Montana Energy April 2013

TABLE OF CONTENTS SPRING 2013 VOLUME 1 NUMBER 1

COVER STORY

DEPARTMENTS

How Big is the Bakken?

18

POLICY & REGULATION Fracking: The Continuing Debate ...............10 Is Keystone Coming to Montana? ..............13 Developing Otter Creek................................16

TECHNOLOGY Incendiary Investment .................................24 POTENTIAL IS LIMITLESS FOR HARNESSING FLARED OILFIELD GAS

TRENDS Meeting the Need .........................................27 TRAINING MONTANA’S ENERGY WORKERS

IN EVERY ISSUE From the Editor...............................................4 Energy in Brief ................................................6 Power Profile ..................................................8 INTERVIEW: GOVERNOR STEVE BULLOCK

From the Field...............................................30 DaVE GaLT, MONTaNa PETROLEUM aSSOCIaTION

Calendar/Directory .......................................34 PHOTO BY VERN WHITTEN PHOTOGRAPHY.

SPRING 2013 I MONTANA ENERGY REVIEW I 3

FROM ThE EDITOR

I started my career in energy more than a decade ago as a staff assistant on the U.S. Senate Energy and Natural Resources Committee, a position which allowed me to observe the development of national energy policy from a unique vantage point. One of the professional staff on the Committee once told me, as I was glamorously organizing file cabinets, that few things in this world have done as much to liberate women as the availability of cheap, reliable energy.

I recently spent a number of months volunteering in a rural part of Nicaragua, a country where energy is neither cheap nor reliable. As I passed hours of my limited free time scrubbing all my clothes by hand, hanging them on a line to dry, the wisdom of my former colleague echoed through my head often. Manual laundry is backbreaking work, slow and laborious, and nearly always falls to women, occupying time that could be devoted to education, self-improvement and achieving personal dreams. The advent of mechanization, powered by affordable electricity, creates leisure time, which in turn frees women from the traditional constructs of “women’s work.”

In Nicaragua, gasoline is outrageously expensive, meaning that cars are often out of the question and buses and taxis are hardly cheap. Many people walk, consuming

hours of time that could be better devoted to economic productivity. The absence of cheap, reliable energy condemns millions of people to poverty all over the globe, including millions of women who pass their days in intense physical labor with barely a moment to dream of a better future.

As a woman who can now toss the laundry in the washer and drive off to work to pursue dreams limited only by my imagination, I am immensely grateful to the thousands of Montanans who work in oil fields and coal mines, building an energy industry that delivers countless benefits every day.

I am also very proud to present this premiere edition of Montana Energy Review.

This quarterly publication is dedicated to capturing the unique aspects of energy development in Montana – an industry that delivers billions in economic benefits to our state each year. Here in Montana, we value quality of life as much as we value economic growth, and I am so pleased to be able to showcase our special talent in balancing those two goals in the energy sector. I don’t think any state can rival our ability to encourage development while maintaining our values. I look forward to highlighting the very best of Big Sky Country over the coming months and years.

jowen@mtenergyreview.com

4 I MONTANA ENERGY REVIEW I SPRING 2013

SPRING 2013 • VOLUME 1 • ISSUE 1 PUBLISHER MICHAEL GULLEDGE

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DIRECTOR OF NICHE PUBLICATIONS /MARKETING ALLYN HULTENG

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EDITOR JENNIFER OWEN

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THE CONTENT OF THIS MAGAZINE IS DESIGNED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR FINANCIAL ADVICE. THESE MATERIALS ARE INTENDED, BUT NOT PROMISED OR GUARANTEED TO BE CURRENT, COMPLETE, OR UP-TO-DATE AND SHOULD IN NO WAY BE TAKEN AS AN INDICATION OF FUTURE RESULTS. THEY ARE NOT OFFERED AS AND DO NOT CONSTITUTE LEGAL ADVICE, LEGAL OPINIONS, OR INVESTMENT ADVICE. YOU SHOULD NOT ACT OR RELY ON ANY INFORMATION CONTAINED IN THIS MAGAZINE WITHOUT SEEKING THE ADVICE OF AN ATTORNEY OR FINANCIAL PROFESSIONAL. MONTANA ENERGY REVIEW IS PUBLISHED QUARTERLY BY BILLINGS GAZETTE COMMUNICATIONS COPYRIGHT© 2013 BILLINGS GAZETTE COMMUNICATIONS ALL RIGHTS RESERVED. REPRODUCTION IN WHOLE OR IN PART WITHOUT EXPRESS WRITTEN CONSENT IS PROHIBITED.

SPRING 2013 I MONTANA ENERGY REVIEW I 5

SWaPS aT ThE TOP

Senator John Kerry has been confirmed as Secretary of State, replacing outgoing Secretary Hillary Clinton, who left the Department in January, just at the Department of State’s ongoing review of the Keystone pipeline heated up.

As the Obama Administration enters its second term, the energy industry faces an acrossthe-board new line-up of regulators and policymakers in the executive branch. The heads of the Departments of the Interior, Energy, Transportation and State, as well as the Environmental Protection Agency (EPA) all announced retirements Sally Jewell has been nominated to replace Secretary of Interior Ken Salazar, whose department oversees energy leasing on federal lands, implementation of the Endangered Species Act and various land management programs. Jewell is president of outdoor sporting goods store REI, and is also a former petroleum engineer. MIT professor and clean energy advocate Ernie Moniz has been nominated to replace Secretary of Energy Steven Chu, who retired in February.

Gina McCarthy has been tapped to fill the top spot

6 I MONTANA ENERGY REVIEW I SPRING 2013

at the EPA, replacing Lisa Jackson as administrator.

Former Massachusetts Senator John Kerry has been confirmed as Secretary of State, replacing outgoing Secretary Hillary Clinton, who left the Department in January, just at the Department of State’s ongoing review of the Keystone pipeline heated up (see story page 13). Finally, Secretary Ray LaHood announced he will leave the Department of Transportation, which has oversight authority for pipeline safety and rail safety in the U.S. A replacement has not yet been announced.

CLIMaTE ChaNGE BaCk ON ThE aGENDa?

President Obama sought to make his climate priorities clear in his February 12 State of the Union address, wherein Obama stated “if Congress won’t act soon to protect future generations, I will. I will

direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change and speed the transition to more sustainable sources of energy.”

During his confirmation hearings, Kerry indicated he intends to make climate change a top priority during his tenure at State, while the EPA is expected to soon announce new environmental standards that are anticipated to prevent future construction of coal-fired power plants.

The EPA may also seek strict regulations on air emissions in the oil field, and the agency continues to evaluate concerns related to hydraulic fracturing (see story page 10). With former chief of staff Jack Lew recently confirmed as Secretary of the Treasury, President Obama tapped known climate change activist Denis McDonough as his top White House aide.

The Democratic-led Senate is expected to follow the President’s lead on the climate agenda. Sen. Barbara Boxer (D-Calif.), chair of the Committee on Environment and Public Works, intends to try to have climate legislation considered by the Senate this summer, with provisions that assess a carbon fee and require federal disclosure of hydraulic fracturing fluids. Speculation persists on Capitol Hill that the Senate Finance

Committee, led by Montana Senator Max Baucus, is examining a comprehensive tax code rewrite, including repealing more than $4 billion in tax incentives for oil and gas production. U.S. House Republicans have pushed back aggressively on carbon controls, warning that any new power plant regulations and other EPA-led efforts to promote a climate change agenda would be firmly opposed.

BUDGET WOES CONTINUE

Congress continues to battle over federal deficit spending and managing the federal debt, with little sign of progress toward a resolution.

On March 1, automatic across-the-board cuts in federal spending, known as sequestration, took effect, resulting in an $85.3 billion cut, slightly more than 10 percent of the projected deficit for 2013. The impacts of the sequester are not yet known, as it will take time for agencies to implement the reductions, but

The Miles City half of the cuts must come from defense programs. Most federal entitlement programs – such as Social Security, Medicaid, food stamps and veterans’ benefits – are exempt from the automatic cuts. The Obama Administration has warned that sequester will cause a slowdown in oil and gas permitting on federal lands.

Repealing or modifying the impacts of the sequester is expected to continue to shape the debate over funding the federal government in fiscal year 2014, which begins October 1. Congress passed legislation at the end of March to fund the federal government through the end of FY2013 without overturning sequestration, as the Senate had originally considered.

Congress will debate funding bills throughout the summer months, providing ample opportunity to continue revisiting the impacts of sequestration. Also on the horizon – a heated debate over raising the debt ceiling, slated for mid-May. Following the last-minute deal on the so-called “fiscal cliff ” on January 1, the Congressional Budget Office issued a report of the impact of the agreement, suggesting that deficits are expected to continue for the next decade and could reach nearly $1 trillion per year by 2023.

National unemployment over the next 10 years is expected to stay near 7.5 percent – in contrast to the economic growth in Montana, which currently has an unemployment rate of approximately 5.6 percent, while North Dakota hovers around 3 percent, due largely to oil and gas production in the two states.

NORThWESTERN CUSTOMERS SEE RaTE hIkE

MEaNWhILE, IN hELENa

Energy advocates are lobbying aggressively against SB295, legislation proposed by Sen. Christine Kaufman (D-Helena) that would repeal Montana’s “gas tax holiday” – a cost recovery incentive that encourages petroleum production in Montana. Supporters include conservation and environmental groups, while opponents include energy industry groups, the Montana Contractors Association, the Montana Chamber of Commerce, the Montana Taxpayers Association and other business groups. A bill proposed by Sen. Llew Jones (R-Conrad) to revise public education funding, use oil and gas tax revenue and provide property tax relief passed the Senate on February 23 and now awaits action in the House. A joint resolution proposed by Rep. Jonathan McNiven expressing support for the development of Montana coal resources and the continued use of coal-based power passed the House and is working its way through the Senate.

Despite a unanimous rejection of the proposal by Montana’s Public Service Commission (PSC), NorthWestern Energy implemented a 12.5 percent rate hike in January.

Montana law permits the utility to raise rates to cover state and local taxes, regardless of PSC action. The PSC’s five members all voted to reject the proposal as a means of protesting tax hikes that are automatically passed on to customers. Less than half of the increase was caused by actual tax increases, while the majority was due to local levies, changes in assessed value of equipment and a failure to collect sufficient revenues in 2012 to cover costs. According to NorthWestern, the average residential customer will see an increase of about $15, while the average commercial customer will pay approximately $22 more

MILES CITy RESOURCE MaNaGEMENT PLaN RELEaSED On March 8, 2013, the federal Bureau of Land Management (BLM) released a draft resource management plan covering approximately 2.8 million acres of federal land in the following counties: Carter, Custer, Daniels, Dawson, Fallon, Garfield, McCone, Powder River, Prairie, Richland, Roosevelt, Rosebud, Sheridan, Treasure, Wibaux and portions of Big Horn and Valley. The resource management plan is a federal

planning document that outlines how lands within the region will be managed for a variety of uses, including energy production.

The draft plan also addresses sage grouse management in the area. BLM is accepting public comment on the draft until June 5, 2013. BLM will also hold a series of public meetings throughout the month of May. More information, including the public meeting schedule and instructions for submitting comments, can be found at http://www.blm.gov/mt/st/en/ fo/miles_city_field_office/rmp. html.

Resource Management Plan is a federal planning document that outlines how lands within the region will be managed for a variety of uses, including energy

CROW aND CLOUD PEak PaRTNER ON COaL

production.

On January 24, Cloud Peak Energy signed an historic deal with the Crow Tribe to develop coal resources on tribal lands.

The agreement, currently under review by the Department of the Interior’s Bureau of Indian Affairs, could result in up to $10 million in payments benefitting tribal members. The deal, covering approximately 1.4 billion tons of coal, must be approved by the Department of Interior (DOI) to take effect. Under the terms of the agreement, Cloud Peak made an initial $2.25 million payment to the Tribe, and will make a $1.5 million payment upon DOI approval. The deal also includes annual option payments to the Tribe, hiring preferences for tribal members and the funding of scholarships for students.

SPRING 2013 I MONTANA ENERGY REVIEW I 7

GOVERNOR STEVE BULLOCk MONTaNa’S ENERGy FUTURE 1. What is your energy agenda – your top three goals for the next four years for the energy industry in Montana?

Montana’s lands have blessed us with an abundance of natural resources that have allowed the state to be an exporter of energy products for decades. As Governor, I take great pride in utilizing Montana’s energy resources to provide good-paying jobs for Montanans, growing our rural communities and support local schools, while safeguarding our quality of life.

Those natural resources have provided for our greatest resource, our kids, for decades. I want my kids — and all kids in this state — to have the same opportunities that I did. We owe it to our children to make use of these resources in a manner that enhances the opportunities they have and protects the lands they call home.

Specifically, my administration’s goals are to: a. Attract investment in all of Montana’s energy resources so as to create jobs, increase the tax base and keep energy affordable for Montana families. b. Assure that regulatory processes are efficient, protect the environment and provide consistency and certainty for developers. c. Support quality education opportunities for Montanans in energy-related fields of study that will encourage students to apply their knowledge here in the state.

2. Does your administration support any particular energyrelated measures in the legislature right now?

We are supporting a number of measures that are energyrelated, including: Senate Joint Resolution 6 (Olson, R-Roundup), to study the effects of Montana’s renewable portfolio standards (RPS). We welcome an objective analysis of the RPS and believe it will reveal that it has been beneficial for Montana. This is borne out by the economic numbers that can directly be tied to the RPS: approximately $1.5 billion in capital investment, $23 million in

8 I MONTANA ENERGY REVIEW I SPRING 2013

Courtesy photo provided by Governor Bullock’s office

property taxes collected, 86 direct permanent jobs and approximately $1.5 million annually paid to landowners that lease their land for energy development.

House Bill 37 (McChesney, D-Miles City), to allow temporary leasing of water rights. This is a common sense approach that would make it easier for water right holders to temporarily change water use in ways that would benefit the holder and help meet increased water demand being created in eastern Montana due to energy development.

Senate Bill 332 (Tutvedt, R-Kalispell), to provide more flexibility for gravel pit operations and improve the The state must permitting process. This should allow for more gravel operations in eastern promote energy Montana, where energy development is driving demand, without compromising development to the ability to regulate those operations in parts of the state where there are foster growth in this increasing conflicts concerning location.

House Bill 580 (Connell, important economic R-Hamilton), provides funding for my Sage Grouse Advisory Council, so sector and put we can maintain our management and control of this important game species Montanans to work, and continue to collectively shape our and we can do it in a energy future.

In my budget I’ve allocated $15 million in matching funds to jump start way that will protect efforts to upgrade infrastructure for those things we love communities in eastern Montana.

3. How important do you believe petroleum and coal development is for Montana? What do you plan to do as governor to make sure Montana benefits from energy production while still maintaining our quality of life?

The economic impacts of this development are substantial, but Montanans also expect that we will protect our outdoor heritage, communities and agricultural producers. That’s why my administration is committed to maintaining sustainable and responsible development of our energy resources for a net benefit to the state and its citizens.

The state must promote energy development to foster growth in this important economic sector and put Montanans to work, and we can do it in a way that will protect those things we love about living here.

about living here.

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SPRING 2013 I MONTANA ENERGY REVIEW I 9

FRAC

10 I MONTANA ENERGY REVIEW I SPRING 2013

At-a-Glance

• Hydraulic fracturing is a technique used to produce oil and gas from tight geologic formations • Fracturing has been used for more than 60 years in petroleum production • Montana has disclosure requirements in place for fracking, and groundwater monitoring in the state shows no contamination of water supplies.

Fracking operation southeast of Sidney, Mont. Photo by Vern Whitten Photography.

ThE ON-GOING DEBaTE OVER hyDRaULIC FRaCTURING

By JENNIFER OWEN ask any Montana oil and gas producer what his or her biggest concern is for the industry in 2013, and the answer is nearly always the same: regulatory uncertainty.

Nowhere is the concern over regulatory overreach greater than in the aspect of hydraulic fracturing. Environmental activists are clamoring for increased federal and state regulation of the practice, while industry experts suggest that responsible use of hydraulic fracturing is essential to domestic energy production in areas like Montana, where the subsurface geology of oil and gas formations is challenging.

“There isn’t a well in the Rockies right now that doesn’t have to be fracked,” said Tom Hauptman, president of Hauptman Resources, a Billings-based oil and gas exploration company.

Hydraulic fracturing is a process of injecting water, sand and chemicals at high-pressure into underground rock formations to create small fissures that allow trapped oil and gas resources to escape and be brought to the surface. Fracturing is often combined with new drilling technologies that allow production wells to be drilled horizontally, rather than vertically. The two technologies together allow producers to economically extract oil and gas in regions like Montana that don’t have as many easily accessible resources as its neighbors.

“Montana’s geology is different from that of North Dakota, and our well development outside of Elm Coulee (Richland County) is not as prolific as those in ND,” said Dave Galt, executive director of the Montana Petroleum Association. “So challenges like changing our tax structure (both on the state and federal level), and increasing regulation make the cost of a well higher and change the economic calculation necessary to get a positive capital investment decision.

The attacks against fracking are also a significant

concern because the use of frac treatment technology coupled with horizontal drilling is what is making this increase in activity possible.”

Fracturing techniques have been used in petroleum production for more than 60 years, and are also used for environmental clean-up, water well stimulation and other industrial processes. Currently, hydraulic fracturing is primarily regulated by the states, but opponents of fracturing are pushing for a more active federal role. Hydraulic fracturing in many oil fields in the eastern U.S. has been halted due to environmental protests.

The U.S. Environmental Protection Agency is currently undertaking a national study to assess any potential impacts on groundwater due to hydraulic fracturing. A draft of the study is expected to be released in 2014.

The federal Bureau of Land Management (BLM) is also revising its regulations for the use of hydraulic fracturing on federal lands. The BLM issued a proposed rule in early 2012, but announced in January 2013 that it would be revising and republishing the draft regulations later in 2013 due to industry criticism that the initial proposal was unduly burdensome and expensive.

SPRING 2013 I MONTANA ENERGY REVIEW I 11

FRACFaQS WHAT IS HYDRAULIC FRACTURING?

Hydraulic fracturing is the injection of water, sand and chemicals at high pressure into underground geologic formations in order to create small fissures in those formations that permit oil and gas to flow into wells for energy production. Besides petroleum development, fracturing has been used for a variety of purposes, including stimulating water wells, cleaning up Superfund sites and geothermal energy production.

HOW DOES IT WORK? First, a well is drilled into the ground using a drilling rig. The well may be drilled vertically, or may include horizontal portions. In the Bakken, most wells include some horizontal drilling. To protect groundwater supplies, steel and cement casings are inserted into the well. These casings are designed to prevent injected fluids, as well as outgoing oil and gas, from escaping.

Once the drilling reaches the underground oil and gas reservoir, the drilling rig is removed and the fracturing process begins. Large quantities of fluids – water, sand and chemicals – are injected into the wells at high pressure to fracture the rocks where oil and gas reserves are trapped. After the fluids have been injected, the well is usually flushed with water and then oil and gas production begins. Fracturing takes an average of 3-10 days to complete.

Mapping done since 2001 in various U.S. locations show that the actual rock fractures, while varied in length, are contained thousands of feet below the water tables and more than a mile below the ground surface.

IS THIS A NEW TECHNOLOGY? Hydraulic fracturing has been part of petroleum production for more than 60 years and has been used more than a million times in the United States. The difference today is that fracturing is being used to access oil and gas reserves in geologic formations that were previously considered unattainable, like shale formations.

This “unconventional” production enables expanded access to even more domestic oil and gas resources.

WHAT CHEMICALS ARE USED IN FRACTURING? Water and sand usually comprise between 98 percent

12 I MONTANA ENERGY REVIEW I SPRING 2013

- 99 percent of hydraulic fracturing fluids. The remainder is a variety of chemicals that vary based on location and may include acids, friction controllers, biocides and similar compounds. Exact materials and quantities vary by company and by formation.

WHAT IS OIL SHALE AND WHY IS EVERYONE TALKING ABOUT IT? Shale is a semi-porous rock that can contain oil and gas. Because it is not as porous as other geologic formations, such as sandstone, resources can be trapped within the shale rock, requiring technology such as hydraulic fracturing to release the oil and gas. Additionally, shale formations, at least those under production now, are often wide, rather than deep, meaning that traditional vertical wells can be very risky. Horizontal wells that run the length of a shale formation lower drilling risk and make oil and gas production in these areas more economic.

HOW IS FRACTURING REGULATED? At the Federal level, EPA regulates the use of diesel fuel in underground oil and gas well injections, as well as the disposal of waters produced from fracking. To the extent that there are any air emissions from hydraulic fracturing, EPA has jurisdiction under the Clean Air Act, and is working to promote best practices and technologies for reducing air emissions. For energy production on Federal lands, the Department of the Interior also plays a role in regulation.

State-level regulations vary. In Montana, hydraulic fracturing is regulated by the Montana Board of Oil and Gas Conservation (MBOGC), a seven-person commission appointed by the governor. Operators must apply for a permit in order to conduct hydraulic fracturing in Montana.

In 2011, Montana began requiring the disclosure of all the components in hydraulic fracturing fluids. Wells are also inspected by the MBOGC for structural integrity.

WHERE CAN I LEARN MORE? Many producers are voluntarily disclosing their fracking fluid contents in a national database. Go to www. fracfocus.org and click on “Find a Well By State” to see county-by-county listings of wells in Montana and the components used in hydraulic fracturing near you.

In Montana, hydraulic fracturing is regulated by the Board of Oil and Gas Conservation, and groundwater is monitored by the Department of Environmental Quality (MDEQ). According to the MDEQ, agency evaluations of public drinking wells located within one mile of hydraulic fracturing sites in Montana – primarily in the Bakken development in eastern Montana – showed no contamination of groundwater.

MDEQ says it will continue to monitor environmental issues in the region as energy development progresses.

“Economic development cannot take place unless communities can provide clean drinking water and properly dispose of waste. DEQ is working with the governor and the impacted communities to meet these growing needs,” said MDEQ Director Tracy Stone-Manning.

Water comprises between 98-99 percent of the fluids used in the hydraulic fracturing process, with the rest made up of sand and various chemicals. Every producer has its own recipe for fracturing fluids, based on site geology and needs.

Since 2011, producers in Montana have been required to disclose chemicals used in hydraulic fracturing.

While concerns over potential water contamination persist, the U.S. Geological Survey states on its website that “hydraulic fracturing has little possibility of contaminating water supplies. Properly constructed wells prevent the introduction of drilling fluids, hydraulic fracturing fluids, deep saline formation waters, or oil and gas from entering aquifers.” Even so, the industry is looking for ways to reduce water consumption, recycle water and limit potential environmental impacts of hydraulic fracturing.

In March 2013, Haliburton Corporation, which provides hydraulic fracturing services in the Bakken as well as throughout the world, announced changes to its methods of fracturing in the Bakken that resulted in water savings between $6,000 and $400,000, based largely on recycling water. The company has set a goal of reducing fresh water use in hydraulic fracturing by 25 percent by the end of 2013.

In the Bakken oil fields of Montana and North Dakota, the hype over hydraulic fracturing has been more muted than in many parts of the U.S. and regulators in the state seem confident that energy production and environmental protection can co-exist.

“I’m confident that we can rise to the challenge of balancing the need for energy development with environmental protection,” said StoneManning.

IS kEySTONE XL COMING TO MONTaNa?

By JENNIFER OWEN

Mont., allowing 100,000 barrels of Bakken oil to move to Gulf Coast refineries.

“This is huge. The job benefits and • Keystone XL is a tax revenue to local government from the proposed pipeline pipeline is crucial to eastern Montana,” that would move said Dave Galt, executive director of the oil from Canada, Montana Petroleum Association.

North Dakota and The proposed Keystone XL route would Montana to Gulf Coast enter Montana in Phillips County near refineries.

Morgan, pass through Valley, McCone, Dawson, Prairie and Fallon Counties • The project represents an before exiting into Harding County, South investment of nearly Dakota. According to the U.S. Chamber $1 billion in Montana of Commerce’s Institute for 21st Century alone, and nearly 1,300 Energy, the pipeline will bring 1,291 jobs to jobs by 2015.

Montana by 2015 and 2,650 by 2020. The Montana Department of Commerce states • Keystone XL has been that the Montana portion of the pipeline delayed for four years due represents an investment of more than $1 to environmental billion. concerns and protests.

“This is about one simple thing: jobs,” said U.S. Senator Max Baucus (D-Mont.) at a January 23 press conference in support of the pipeline. “Thousands of jobs to Photography by Larry Mayer. build the pipeline; thousands of jobs from as producers in the Bakken oil field experience the ups and downs of one of the biggest manufacturing; and many more jobs supported discoveries of oil in U.S. history, a pressing issue lingers over the landscape: how to by carrying Bakken oil from Montana and North Dakota across the country. America can’t afford deliver petroleum products to refineries at a competitive price. to wait for these jobs any longer. We’ve done Enter the fiery debate over the Keystone XL pipeline will have an initial capacity of 830,000 more than four years of careful studying and pipeline, a proposed expansion to the Keystone barrels per day (bpd). planning. We’ve addressed safety concerns. No network of pipelines owned and operated by The project, designed primarily to bring more excuses; it’s time to put Montanans to work TransCanada, a Canadian-based infrastructure Canadian oil sands to the U.S. market, would building the Keystone pipeline.” company that provides pipeline services connect to existing infrastructure in Steele Because the pipeline would cross an throughout North America. Keystone XL City that transports oil to Cushing, Okla. and international border, a Presidential Permit is would run from Hardisty, Alberta to Steele City, ultimately to the Gulf Coast. The proposed required. Climate activists have robustly opposed Nebraska, covering approximately 875 miles. The project would include an on-ramp near Baker, the pipeline since it was initially proposed in 2008, SPRING 2013 I MONTANA ENERGY REVIEW I 13

alleging that the pipeline will contribute to global warming by increasing dependence on petroleum.

The lead agency for the federal permitting process is the U.S. Department of State, now headed by former Massachusetts Senator John Kerry. During his January 2013 confirmation hearing, Kerry said that he intends to be a “passionate advocate” for climate change issues at State and was noncommittal on approval of the Keystone XL pipeline.

“I’ll make the appropriate judgments,” Kerry said at the hearing. “There are specific standards that have to be met with respect to that review, I’m going to review those standards and make sure they’re complete.”

In a move that disappointed environmentalists, the Department of State released a revised draft supplemental environmental impact statement on March 1, 2013, finding no significant adverse environmental impacts from the project and noting that the pipeline is unlikely to significantly increase dependence on petroleum. The draft was an update to environmental

14 I MONTANA ENERGY REVIEW I SPRING 2013

work done in 2011 and reflected changes in the pipeline route to avoid sensitive land in Nebraska.

“While I welcome the study’s finding of ‘no significant impacts’ on the environment, the President and the State Department need to work faster.

I’m going to keep applying a full court press to move Keystone forward because Montana jobs are depending on it,” said Baucus in a statement in response to the draft environmental impact statement.

The draft environmental impact statement also noted, of particular relevance to Montana, “the proposed project would not likely affect greater sage-grouse mating behavior and would likely result in a low impact on nesting greater sage-grouse.”

The public comment period on the draft report closes on April 22, 2013. The State Department will then evaluate the comments and issue a final environmental impact statement. In addition, State must make a determination that issuing the permit for Keystone XL is in the national interest, a process that includes input from other federal agencies.

The Canadian government signed off on the project in 2010.

On March 8, 2013, a bipartisan group of Representatives introduced a bill in the U.S. House to expedite Keystone XL, stating that the pipeline would no longer need a Presidential Permit and that the 2011 environmental analyses are sufficient to satisfy the requirements of the National Environmental Policy Act. The bill would also limit legal challenges to the pipeline. Similar legislation was introduced in the Senate on March 14 by a bipartisan group of Senators led by Baucus and Sen. John Hoeven (R-N.Dak.).

In Montana, the lack of pipeline

infrastructure in the Bakken area means that nearly 60 percent of the oil is moved by truck or train, generally resulting in higher transportation costs and lower prices. TransCanada has stated publicly that it has firm commitments for 65,000 bpd of the 100,000 bpd of pipeline capacity set aside for Bakken oil.

Nationally, the Keystone XL pipeline is expected to generate more than $20 billion in private sector investment, more than 42,000 jobs and approximately $5.2 billion in property taxes over the lifetime of the project. Given the economic significance, many view the approval of the pipeline as inevitable. TransCanada has stated it is ready to begin construction upon project approval, with a projected in-service date of 2015.

“I think Keystone XL will be built – it is just a question of when,” said Dustin de Yong, an energy development specialist with the Montana Department of Commerce.

“While I welcome the study’s finding of ‘no significant impacts’ on the environment, the President and the State Department need to work faster. I’m going to keep applying a full court press to move Keystone forward because Montana jobs are depending on it.”

— MaX BaUCUS, U.S. SENATOR

Opposite page top left: Dawson county commissioner James Skillestad of Glendive walks on his property north of Glendive. The Keystone pipeline is proposed to run right through Skillestad’s property and he approves of the project. Skillestad says the pipeline will be a huge benefit to the county. Bottom Left: Mike Hammond, a rancher who lives north of Whitewater, Mont., will have the Keystone pipeline run through parts of his property. Hammond approves of the pipeline which will run right next to an already existing pipeline on his property. Bottom Right: The Keystone pipeline will be next to this existing natural gas pipeline in northern Montana. Photos by Gazette Satff.

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OTTER CREEk PROJECT MOVES FORWaRD IN SOUThERN MONTaNa • Arch Coal’s proposed development of coal resources in Montana has the potential to bring nearly $1 billion in economic impact to the state.

• The project is currently in the early stages of environmental permitting, with a draft environmental analysis expected this summer.

• Also in the permitting process is the Tongue River Railroad, a line designed to help move Otter Creek coal to market.

The Powder River in Eastern Montana. Photo Larry Mayer.

In the quiet, rolling plains of Powder River County, outside of ashland, one of the largest coal development projects in Montana’s history is underway, promising to dramatically change the landscape of this rural area.

In March 2010, Arch Coal successfully bid $85.8 million for the rights to develop 572 million tons of coal in the Otter Creek portion of the Powder River Basin, covering approximately 8,300 acres. Now in the early stages of the environmental permitting process, the Otter Creek project could bring more than 2,600 construction jobs, 1,700

16 I MONTANA ENERGY REVIEW I SPRING 2013

permanent jobs including 300 mining jobs, and nearly $1 billion in economic impact to Montana.

In addition to the $85.8 million paid to the state, Arch Coal will also pay royalties on the coal extracted, currently estimated to be approximately 20 million tons per year.

“It’s probably the largest development we have

had in 40 years. It is incredibly significant,” said Dustin de Yong, an energy development specialist with the Montana Department of Commerce.

Development of coal resources holds tremendous economic potential for Montana.

On Feb. 26, 2013, the U.S. Geological Survey (USGS) released new estimates of coal reserves in the Powder River Basin. According to the new assessment, there are 162 billion short tons of technically recoverable coal, with approximately 25 billion short tons economically recoverable at current coal prices. In total, the Powder River Basin has about 1.07 trillion short tons of coal in-place, a resource that may be more accessible over time as technology advances.

The Powder River Basin is the world’s largest reserve of subbituminous coal, a category of coal that has a lower heat value per pound, but also contains less sulfur, making it an attractive resource for reducing environmental impacts of electricity production. The Powder River Basin currently provides slightly more than 40 percent of the coal used in U.S. electricity production.

“We see a solid future market for Powder River Basin (PRB) coal. The PRB has been the fastest growing coal supply region for many years,” said Mike Rowlands, director of Otter Creek operations for Arch Coal. “Montana sits on the nation’s largest volume of recoverable coal reserves. We believe PRB coal has a compelling story when compared to natural gas. PRB coal is the most cost-competitive fossil fuel source in the U.S. There is an opportunity for PRB prices to increase even in a low-priced natural gas

“It’s probably

environment, such as we have today.”

Despite the significant economic benefit to Montana, the project has not been without controversy. The Montana Land Board, the entity charged with managing Montana’s coal reserves, narrowly approved the project on a 3-2 vote, with then-Attorney General and now-Governor Steve Bullock and Superintendant of Schools Denise Juneau opposing the project.

The project also withstood a legal challenge from environmental opponents, alleging that the Land Board

the largest development

comment period for scoping closed on March 6, after three public meetings and more than 1,000 comments filed.

“We’re at the beginning of the public participation portion of the process. We want it to be as fair, transparent and inclusive as possible,” said MDEQ Director Tracy StoneManning.

According to MDEQ, the draft environmental impact statement is due sometime this summer, at which time there will be an additional public comment period.

“We would expect the Montana DEQ would make a decision on the permit application sometime in 2014. There is no official deadline,” said Rowlands. “The timeline for development of Otter Creek is dependent on future market conditions and other factors.”

Moving the coal

we have had in 40 years.

It is incredibly significant....”

— DUSTIN DE yONG, ENERGY DEVELOPMENT SPECIALIST, MONTANA DEPARTMENT OF COMMERCE.

Map by Gazette Staff.

improperly issued the leases to Arch Coal. The Montana Supreme Court unanimously rejected the claims in an Oct. 23, 2012 decision.

Arch Coal has filed its permits with the Montana Department of Environmental Quality (MDEQ) to begin development of the project. The filing of the permits triggers review under the Montana Environmental Policy Act, which directs preparation of an environmental impact statement for a project of this size. Currently, MDEQ is in the scoping phase, which means the agency is defining the scope of impacts that will be included in the environmental review. The public

Important to the development of coal resources in the Powder River Basin, including the Arch Coal Otter Creek Project, is the development of a new rail line to move the coal to markets. The Tongue River Railroad, a proposed 42-mile rail line from Colstrip to Ashland, has been under development to serve the area for more than 25 years.

The project was initially approved in 1986 by the federal Interstate Commerce Commission (ICC), but had to be repermitted in the 1990s, due to the failure to develop any portion of the project. For the next two decades, various changes and additional lines were proposed, some of which were challenged in federal court.

In 2012, the successor to the federal ICC, the Surface Transportation Board, directed the Tongue River Railroad Company to submit a new proposal for a rail line between Miles City and Ashland. The new proposal was submitted in October, but again revised in December to reroute the line from Colstrip to Ashland, creating a more cost-effective and less environmentally harmful rail line.

Public comment on the new proposal closed on April 2, 2013.

The Montana Department of Commerce estimates that the Tongue River Railroad represents $490 million in capital investment in Montana. The Arch Coal Otter Creek development and the railroad, while not inseparable, are closely linked.

“If you’re for the Arch Coal project, you have to be for the Tongue River Railroad,” de Yong said.

SPRING 2013 I MONTANA ENERGY REVIEW I 17

BY JENNIFER OWEN • PHOTO BY VERN WHITTEN PHOTOGRAPHY

18 I MONTANA ENERGY REVIEW I SPRING 2013

The word is tossed around freely, sometimes an enthusiastic declaration, other times a fearful whisper or derisive sneer. It is credited or blamed with everything from increased traffic to crowded schools, housing booms and population spikes, saving the economy and raising land prices.

“Bakken. It’s the Bakken.”

The Bakken oil shale, an innocuous geological formation nestled in the vast Williston Basin, has breathed new life into rural North Dakota.

The gold rush stories abound – farmers made millionaires overnight, Walmarts that can’t get products on the shelf fast enough, mile-long lines at drive-thrus, mancamps that echo wild frontier days.

North Dakota has seen its unemployment rates plummet, its school trust fund skyrocket and its rural communities packed with new residents, new construction and expanding businesses. But what about Montana? Where does Big Sky Country fit in the Big Oil Boom?

SPRING 2013 I MONTANA ENERGY REVIEW I 19

Geology Matters

From a strictly geographic point, Montana is not the heart of the Bakken.

The Bakken formation is a multi-layered geographical formation that covers about 200,000 square miles of subsurface area in Montana, North Dakota and Canada. The formation consists of three layers: an upper shale rock layer, a middle sandstone layer and a lower shale rock layer. All three layers contain petroleum resources, but the shale layers are less porous than sandstone, resulting in oil and gas reserves that become trapped inside the

20 I MONTANA ENERGY REVIEW I SPRING 2013

rock. Montana’s portion of the Bakken is smaller than North Dakota, has less sandstone, and has more shale, making the resource more difficult to recover.

“You have to have an accurate perspective of the size of the resource in Montana,” said Brian Cebull, owner of Nance Resources, one of the many companies doing business in the Bakken. “The direct impact in Montana, at today’s prices … we just need to be realistic.”

Even with the geologic challenges, the opportunities for development in the Bakken are significant. According to a 2008 assessment by the U.S. Geological Survey, the Bakken contains between 3 billion and 4.3 billion barrels of technologically recoverable oil and gas. Advocates for Montana energy production are quick to note that the current Bakken boom started in Montana, with the 2000 discovery of the Elm Coulee oil field in Richland County.

“The Bakken was born in Montana. We started with great wells in Elm Coulee, and then outside of that, there have been good yields in other counties, but they have to use different techniques,” said Dustin de Yong, an energy development specialist in the Montana Department of Commerce.

“It has been a strange evolution. The Bakken started here, then it went away, and now it is coming back. No one is ever willing to give a prediction of how it will work out.”

By the numbers, the differences between Above: A night shot of a Montana and North Dakota are stark. rig in Ray, N.D. Photo by Current estimates suggest there are Vern Whitten Photography. between 10 to 15 drilling rigs operating in Left: MBI Energy Services Montana, while North Dakota has more workover rig maintains an than 170 rigs. North Dakota has the oil well near Bainville, Mont.

Photo by Larry Mayer nation’s lowest unemployment rate, at 3.2 percent, while Montana sits at about 5.6 percent. Montana’s location on the edge of the Bakken shale appears to place the state at a significant disadvantage.

“Williston has been fortunate in that they really had the industry come in and set up in Williston as a hub. In Montana, we have a little of that in Sidney, but not nearly the extent of Williston. We are getting a lot of the outlier businesses,” said de Yong. “We’re kind of on the outside edge feeding in.”

Rig counts alone rarely capture the whole story. Technological

advances and experience in the particulars of the Bakken have cut the amount of time needed to drill a well from more than 30 days a year ago to approximately 18 today, meaning fewer rigs are needed to do less work.

Additionally, much of the drilling underway in the Bakken right now, both in Montana and North Dakota, is being done simply to comply with the terms of leases. Most oil and gas leases include a clause requiring operators to begin production within a set period of time. If production does not begin in that timeframe, the lease expires. Assuming initial production is started, the lease is considered “held by production” and converts to a longer time frame, allowing producers to manage production rationally, according to market forces. While additional wells may be added over time, the initial drilling ceases and drill rigs move on.

The geologic differences between Montana and North Dakota, while significant, can be overcome, it appears, by incentives. Opinions vary widely on “Companies even in financial the extent to which Montana will see longpetroleum production in the Bakken, western Montana term but there is one point of near-unanimous Montana’s tax structure keeps the can serve Bakken agreement: state relevant. Montana offers a lower tax rate the first 12-18 months of production, demand. [The indirect during allowing producers to recover costs in an manner. impact] is a bigger expedited “We need the cost recovery period here in to attract investment,” said Bill Lucas, component of the order district manager for U.S. Bank in Billings, finances a variety of energy-related positive impact in which projects. “It is easier to drill in North Dakota, if we don’t have incentives, we will watch all Montana than so the industry go over the border.”

Although producers and economic North Dakota.” development authorities hail the tax structure as the key to Montana — BRIaN CEBULL competitiveness, the incentive is under NANCE RESOURCES attack. Legislation under consideration now in the Montana Legislature, sponsored

by Senator Christine Kaufman (D-Helena), would repeal the incentive.

Representatives of energy industry groups and business groups strongly oppose the bill, suggesting it would eliminate Montana’s competitive advantage.

“When considering tax policy in Montana, it is important to remember that the reason to delay taxes on any investment project is to incentivize the investment. This in turn stimulates the economy, creates jobs and solidifies a future tax income stream,” stated Nancy Schlepp, president of the Montana Taxpayers Association. “Where the Bakken is concerned, North Dakota geology is more conducive to oil production than Montana. Combine this with the fact that many of our Montana oil exploration areas are outside of the Bakken and it becomes absolutely critical to keep incentives in place so Montana continues to be on the energy production map.”

Live, work, play – Montana’s secret weapon

Even if Montana is expected to reap less direct benefit from petroleum production, the state stands to see significant secondary economic growth due to goods and services industries seeking to supply the Bakken, as well as families of energy workers who prefer to live in Billings or surrounding areas. A 2012 study from the Montana State University-Billings Center for Applied Economic Research stated that the direct and indirect impacts of oil and gas production in Montana amount to “over 20,000 Montana workers and nearly $10.5 billion in economic output.”

“Companies even in western Montana can serve Bakken demand,” said Cebull. “[The indirect impact] is a bigger component of the positive impact in Montana than North Dakota.”

The City of Billings in particular seeks to position itself as the regional center of energy development, offering workers, investors and business owners a comprehensive platform for growth and development.

“What makes us a great hub is the balance of infrastructure,” said Steve Arveschoug, executive director of the Big Sky Economic Development Authority (BSEDA), citing the quality of health care, education and transportation options in Billings. “We’re a livable community as well as a commercial center.”

Arveschoug notes that Billings has an enviable location as the terminus of interstates, as well as easy access to rail. While housing is tight and prices are going up, Arveschoug states that there are numerous multifamily housing complexes and hotels under development. Although Billings has much to offer potential new businesses and families, Arveschoug believes that some critical items are still missing, including a state-of-the-art convention center and a large-scale industrial distribution complex.

“We may actually be losing business because we don’t have large spaces,” said Arveschoug, stating that the BSEDA has received inquires from businesses looking for industrial space as large as 200,000 square feet.

Workforce Development a Priority

Perhaps the biggest asset Montana has to offer to the Bakken oilfield development is an educated and prepared workforce. Industry watchers suggest that Montana is an ideal location to build an energy labor force – cost of living is reasonable; the quality of K-12 education is strong and supported by a quality network of universities, colleges and technical schools; and Billings is a viable option for young families.

“Young people have a chance to work here,” said Tom Hauptman, president of the Billings-based Hauptman Resources, an independent oil and gas exploration firm. “Now is the time for young people in Montana.”

Arveschoug echoes the sentiment, saying that Billings in particular has lots of young professionals that create a “great braintrust for energy development.”

However, he also cautions that Montana’s energy industry is competing with Canada for new workers, and the Canadians are investing significantly in training and attracting an educated labor force to the Alberta oil sands.

“Education is a fundamental part of community infrastructure. As a community, we have to be serious about investing in the K-12 system,” Arveschoug said.

SPRING 2013 I MONTANA ENERGY REVIEW I 21

CONTINUED FROM PAGE 9

To this end, my administration will support and encourage responsible development all of Montana’s energy resources. That means we will seek top dollar for state-owned resources, support landowners and property rights, address the needs of our communities affected by booming energy development, and protect Montana’s clean air, pristine waters and world-class wildlife.

our business climate to attract more development.

Montana can still get out in front of many of the issues that North Dakota has had to catch up with. For example, North Dakota has experienced significant problems with gas flaring, and we have an opportunity to address this issue before it becomes a concern for eastern Montana communities.

Oil, gas and coal revenue is very important to maintaining Montana’s educational excellence as well as other public services. Taken together, the petroleum and coal industries support billions of dollars in economic activity in Montana, creating thousands of high paying jobs (two to three times the county average wage). Production, severance and gross proceeds taxes on coal, oil and gas have risen from about $90 million paid in 2002 to an average of about $300 million per year since 2008. That is very important to Montana’s economy.

And let’s not forget the renewable energy sector, which has grown substantially in the last half decade. Wind power has become a recognized electrical generator in the state, producing 4 percent of the state’s electricity in 2011, and as described above, is a significant economic engine. Montana is ranked number two in the nation for wind development potential and there is much more economic opportunity yet to be realized.

6. Do you support the Otter Creek project, including the Tongue River Railroad? Will your administration encourage coal development in Montana?

The coal industry in Montana is very important to the state’s economy now and it will continue to be in the future. I will work with my regulatory agencies charged with permitting the Otter Creek Mine and TRR to assure an efficient and accurate permitting process, and I will fully support the outcomes of that process. I will support and encourage continued responsible development of Montana’s vast coal resources. And I will support continued research and development of technologies that address carbon emission issues related to coal, such as the two important DOEfunded carbon sequestration research projects underway in the Kevin Dome and Bell Creek oil field areas.

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4. What thoughts do you have on revenue sharing, between the state and the counties? Should energy-impacted counties receive a larger portion of revenues to offset costs of infrastructure impacts?

Local governments, excluding cities, receive half of all oil and gas production revenues. I do not believe it’s necessary to change the current distribution model.

As noted above, I have proposed an investment of more than 15 percent of the state share of total oil and gas reserves into affected cities to help mitigate these impacts.

5. Are there specific “lessons learned” from our neighbors in western North Dakota that can or should be integrated into energy development in Montana.

First and foremost, the oil and gas industry drills where the resource is most productive, so we should be thoughtful in how we use

22 I MONTANA ENERGY REVIEW I SPRING 2013

7. Do you support the enhanced cost recovery period, also known as the gas tax holiday, for production in Montana?

Without question, oil and gas taxes are a major source of state and local tax revenues. Oil production in Montana has doubled since the holiday was adopted in the late 1990s.

While some folks talk about changing or even repealing the oil and gas tax holiday as a possible solution to the financial woes of local communities, I know that the needs are here and now, and we can’t wait for the legislature to figure this out.

8. From your perspective, what should state government do to encourage energy development in Montana? Should the state concentrate on infrastructure, like roads and airports, or should the state encourage workforce training and development? What are the gaps in economic development that you intend to tackle as governor?

We must address the needs of our communities affected by booming energy development. That’s why I’ve asked the legislature to provide significant funding to jump start efforts to upgrade infrastructure, and have asked my agencies to prepare a comprehensive review of infrastructure needs in communities affected by oil and gas development, so we can all work off the same page and plan for needs into the future.

In Montana, we work best when we work together. That’s why I recently created a Sage Grouse Advisory Council, so we can work together to protect this species and promote energy development.

Other things state government can do to encourage responsible energy development include: a. Administer efficient and consistent permitting processes across all state agencies, providing predictability and certainty.

b. Where appropriate, coordinate with federal agencies, other state/ regional organizations, local governments and local development organizations to deliver all available assistance to the industry, such as financing programs and tax incentives. c. Focus on infrastructure, like roads, airports, etc. and workforce training and development.

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I look forward to working with everyday Montanans, industry representatives, economic developers and government officials and agencies to attract investment in all of Montana’s energy sectors to create jobs, increase the tax base and keep energy affordable for Montana families.

9. What are your thoughts on the Keystone XL pipeline? Have you been working with Montana’s congressional delegation to urge the President’s approval?

Yes, I recently wrote President Obama to express my strong support for the Keystone XL Pipeline project. If responsible controls are put in place and long-term oversight of this project is assured, the President should grant the Presidential Permit and move forward with this job-creating project.

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24 I MONTANA ENERGY REVIEW I SPRING 2013

POTENTIaL IS LIMITLESS FOR haRNESSING FLaRED OILFIELD GaS

amid grass-laden prairie and craggy Badlands, oil wells beam like giant medieval torches in the cerulean North Dakota sky. These candles of industry produce upwards of 700,000 barrels of oil each day from the shale reservoirs deep beneath the earth. Simultaneously, these North Dakota rigs are burning off an estimated 30 percent of their natural gas byproduct into the air, a technique known as “flaring.”

But why is this valuable resource seemingly going up in smoke?

While pumping a well, producers encounter oil and The air up there

natural gas. Oil can be collected, transported by truck or train and sent to market. Gas, on the other hand, poses a logistical problem in that it needs to be ushered through a pipeline to a processing plant, or separated with a portion of the gas extracted as a natural gas liquid (NGL) then transported.

Because it is difficult and sometimes, impossible, to transport natural gas from satellite wells, excess gas is often • Burning off excess flared, raising questions about wasted natural gas related resources and environmental impact. to oil production, Price matters, too—when natural gas known as flaring, prices are low, as they currently are, the is a common industry cost of infrastructure needed to gather practice, especially and transport gas can outweigh potential when gas prices are revenue gains and tip the balance in favor low. of flaring.

North Dakota has approximately 4,300 • Billings-based G2G wells connected to a pipeline, leaving around Solutions is developing 1,100 waiting to be hooked up, according innovative solutions to to Justin Kringstad, director of the North capture the gas in a Dakota Pipeline Authority. As producers more economical way. attempt to narrow that gap, North Dakota law allows for companies to flare gas for one • In addition to financial year after production starts. benefits, capturing In Montana, producers are afforded gas has a more positive a 60-day testing period on the well with environmental impact no limits on the amount of venting or than flaring. flaring, according to Tom Richmond, administrator of the Montana Board of Oil and Gas Conservation.

“After those 60 days, the producer is only allowed to flare 100 MCF or less,” Richmond said, unless an exception is granted by Board.

Because most of Montana’s wells are currently attached to a transport pipeline, flaring isn’t as much an issue as it is in North Dakota.

With all the chatter about the affordability of processed natural gas, it’s easy to erroneously assume that the natural gas escaping pipe stacks in the Bakken is of the “expendable” variety.

“With the heritage we have in North Dakota, the concept of waste is hard to swallow,” Kringstad said. “We see great value in capturing flared gas and are increasing infrastructure needed to move it to market.”

In February, natural gas delivered to Northern Border at Watford City was down to $2.83/million cubic feet (MCF), resulting in a current oil to gas price ratio of 31 to 1, according to the North Dakota Industrial Commission’s Department of Mineral Resources.

Yet, Bakken/Three Forks natural gas content is ripe with something that has producers and processors fixed and fascinated.

“Natural gas produced from the Bakken/Three Forks area is very rich in natural gas liquids (NGLs),” said Kringstad. “These NGLs (ethane, propane, butane and natural gasoline) are very valuable and add additional economic incentive for the industry to capture the wellhead natural gas as soon as possible.”

So, if the value of the flared gas has been evaluated and second party vendors are interested in capturing and transporting it, what’s the hold up?

The problem is one of infrastructure and scope.

With the Bakken covering nearly 18,000 square miles and upwards of 1,000 wells waiting to be hooked up to pipeline, there is nowhere for the gas to go but up.

That’s where Brian Cebull and his team at G2G Solutions come in.

Waste to revenue

Cebull and his business partners saw an opportunity to spearhead an innovative business designed to capture and transport NGLs from well sites without the use of a pipeline.

SPRING 2013 I MONTANA ENERGY REVIEW I 25

“Collecting flared gas helps to reduce carbon emissions and harmful VOCs (volatile organic compounds),” he said.

“There is definitely an environmental “Collecting flared gas helps to benefit to what we do.”

The Montana Department of Natural reduce carbon emissions and Resources notes that flaring is a common practice used by the industry to control harmful VOCs (volatile organic certain harmful emissions associated compounds), there is definitely with oil production, but that flaring also increases emissions of nitrogen an environmental benefit to oxide, carbon monoxide and fine particulate matter. Thus, technologies what we do.” that capture gas, like G2G, can provide — Brian Cebull, measurable environmental benefits.

Partner, G2G Solutions Industry leaders like Kringstad also see the value in this technology.

Photo by James Woodcock “G2G and others have answered “Because we’re compact and mobile, we can the call and have seen the window of opportunity,” G2G Solutions—Gas to green (as in position ourselves in the safest most convenient Kringstad said. “Additional gas plants are being “environmentally green ” )— was born.

Cebull, who owns Nance Resources in Billings, spot on the site,” Cebull said. “And because we built and extra pipeline will be laid to further is a petroleum engineer. His G2G partner, provide our own trained staff, our customers don’t accommodate this need.”

Between 2011 and February of 2013, more than Mark Peterson, owns Aspen Consulting and have to do a thing.”

Cebull credits the expertise and skill of his field 2,300 miles of new pipe was laid to connect wells Engineering in Helena and is a chemical engineer.

A third partner, James Haider, owns Chinook supervisors and technicians with much of G2G’s and transport gas to market, Kringstad said. That’s Engineers and Associates in Helena and is a success. He is also proud that the company has roughly the distance from Seattle to Washington Montana roots and looks forward to expanding D.C. mechanical engineer.

“We’re dedicated to developing this,” he added.

“The three of us put our heads together, and business beyond the Big Sky. ONEOK Partners, an Oklahoma-based Having “worked out the bugs” in the field, it was a synergy of specialties,” Cebull said of the Cebull said G2G is excited to implement a new, petroleum firm largely involved in transporting oil G2G brainchild.

This was back in August 2011. By May of 2012, patent-pending flow control technology that will and NGLs in the Bakken and around the country, G2G had equipment in the field to collect and allow the systems to accommodate both surges also sees promise in expanding infrastructure to and ebbs in gas production rates, allowing for meet the needs of producers flaring gas. transport NGLs. Megan Lewis, a spokesperson for ONEOK, The treatment units themselves essentially look continuous operation.

In addition to erratic gas flow rates, “wells in the announced that the company plans to invest like a trailer and can be hauled from well site to well site, capturing, liquefying and storing NGLs. G2G Bakken and Three Forks are known for producing approximately $2.7 billion in natural gas and NGL growth projects in the Williston Basin through does not own or sell the collected material. Rather, high initial rates,” Cebull said.

But high initial rates also equal high rates of 2015. In November 2012, ONEOK canceled plans G2G technicians act as courier—extracting liquids to construct a new oil pipeline in the Bakken region, to be processed. Lease and mineral rights owners initial decline.

“G2G can combine multiple systems on a single citing lack of demand. Currently, the company maintain sole ownership of the recovered NGLs. “We took the basic natural gas processing well to treat high-flow rates and remove systems is constructing a $500 million, 500-mile NGL pipeline that begins in Sidney, Mont., and connects system and made it moveable and scalable,” Cebull and capacity as the well declines.” to existing infrastructure in Colorado, just south of said.

Cheyenne, Wyo. Because wells, especially multi-well pads, can Collect, conserve In addition to “essentially creating revenue from “Our investments in this area are a positive step become quite congested, Cebull said a definite plus of G2G is that it has a small footprint and a waste stream,” Cebull sees another benefit to his toward expanding the current infrastructure and business. reducing flaring activity,” Lewis said. provides its own operators.

26 I MONTANA ENERGY REVIEW I SPRING 2013

MEETING ThE NEED:

TRaINING MONTaNa’S ENERGy WORkERS

By TOM hOWaRD • PhOTO By LaRRy MayER

• Montana’s trade schools and universities are responding to a significant spike in demand for trained energy workers.

• Average starting salaries for petroleum engineers in the region are around $85,000.

• Worker safety is a critical component to a solid training program, as oil and gas production are among the nation’s most dangerous jobs.

When welding student Brandon Walton graduates from City College at Montana State University Billings this spring, he shouldn’t have too much trouble finding a job.

Walton, from Belgrade, hasn’t decided exactly where he’ll work once he graduates.

“I’d like to stay in Montana right now, but we’ll see,” Walton said. “I want to get my feet on the ground first.”

George Harper, Walton’s welding instructor at City College, said the energy boom that has swept through North Dakota and eastern Montana is creating a big demand for trained welders.

Harper was recently contacted by ADF, a Canadian company that’s looking to hire dozens of welders to work in a steel fabrication business that it’s developing just north of Great Falls.

“Over the last 12 months, the welding program has taken off,” Harper said. “We can’t produce enough welders.”

In the school’s welding shop, sparks fly and bright light flickers off the ceiling as students practice joining together steel plates and lengths of pipe, using different welding methods.

Harper examines two lengths of pipe joined by a tidy-looking weld.

“You’ll see there’s a root all the way around,” Harper said, pointing to a dark bead that extends just inside the pipe’s inner wall. “It’s a difficult task to learn, and it’s one they have to have.”

Harper says students don’t pass the class until they can make welds that adhere to stringent national standards. Welds are tested for strength with a special bending press.

“Everything they prepare for is to be able to understand and equate to the national standards and codes that it takes to do manufacturing and fabrication,” Harper said.

Last fall, City College began offering a night section for its welding classes in order to accommodate more students. The college offers a twoyear associate of applied sciences degree, but some students are so eager to start working that they leave the program after completing their welding training, said City College Dean Marsha Riley.

Welding skills represent a significant part of the program, but Harper provides a more comprehensive approach in his instruction.

“Can you be there on time? Can you be diligent enough to stop a coworker from doing an unsafe act? Can you work well with others?

These are all things we learned in kindergarten, but we have to teach them,” Harper said.

Another consequence of the Bakken oil boom is playing out 500 miles away in Butte, where students are lining up to join the petroleum engineering program at Montana Tech of the University of Montana.

Last fall, Montana Tech’s petroleum engineering program had around 350 students, and enrollment has grown by about 10 percent per year, said Leo Heath, head of the petroleum engineering program. Montana Tech is one of about 20 colleges and universities across the nation to offer an accredited petroleum engineering program.

“We are definitely seeing more interest in the program overall, and SPRING 2013 I MONTANA ENERGY REVIEW I 27

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HoHn EnginEEring, Pllc PROFESSIONAL CONSULTING SERVICES TO THE OIL AND GAS INDUSTRY SINCE 1984

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Fiscus Wealth Management Group UBS Financial Services Inc. 401 North 31st Street Suite 1700 Billings, MT 59101

ubs.com/team/fiscusgroup Chartered Retirement Planning CounselorSM and CRPC® are registered service marks of the College for Financial Planning®. As a firm providing wealth management services to clients, we offer both investment advisory and brokerage services. These services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. For more information on the distinctions between our brokerage and investment advisory services, please speak with your Financial Advisor or visit our website at ubs.com/workingwithus. UBS Financial Services Inc., its affiliates, and its employees are not in the business of providing tax or legal advice. Clients should seek advice based on their particular circumstances from an independent tax advisor. ©UBS 2013. All rights reserved. UBS Financial Services Inc. is a subsidiary of UBS AG. Member SIPC. 7.00_Ad_3.937x4.31_UX0228_FisK

28 I MONTANA ENERGY REVIEW I SPRING 2013

Photo by Larry Mayer.

that’s associated with the fact that there is such a high level of activity in the oil and gas industry. There is certainly some association with the Williston Basin,” Heath said.

New graduates from Montana Tech’s engineering program are almost guaranteed to receive a job offer. Many sign on when recruiters visit campus, while others wait until after graduation before they start looking for work.

Heath estimates the overall placement rate for new petroleum engineering graduates at around 98 percent.

Demographic trends also contribute to ample opportunities for new petroleum engineers. Tech’s program was popular during the 70s and early 80s when prices were high and the oil patch was hopping. Interest in the program waned when oil prices tumbled to around $10 per barrel in the 80s. But now that engineers and geologists who graduated in the 70s are nearing retirement age, there are even more opportunities for young workers, Heath said.

“The Society of Petroleum Engineers says that the average age for engineers is around 56 or 57 years old. And when they retire, who are the ones who will replace them? Those who are in their 20s,” Heath said.

He estimates that about 40 percent of the students participating in Montana Tech’s petroleum engineering program are from Montana and another 25 percent are from surrounding states. Foreign students, especially Canadians, account for the rest of the students.

Last year new petroleum engineers from Tech reported an average starting salary of around $85,000. On top of that, many companies offer cash bonuses of $10,000 to $25,000 to help students relocate, Heath said.

While many new petroleum engineers end up working in Denver, Houston or other cities with regional energy headquarters, Bakken demand is providing opportunities for graduates who wish to remain in the region, Heath said.

Petroleum engineering is a challenging field that also provides opportunities for advancement. “What happens with a lot of our students is they become skilled in engineering, but also project management,” Heath said. “When

you drill a well, it’s managing a project that has a lot of people and services involved, and it deals in logistics, people management and land ownership.”

The abundance of jobs in the oil patch has prompted many high school graduates to forgo higher education. Dawson Community College in Glendive has struggled with declining enrollment. Because of the boom, high school seniors who may have gone on to college instead head to the oil patch to land jobs that pay well.

With so many high-paying energy-related jobs available, community colleges are also struggling to hire instructors. Dawson Community College recently suspended its diesel mechanic program because it couldn’t find instructors willing to work for the salary that was offered.

— George Harper, Due to long hours and the presence of Welding Instructor, City College dangerous equipment, working in the oil industry is known as one of the nation’s more dangerous occupations. The oil and gas extraction industry has an annual occupational fatality rate of 27.5 per 100,000 workers, more than seven times higher than the rate for all workers in the United States, according to the Centers for Disease Control and Prevention.

From 2003 through 2009, 716 workers involved in oil and gas extraction were killed on the job. Twenty-nine percent of those fatalities resulted from highway crashes, and 20 percent resulted from workers being struck by tools or equipment, according to the CDC. Because of the inherent dangers associated with the industry, company officials say safety is their top priority.

A little more than a year ago, Sanjel Corp. opened a training and maintenance facility in Billings that trains crews that do hydraulic fracturing in oil wells. The process, widely known as fracking, involves pumping water, sand and chemicals down an oil well to stimulate oil and gas production by fracturing rock.

The program involves two weeks of classroom instruction in addition to hands-on training so that fracking crews can operate safely and efficiently in all types of weather.

Meanwhile, the Montana University System has been busy developing programs tailored to the energy industry.

In 2011, the Board of Regents created a statewide Workforce Development Taskforce to assess the training needs of the industry, with emphasis on issues such as safety, equipment operation, welding and other skills.

Companies have expressed a need for short training programs and have been receptive to receiving online, hybrid or other types of distance learning.

John Cech, deputy commissioner for two-year and community college education with the Montana University System, said Montana plans to apply for a federal Department of Labor grant to pay for work force training that focuses on two-year and community colleges. The Trade Adjustment Assistance Community College and Career Training Program program is designed to provide training for jobs for which there is a big demand.

“Can you be there on time? Can you be diligent enough to stop a coworker from doing an unsafe act? Can you work well with others? These are all things we learned in kindergarten, but we have to teach them...”

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www.usasymposium.com/bakken SPRING 2013 I MONTANA ENERGY REVIEW I 29

GUEST COLUMN

WhaT OPPORTUNITy LOOkS LIkE ”

By DaVE GaLT, EXECUTIVE DIRECTOR, MONTaNa PETROLEUM aSSOCIaTION

The positive impacts of Montana’s oil and gas industry are astounding. From the economic benefits to bringing us closer to energy independence, there’s much to be excited about when it comes to the Treasure State’s resources.

In February the Energy Promotion Division within the Montana Department of Commerce released data on oil, gas and coal revenues from 2012. More than $200 million in taxes from these energy sources were collected by the state to fund local government programs and county schools. In Billings, property taxes from the three refineries account for one-quarter of the total property taxes paid.

The energy sector has also created high-paying jobs in the state; nearly 30,000 jobs directly and indirectly related to oil and gas production. In order to highlight some of the amazing real stories the oil patch has written since the Bakken revival, the Montana Petroleum Association (MPA) has begun a re-branding campaign called “What Opportunity Looks Like.”

We’ve existed as a non-profit trade association since the 1930’s, supporting the oil and gas industry. Now, we’re sharing the success stories of people from all over Montana who’ve discovered newfound opportunity thanks to the Bakken and other resource plays.

Take the Gearhart family of Whitefish, for example. The growth in the oil patch has meant growth in their family-owned business, Big Mountain Glass (BMG). The company has been in Montana for 41 years and has provided commercial glazing on several projects including MetraPark in Billings. BMG has twelve full-time employees. Among them is the owners’ son and MSU graduate Scott Gearhart.

Before the downturn in the local economy, said Scott, Big Mountain had 21 full time employees. With the recent resurgence of job opportunities in North Dakota and Eastern Montana, however, he said that, “The Bakken has definitely been a huge help and a huge source of revenue to us, about 15 percent of our total revenue.”

While Scott works alongside his parents in Whitefish, younger brother Tyler works as a MWD Field Technician for The Directional Drilling Company right smack in the heart of the Bakken oil patch. Like Tyler, thousands of others are beckoned to the Bakken.

High school senior and student body President from

30 I MONTANA ENERGY REVIEW I SPRING 2013

Plentywood Ausin DeShaw explained his desire to be a part of the oil boom by saying, “It’s all around me, the Bakken. It’s such a good opportunity with so many high-paying jobs, and practically a guarantee in landing a job. You can’t say that for many other places.”

The opportunities are widespread, reaching from eastern Montana to the eastern slope of the Rockies and beyond. With new economic activity in areas like Choteau in Teton County, including two new manufacturing facilities which will provide oilfield equipment, the door to new jobs and investments is wide open.

Ranchers Lew and Christy Clark have just purchased thirty two acres within the Choteau city limits for a project they call a longterm, family-owned investment. “We want to provide affordable housing for new workers in the area,” said Lew. The stories go on and on. From a SurgiFrac technician in Kalispell who was an unemployed logger until Halliburton came to town for a job fair, to green energy entrepreneurs like the guys behind G2G Solutions, a company that will help solve the issue of flared gas, we’re coving it all. We’re also committed to educating the public about oil and gas production and its benefits through events like the free FrackNation screening we held in Helena during the first month of the Legislature.

The benefits of the oil and gas industry exceed that of new revenue, high- paying jobs and essential energy like heat, light, and mobility. The industry is giving back in philanthropic ways too.

We recently issued a survey to our (MPA) members on their voluntary contributions to nearby communities. After receiving the first five responses, donations to local schools, charities, first responders, the Central Montana Medical Center, college scholarships, fire departments, roads and infrastructure already total more than $3 million dollars. This number does not include contributions made towards the research and development of new, environmentally efficient technology such as the capture of flared gas and pollution control equipment.

Thanks to such investments in technology, and good ole’ American ingenuity, the oil and gas industry has not only become one of the most prosperous in our state, it’s also become one of the most promising. New efficient extraction methods and greater employment opportunity than ever have made one thing certain; that the Treasure State & the Big Sky Country really can coexist.

See more on our Facebook page and at montanapetroleum.org.

EnErgy’s s t r at e g i c p l ay ™

Billings, Montana is: • Centrally located to multiple oil, gas, coal and wind plays.

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• At the crossroads of Interstates 90 & 94 offering rail and direct air service to Denver, CO and 11 other cities • Home to energy companies like Sanjel, Arch Coal, ConocoPhillips, SM Energy, ExxonMobil and more • Progressive, business-friendly and located in one of the most tax-friendly states in the country

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American Welding & Gas (AWG) is an industry-leading and employee-owned company in the business of providing industrial welding equipment & gases.

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Montana Land Board Meeting Helena, MT April 15, 2013 Platts 7th Annual Rockies Oil & Gas Denver, Colo.

April 15-16, 2013 Public Comment Period Closes – Keystone XL pipeline April 22, 2013 Bakken Investor Conference Minot, N.Dak. April 24-26, 2013

ASSOCIATIONS Billings Chamber of Commerce 406-245-4111 815 S. 27th St. Billings, MT 59107-1177 billingschamber.com visitbillings.com Montana Petroleum Association P.O. Box 1186 Helena, MT 59624 406-442-7582 montanapetroleum.org

LEGAL SERVICES KLJ 800-213-3860 18 offices in 5 states with headquarters in Bismarck, ND kljeng.com

Montana Board of Oil and Gas Conservation Meeting Butte, MT April 25, 2013 Scheduled 90th Day of the 2013 Montana Legislative Session April 27, 2013 Williston Basin Petroleum Conference Regina, Sask.

April 30 – May 2, 2013

Miles City Resource Management Plan (RMP) Public Meetings

Terry Elementary School Terry, Mont.

May 8, 2013

Big Sky Energy Forum Billings, Mont.

May 7-8, 2013

Energy Exposition Gillette, Wyo. June 5-6, 2013

MSU Sidney Extension Office Sidney, Mont.

May 6, 2013

Forsyth Haugo Center Forsyth, Mont.

May 9, 2013

Eastern Montana Energy Expo Glendive, Mont.

May 15-16, 2013

Montana Board of Oil and Gas Conservation Meeting Billings, Mont.

June 6, 2013

VFW Hall Jordan, Mont.

May 6, 2013 Ekalaka Events Center Ekalaka, Mont.

May 7, 2013 Thee Garage Showroom Baker, Mont.

May 7, 2013

CONSTRUCTION SERVICES Knife River Yellowstone J. Halvor Fuglevand 406-651-2524 james.fuglevand@ kniferiver.com 1375 4th Ave. N. Unit C Billings, MT 59101

FINANCIAL SERVICES Fiscus Wealth Management Group UBS Financial Services Inc. 406-238-1716 kevin.fiscus@ubs.com 401 N. 31st St, Suite 1700 Billings, MT 59101

34 I MONTANA ENERGY REVIEW I SPRING 2013

First Interstate Bank John Sutherland 1-800-843-4652 John.Sutherland@fib. com Montana, Wyoming, Western South Dakota www.firstinterstate.com

ENGINEERING Hohn Engineering, PLLC Thomas K. Hohn, P.E. 406-294-4646 tkhohn@hohneng.com 2708 1st. Avenue N. Suite 200 Billings, MT 59101

Broadus Community Hall Broadus, Mont.

May 9, 2013 Miles City BLM Field Office Miles City, Mont.

May 13, 2013

Montana Land Board Meeting Helena, Mont.

May 20, 2013

Montana Land Board Meeting Helena, MT June 17, 2013

Miles City RMP Public Comment Period Closes June 5, 2013

Have an event you want listed? Email us at jowen@mtenergyreview.com.

More details and links to events available at mtenergyreview.com.

ECONOMIC DEVELOPMENT Big Sky Economic Development Jeremy Vannatta 406-256-6871 jeremy@bigskyeda.org 222 N. 32nd St., Suite 200 Billings, MT 59101 www.bigskyeconomicdevelopment.org

ENERGY SERVICES Beaver Creek Archaeology 701-663-5521 info@bcarch.org 1632 Capitol Way Bismarck, ND 58501

Larson Electronics LLC Rob Bresnahan 1-800-369-6671 rb@magnalight.com 9419 E. Us Hwy 175 Kemp, TX 75143

OIL & GAS TRADE SHOWS Bakken Oil Workers & Oil Service Expo Blue 52 Productions Amy Voisard 937-479-4255 avoisard@blue52productions.com usasymposium.com/ bakken/

Synergy Station, Inc. Laura McRea 406-696-5433 laura@synergystation. com Billings, MT www.synergystation.com Eastern Montana Energy Expo Amy Deines 406-377-7792 dcedc@midrivers.com 808 N. Merrill Glendive, MT 59330 www.dawsonedc.com

Get your business listed in this directory today!

For information call:

Jessica Tuck, Sales Consultant Montana Energy Review P: (406) 657-1427 M: (406) 694-3169 jtuck@mtenergyreview.com