Boom and bust cycles come with the territory in the oil patch. We’ve all seen variations on the theme, like the bumper stickers that pleaded, “Lord, give me another oil boom and I promise I won’t piss it away!”
And we’re all schooled in the idea that when a boom moves through an area, everything gets too expensive—real estate (both home purchases and lodging expenses), equipment, and services.
We tend to look at it through the lens of operational expenses to get our personnel—engineers, landmen, drilling crews, seismic crews, pumpers, gaugers, etc. —and equipment—rigs, frac tanks, water trucks, rental tools, etc.—out into the field to start drilling, fracking, and producing.
Let’s take a different perspective. Let’s look through the lens of local government—municipal and county—to try and get perspective on what they’re facing on both the upside and downside of the hydrocarbon economy.
Suppose you are mayor of a small Texas town.
Ever since you took office, your small city or town has kept on keepin’ on, with the usual suspects steadily delivering predictable tax revenues from both property and sales taxes.
One day, while having coffee at the local coffee shop, your friend Ted who runs the local Chaparral Motel clues you into the fact that a team of 10 from a seismic crew have booked five rooms for two weeks.
The following week you run into Mildred, a widow now trying to run the family cattle business alone, and she tells you that two companies have offered to lease her 700 acres of minerals. They’re offering $100 per net mineral acre, which you know will be really helpful to Mildred.
Then, while you’re sippin’ a cool one at the Lariat Grill, Bobby, who has local construction company Black Mesa Construction, confides that one of the two companies you remember from your chat with Mildred, has contacted him and wants to contract with him to get his D-9 “on location” to clear the scrub and dirt off a three-acre pad.
Fast forward one year and your motels are fully booked, a new taco shack and two restaurants have been built on the road out to Mildred’s, and Bobby’s hired three new hands to take on the new business that’s come his way.
You’re feeling pretty good because money’s coming into town, your friends and neighbors seem to be prospering (lots of folks have new trucks), and your local high school football team seems to be on track to contend for a district title.
Fast forward to 2014.
If your town has replicated the kind of sales tax increase that Big Spring (Howard County, Texas) estimated for 2012-2013 budgeting purposes, you’re feeling pretty flush.
Of course, a lot of roads have begun to deteriorate in your town and out of town across the county. The police chief has had to increase the public safety force by six patrol officers, and due to the increase in building, you’ve had to increase staff in your planning and development departments to handle permitting and easements.
What’s next? We know the answer because we’ve lived it.
Economic activity as measured by gross county sales, in our hypothetical town, probably turned sharply downward from 2014 to 2017. No surprise, given the steep drop in oil prices toward the end of 2014.
The amount of those gross sales subject to sales tax (about 30% of gross sales) and therefore one source of funding for towns, cities, and counties, declined as well.
To what extent was this driven by stress in the oil patch?
Not all oil patch counties trended the same way. While some Permian counties, including Reeves and Ward, saw drops in gross sales from oil & gas extraction, Howard County saw a peak in gross sales due to oil & gas in 2015.
So did the Eagle Ford play in Karnes County, whereas another Eagle Ford play in Dimmit County dropped each year from 2014 to 2017, only to recover its mojo in 2018 and is on pace to see economic activity from oil & gas increase by about $50,000,000 by the end of 2019.
Unlike Dimmit County, however, Karnes County gross sales from oil & gas have dropped to 21% since 2015.
In the Permian, Reeves County is projected to see about the same level of gross oil & gas sales activity in 2019 as it did in 2018, whereas Ward County is trending upward and Howard County looks to be trending down with 2019 activity at 52% of 2017 levels.
Why should this matter to us?
Simply put, the “hidden” infrastructure that oil & gas development relies on—road creation and maintenance, EMS, police, fire departments, housing construction permitting and support—has to be paid for by town and county funding sources.
When budgets for these entities are subject to unpredictable surpluses and deficits, the process of planning rationally becomes an exercise in guesswork.
As a result, most city and county planners will do the prudent thing and ratchet back their spending plans to synch their budgets with conservative revenue expectations.
Adding to the planning chaos is the Texas Legislature’s passage of Senate Bill 2, which decreased automatic tax rate caps from 8% (max) to 3.5% on property taxes. City governments are now faced with the task of providing services and infrastructure with even less revenue.
The question is: How does fragmented planning and budgeting at city and county levels affect operators’ ability to execute on their development strategies?
Can operators partner with city and county officials to help put revenue projections on a more dependable footing? Sharing their expected quarterly and annual rig counts, as well as multi-year projections for drilling would be a start.
If you have any insight into these issues—especially if you’re a city or county official with meaningful oil & gas activity or an operator that can provide perspective on this—I’d love to hear from you.
Contact me at [email protected].
Data sourced from Texas Comptroller of public accounts; some counties did not have data for the years studied.