acid, and also for other chemical products that serve the oil-field industry, either lubricants or surfactants. All of them move in bulk and hence the demand for the equipment.”
He says lease rates on equipment are moving up in step with the increased cost of equipment.
“There is just a very general widespread shortage of even used tank equipment,” he says. “Used stainless equipment is in short supply. I don't know what you can do about it. If it's not there, you can't provide it.
“Certainly you could approach people who have equipment and ask if they are interested in selling it. But often times these are not people who just found the trailer somewhere, so they know — or think they know — they have something of value. So they typically ask for more than it's worth, and that's usually the end of the conversation, unless you absolutely have to have a piece of equipment. Fortunately, we haven't found ourselves in that position. There's a lot of junk out there for sale at DOT-compliant prices, as you might say, so you really have to be careful what you're getting into.”
How long will the energy-related boom continue to boost the leasing industry?
“It's increased our revenues and profits substantially,” Nappi says. “I have no idea how long it's going to continue, but my conservative guessimate based on what I read on the Internet would be at least three to five years. So we're hopeful.”
Klein wasn't quite that optimistic.
“I would say right now we're going to be good through 2013,” he says. “I hear that it will remain, but maybe not quite as great. It may taper off a bit, but it will still be above average.”
He says there are two potentially influential factors: the results of the presidential election and the price of diesel.
“If these guys are paying $3.50 to $4 a gallon now, and we're talking about gasoline being up to $5, that means diesel probably will be close to $6,” he says. “We're talking summer. So in a short period of time, it could literally jump $2 a gallon. So unless these guys have provisions in there for gasoline surcharges, when the price goes up, whatever they bid their haul at, they could be upside down.
”Unfortunately, you're not always able to pass that on. Maybe some people say, ‘We'll discuss that when the time comes.’ Either you want the deal or you don't. Unfortunately, there's somebody who will say, ‘We'll take that deal.’ You look at your numbers and say, ‘There's no way I can do that.’
“But there's always somebody in this industry who's going to come in and do it for less. Guys drop out and new guys come in. Then they'll drop out and the other guys will come back in. Bottom-feeders will come in at a low price and all of sudden, service goes down considerably. The shippers are calling that guy they let go and saying, ‘Hey, can you come back? We missed loads. We need your guys to come back.’ They come back and say, ‘We've got to cover our surcharges.’ That's usually how this whole game works in the trucking industry.”
Even leasing companies that aren't tapping into the energy market are doing well these days. Take Matlack Leasing, for example.
“Were busy building trailers for customers on demand — hydrochloric acid tanks, different corrosive product tanks,” says Jim Rogers, Matlack Leasing vice-president. “Our customers are coming to us, asking for more and more specialized equipment. We're doing a lot of specialized equipment on a lease-purchase avenue. It's a very big shift in the industry for us. Customers used to do direct leasing. Now they want to own them at end of the term. So we have a program where we allow them to do that.
“A lot of those trailers are specialized tanks with linings. If the lining is compromised or no longer good, by the time they pay for the lining, they could almost pay for the trailer in some cases. It's just an economic decision. In many cases, it's easier for them to own a trailer to avoid the potential cost of an off-hire fee.”
Rogers says that Matlack has always been so busy that it never entertained the idea of getting involved in the burgeoning energy sector.
“We just weren't sure how long it was going to last,” he says. “The terrain those vehicles run in, if you don't spec it correctly with air ride and some bells and whistles, when they come back they could face pretty big damages. So quite frankly, it's something we stayed away from. I'm not sure if we did the right thing or wrong thing. Sometimes you just have to make that decision and just run.” ♦