Petrodollars: putting aside oil money for a rainy day

With some states seeing a flood of revenues from higher prices and new streams of energy, some of them are looking at the Alaska model of creating a permanent fund to benefit residents. In this week’s Platts Oilgram News Petrodollars column, Starr Spencer looks at the plans being hatched in West Virginia and North Dakota.

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With new fields constantly emerging from a rash of US unconventional drilling in full flower, at least one state is mulling entry into a growing lineup of producing peers that have set aside a permanent or “rainy-day” fund fueled by petroleum revenues.

West Virginia is the latest to study the potential for creation of a permanent fund from state oil, natural gas and coal revenues. In recent years the Appalachian Mountain state has reaped natural gas wealth from the Marcellus Shale and renewed drilling of older fields using new extraction technologies.

Like Alaska, Texas and most recently North Dakota, which all have permanent funds, West Virginia wants to “turn nonrenewable resources into a sustainable source of income for the state,” Jill Kriesky, an economist with the nonprofit, nonpartisan West Virginia Center on Budget and Policy, said.

“Right now we’re not endorsing any particular way of funding,” Kriesky said. “We’re trying to lay out some options.”

While the Center studies the issue, Kriesky presented a case to state legislators last month for a potential 1% increase in the state’s current 5% severance tax to create a permanent fund for such social and public works programs as infrastructure expansion, job training, clean energy programs, grants and loans. She said the added 1% would yield estimated revenues of $100 million in 2011.

While relatively few US states now have permanent funds, rising oil and gas revenues from an activity boom created by high oil prices and prolific development of unconventional plays has prompted some jurisdictions to take a look at the funding possibilities. For example, North Dakota voters last year gave a green light to creation of a Legacy Fund, into which the state July 1 began depositing 30% of its oil and gas tax revenues.

The fund cannot be touched until 2017. After that, up to 100% of its interest can be tapped each year, along with up to 15% of the principal, Pam Sharp, director of the North Dakota Office of Management and Budget, said. The state in recent years has seen a huge revenue boon from the Bakken Shale, one of the largest US oil deposits industry has exploited in years.

Sharp was uncertain how much the nascent fund amassed in its first week of life. “We estimate roughly each month maybe $23-$30 million will go into it,” she said. “Over the course of the next biennium [which ends June 30, 2013] we estimate we’ll have over $600 million in the fund.”

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Of course, the granddaddy of mineral resource-derived money pools is Texas’ Permanent University Fund that was designed in 1876 to support higher education in the state. Initial lands included in the system were sited around the University of Texas-Austin and came to include West Texas acreage. Some of these areas were thought so unproductive at the time that grazing leases were the fund’s main source of early revenues.

Discovery of oil in Texas in 1901 at Spindletop kicked off an oil boom in the state. The University Lands System now includes vast spreads in the prolific Permian Basin which is also undergoing a drilling revival. In March, the twice-yearly University Lands lease sale drummed up nearly $250 million for higher education in Texas. From its inception, about $5 billion has been deposited into the Permanent University Fund from oil and gas royalties, lease bonuses and rentals on 2.1 million acres of University lands.

The Alaska Permanent Fund, voted in during the 1976 elections, now has a purse worth just under $40 billion, Laura Achee, spokeswoman for the Alaska Permanent Fund Corporation, said. The state requires deposit into the fund of 25% of all mineral royalties, including oil and gas, and up to 50% for some leases.

“On average recently, deposits have run in the $700 million range per year,” Achee said.

She also noted the value of having an investable cash cushion. “During the 35 years of this fund’s existence, we’ve paid out more than we’ve collected in royalties, meaning the $39.8 million in the fund today is almost entirely from investments. We’ve taken in $14.7 billion but paid out $18.4 billion and are still worth a little under $40 billion.”

A major problem in creating a secure money reserve is that governments are use to spending funds, not sitting on them. So the idea of an inviolate nest egg may be politically controversial in producing states that now count on dollars that legislators might want to sock away in a permanent fund.

In West Virginia, Kriesky said her Center’s study should be finished by September. But other options are under review besides a permanent fund; simply reallocating distributions from the current severance tax is another possibility, she said.

And even if a permanent fund is the best way to go, Kriesky doubts the state would “move that fast.”

“We do try to talk to legislators and others who might be interested in submitting a bill on this,” she said. “There are enough new ideas that people are concerned what happens.”–Starr Spencer in Houston

Platts