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IT IS HARD to find a beacon of light in the US economy. However, something unusual is happening in the most underpopulated and barren lands of the country – an oil boom is welling up. In Williston, North Dakota, hotels and motels are fully occupied, the shelves of Walmart are empty and the roads are lined with trailers and tents. These so-called man-camps are temporary accommodation for hundreds of oil-crew workers who have been transferred up to the rocky plains to drill for wells that, by some estimates, might produce as much as 24 billion barrels of oil.
The oil lies in the Bakken Formation, which spans North and South Dakota, eastern Montana, and south Saskatchewan in Canada. Technological advances in oil drilling have made this land a focus for oil producers. With deeper and horizontal drilling, companies such as Continental Resources, EOG Resources, Hess Corporation and Brigham Exploration are hoping to make serious money once the oil starts to flow. Investment opportunities are few and far between however. For one, while analysis looks promising, little oil is moving as yet. The second deterrent to investors is political risk and a question of ethics, for most of the land belongs to the Tribal Nations of the US.
Sharing the land
Tribal Nations in the US, with a population of just 2 million, control about 55 million acres. The reservations allotted to them were chosen because the land was rocky and considered to be unsuitable for farming and therefore of little value. With little help from the US government, unworkable land, no tax base and little integration with modern society, many of the Native Americans have the worst standard of living in the US. "People think they are making money from casinos, but that is rarely the case," says an oil investor. One in four Native Americans is in poverty. Unemployment rates on reservations can be as high as 75%. Substance abuse and suicide rates are much higher than the national average.
Unbeknown to the decision-makers, however, the rocky lands Native Americas were allocated have proved rich in oil and gas. In some ways, says John Jurrius, chief executive and founder of Native American Resource Partners (Narp), the Tribal Nations are having the last laugh. Jurrius’s firm is funded by a $5 billion private equity firm, Quantum Energy Partners. With the capital injection, Narp works with Tribal Nations to establish a joint energy company that can give a return of as much as 500% to Quantum Energy and its institutional end-investors, while ensuring the Tribal Nations are fully compensated for their resources. Jurrius and the other senior members of Narp all formerly worked in the oil and gas industry. In the 1980s Jurrius began partnering with the Southern Ute Tribe in Utah, working on the tribal council and with financial investors to develop natural gas resources, and create a financial plan and growth fund for the tribe, generating hundreds of millions of dollars in long-term commercial revenue.
It’s a new direction for investing in oil and gas production – a sector not renowned for marrying profits with ethics. "By having a joint company it means the tribes are proactively developing their resources, rather than being limited to their historically passive role of receiving lease income while industry takes most of the income streams from resource developments on reservations," says Jurrius.
Tribal Nations are not unfamiliar with oil production companies. In the past, and indeed in parts of the Williston Basin, tribal members have leased land to oil producers. The deals have not worked in their favour. Forrest Smith is a member of the Fort Peck Tribes, which have around 12,900 Assiniboine and Sioux members and sit across 2 million acres in northeastern Montana on the edge of the Williston Basin. Some of Smith’s tribe’s members leased land to oil producers in the 1980s for a 12.5% royalty fee. When the oil price dropped to $30 a barrel, the producers sold the land and left, leaving just 900,000 acres of land to the Tribes, and no more royalty fee. "In some ways we have been our own worst enemy," says Smith. "We have not always fostered a relationship with the outside oil companies, and certainly have not managed business agreements in a way that would provide us with long-term capital." Smith is the director of the Fort Peck Tribes’ Minerals Resource Office. "It’s a huge opportunity for us working with Narp," he says. "Now instead of having just a passive royalty position with the 16.67%, we use the $100 million of capital from Quantum Energy to lease to our own energy company and therefore, as co-owners of the company, we can retain a larger piece of the revenues." Fort Peck Energy has already partnered with Samson Oil and Gas Limited and will receive a third of the working interest revenues from the oil on the reservation.
Tribal money not at risk
While Narp provides the capital, expertise and guidance, the tribes as co-owners of the energy company not only provide the resources but are given an incentive to develop the land, work with oil production companies and develop a long-term capital-producing business. The tribes have the choice of purchasing a controlling interest at original net present value during certain points in the life of the company and have their own company. "The risk is taken out for the tribes’ members," explains Jurrius. "If the wells do not produce oil, it is the oil producers who have been allowed to come on the land that bear that risk. But there is the incentive for the tribe as the energy company is co-owned by them to work with the producers to encourage them to explore for oil."
It is a new concept for some of the older Native Americans who sit on the tribal council. Smith says the capitalistic approach is not at one with the traditional thinking of the Tribal Nations and that feelings are still mixed: "Hopefully the success of the jointly owned company will change those views. This kind of joint venture makes much more sense." He points to one tribe in the region that sold land for $20 an acre in 2004, only to have that land in 2008 valued at between $1,000 and $1,800 an acre. "They did not have the expertise that would have helped them realize the value of the land, and they did not set up the deals to take a share of the working interest over the life of the wells."
Smith says if oil stays above $60 a barrel, Fort Peck Energy Company could be worth billions in six to seven years’ time.
If the oil is there, such projections are not unfathomable. The Southern Ute Tribe, for example, is valued at around $15 billion, largely in part because of the success of the tribally owned energy company, Red Willow Production Company.
Positive socio-economic change
Smith says the socio-economic impact on the Fort Peck Tribes if the company makes even a fraction of that will be life-changing. "Some of the proceeds could be allocated to pay for college tuition for younger tribal members. They would be sponsored by us to study and in return would agree to come back and work here for four years." Solving the unemployment problem will however take time, says Smith. At present companies that wish to set up on Fort Peck land are required to agree to employ tribal members as 80% of their workforce – but only if they have the skills required. "Most of those that have the skill-set leave the reservation to get work in other oil-rich regions where the salaries are higher," says Smith. "Some companies are willing to take on one or two tribal members and train them up but it will take time to have a fully skilled workforce. Initially employment is likely to be for truck drivers and manual jobs. We have to wait for the oil to be proven here first and for the boom to take off."Smith says once the land is proven and the wells are producing, industry such as oil-rig parts manufacturing could come to Fort Peck, which would provide jobs.
Jurrius points to the Southern Ute Tribe as an example of how a Tribal Nation’s fortunes have been turned around through owning an energy company. "The drop-out rate in schools there was 50%, now that is 10%. They have 135 kids in college each year – compared with none before. They have their own retirement programmes and healthcare budget. The Nation even achieved a triple-A rating to float bonds to build a hospital for the community," says Jurrius.
While partnering with tribes will have socio-economic benefits, Jurrius is clear that Narp is designed to create returns. "It’s a model that means if the tide rises, all boats float, but it is a niche area of investing and does have its challenges. It really suits only private equity as it is long-term money. Tribal land is not subject to US law, and so there are risks. It requires patience and knowledge of tribal governance, and is ultimately dependent on the resources that can be extracted."
As yet, oil has been slow to come out of the ground and one oil analyst at an investment bank in New York says better infrastructure will be needed to move the crude oil down to the Gulf refineries. "If the oil is there as predicted, we think it will take two years for the boom to really hit. So far, it is more hype than solid figures, but we have seen an uptick in US oil production – the highest since 2003."
If the 24 billion-barrel projection is even partly correct, concerns about oil supply will be relieved, and only 30% of Tribal Nation land is under development. The poorest land in the US could turn out to be the richest.
