Historical Look At Taxable Sales And Purchases, North Dakota -- Some Idle Chatter -- July 15, 2014

Updates

Later, 5:33 p.m. PDT: I stand corrected. I am wrong with some of what I wrote in the original post; take that into consideration when you read the original post. A reader tells me that much of the "stuff" used to drill a well is, in fact, taxable. The reader wrote:

Just read your post on taxable sales and purchases.  You are probably right that most of pipe, sand, and ceramic are bought out of state but ND has a Sales and Use tax which means you must pay a use tax on materials used in ND.  To verify that this could apply to oil wells I found this document:

http://www.nd.gov/ndic/ogrp/info/g-015-033-faq.pdf

Here is an excerpt:

Does the state collect “use tax” or “sales tax” on all the steel and equipment being used?  

Sales tax is paid on everything that is permanently installed in or on the well. With booming oil activity, the sales tax revenues in western North Dakota cities have been growing at a record pace each quarter.

A huge thank-you to the reader for catching this; something (among many things) I did not know.

Original Post

 
For the archives, from The Williston Wire:

-------------------------- -Fargo ----- Bismarck ----- Williston ------- Grand Forks -- Minot ---  Dickinson

Some idle chatter.

My hunch is that much of the "stuff" used to drill wells is not bought in Williston. Rigs, pipe, sand, ceramic, comes from out-of-state. Much of the house-building was done with pre-manufactured frames also coming from out-of-state (Colorado?). As folks move into their homes, they will be maintaining their homes, furnishing their homes, and refurnishing their homes. Unlike many areas of the country, existing homeowners and new homeowners have money to spend.

Not only do the folks in Williston have money to spend, they have LOTS of money to spend. Williams County leads the state in average annual salary: $78,390

• North Dakota average annual salary: $48,000
• National average annual salary: $49,000

That's quite a delta between $80,000 and $50,000.

Without a Menard's, Home Depot, Target, Nieman Marcus in Williston, folks are driving to Bismarck, Minot, and Dickinson to do their shopping. Okay -- some exaggeration there, but one gets the point.

I think there are two important data points that are not reflected in the current taxable sales and purchases going forward:

• how much is being spent by Willistonites going to Minot
• how much will be spent by Willistonites simply because there are "more things" and "more places" to spend their money as these retailers are established

This is way out of my area of expertise, but my hunch is that more money stays in the area maintaining and servicing wells than drilling wells. Again, except for personnel costs, I assume most costs associated with drilling a well are "out-of-state" -- the big expense being the rig, pipe, sand, ceramic. However, on a day-to-day basis, maintaining and servicing existing wells would be local: gasoline/diesel for transportation to/from the site; meals on the road by the servicing crews; local supplies for minor repairs, etc.

With regard to drilling, all indications are that they will continue to drill about 200 new wells/month for the next (fill in the blank here) years. And, I know it's hard to believe, but each new well being drilled does not mean an old well is plugged and abandoned. Nope. The two hundred new wells are added to the existing 5,000 wells [yes, a small number of wells are plugged and abandoned every year, but the rate of such abandonment is probably decreasing as the economics (higher prices for oil) improve].

I think we agreed that the minimum amount of money being spent to maintain an existing well is at least $5,000/month. Unlike drilling a well, my hunch is most of that money (except perhaps for workover rigs) is spent locally.

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Cherry Picking

1Q10:

• Fargo: $460K
• Bismarck: $277K
• Williston: $216K
• Minot: $200K

1Q11:

• Fargo: $481K
• Bismarck: $302K
• Williston: $447K
• Minot: $255K

1Q12:

• Fargo: $541K
• Bismarck: $386K
• Williston: $791K
• Minot: $357K

1Q13:

• Fargo: $543K
• Bismarck: $393K
• Williston: $790K
• Minot: $322K

1Q14 (city, taxable sales for the quarter, percent change from 1Q10):

• Fargo: $563K (22.4%)
• Bismarck: $385K (40.0%)
• Williston: $779K (261.0%)
• Minot: $309K (54.5%)

There are a number of observations that one could make from those data points. First, there seems to be a new normal:

• Fargo: $550K
• Bismarck: $400K
• Williston: $750K
• Minot: $325K 

There is nothing to suggest that trend will not continue, all things being equal.

The data I don't have is the split between "direct oil-related taxable sales" and "other." Let's be sexist here, and call the "direct oil-related taxable sales" those dollar amounts associated with "dad" and the "other" sales those associated with "mom." I assume the huge jump in taxable sales in Williston from
 1Q10 and 1Q12 (and that's a huge jump) was due to "dad." Taxable sales attributable to "dad" should start to level out as the oil industry matures in the Williston Basin.

On the other hand, the taxable sales attributable to "mom" should start to increase as more folks move into their own homes. As retail opportunities expand in Williston, "mom" will do more of her Neiman Marcus shopping in Williston rather than driving to Minot. I doubt we will see huge increases in the near term, but all things being equal, it's very possible "mom" will spend more of her dollars in Williston than in Minot.

Quick: what retail sector might show the most growth over the next five years in Williston? I would not be a bit surprised if it might not be .... drum roll ... drum roll ... automobiles and trucks. Two huge data points:

• the huge delta between the average salary in Williston and the rest of North Dakota
• as more and more families move in, more and more adult teenagers -- and hey, where are they building the new high school? Hint: not in walking distance for anyone except perhaps one housing subdivision on the northwest side of town. How many high school students do you know that enjoy taking the bus to school? LOL.

See this story, and this story. 

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Dickinson

A special note about Dickinson. Of the six cities listed below, one could argue that one of the six has not plateaued to the same extent as the other five: that would be Dickinson:

1Q10: $87K

1Q11: $131K

1Q12: $217K

1Q13: $249K

1Q14: $310K (256% change from 1Q10). 

It appears that Dickinson, unlike the other five cities, may not have reached its "new normal." With the MDU-Calumet refinery and the potential of the Tyler, Dickinson might be the surprise story over the next five years.  It's possible Williston, Watford City, and Dickinson still have a significant way to go to reach their "new normals," but Dickinson may be the most exciting in terms of new growth.

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Geography

Say what you want, but the delta between $750K (Williston) and $325 (Minot) is not trivial. I challenge a person who has never been to North Dakota before to spend one day in Williston and one day in Minot and tell me which city is "bigger." Hint: it's not Williston. Minot is THE big city between the geographic center of North America (Rugby, North Dakota) and Havre, Montana, a distance of 500 miles.

Between Regina, Saskatchewan (Canada) and Rapid City, a distance of almost a thousand miles, there are only two cities of any size: Williston ($750K) and Dickinson ($300K -- about the same as Minot).