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Oil and gas production from Montana's state trust lands.

As prices for oil reach an all-time high, profits for oil companies are also on the rise. Exxon Mobil supplanted Wal-Mart in 2006 as the largest company in the United States, with the No. 1 ranking on the FORTUNE 500 list. Last year, Exxon Mobil generated $339.9 billion in total revenues and $36.1 billion in profits (Schwartz 2006). By comparison, during the same period, Wal-Mart grossed $315.7 billion and netted $11.2 billion.

With all the attention given increased prices and profits lately, one might wonder what the impact of oil and gas production has been on Montana's economy. Adair and Rickard (2006) with the Center for Applied Economic Research at Montana State University-Billings have conducted such an analysis. In 2005, 32.8 million barrels of oil and 108.1 million MCF of natural gas were produced in Montana from approximately 3,900 producing oil wells and 5,400 producing gas wells (Table 3, page 9). Oil production in 2005 represented a 33 percent increase over 2004 levels, and an increase of 101 percent when compared with 2001. The 2005 oil production was valued at $1.78 billion, with natural gas adding another $843 million. Oil and gas production generated $140.3 million in taxes, with roughly half of the revenue distributed to counties and half to the general fund. Richland and Fallon counties received tax revenues in excess of $16 million and $15 million respectively. Adair and Rickard (2006:28) conclude: "The direct economic impact of the entire oil and gas industry in Montana is approximately $5.8 billion and supports over 5,000 Montana jobs. The total economic impact [with the output multiplier] is valued at $8.6 billion and 12,000 jobs."

Another component of the overall economic impact of oil and gas production in Montana is the direct impact it has on school funding through the management of state trust lands. In Wyoming, oil and gas revenues have provided the state with a $1.8 billion surplus. Last winter, Wyoming's Legislature boosted K-12 spending 24 percent--to more than $12,400 per pupil (Gruver 2006). In the past two years, oil and gas revenues generated from the management of Montana's state trust lands have increased by more than 200 percent (Table 4, page 9).

History of the State Trusts

The U.S. Congress established the policy of granting land for the support of schools in new states with the General Land Ordinance of 1785, and more specifically with the Northwest Ordinance of 1787. The original 13 colonies and the three subsequent states that were admitted into the Union were not given any land grants because no federal lands existed within their borders. Ohio was the first state to be admitted to the Union under the General Land Ordinance of 1785. In Ohio, section 16 in each township was granted directly to the township--"to the inhabitants of such township, for the use of schools" (Souder and Fairfax 1996:18). The Enabling Act of 1889, under which Washington, North Dakota, South Dakota, and Montana were admitted to the Union, states: "That upon admission of each of said states into the Union, sections numbered 16 and 36 in every township of said proposed states ...are hereby granted to said states for the support of common schools."

Montana Trust Land Beneficiaries and Revenues

The original common school grant in Montana was for 5,188,000 acres, with an additional 668,720 acres granted for other endowed institutions (Schultz and Butler 2003). Currently, Montana's trust land acreage totals more than 5.1 million surface and 6.2 million mineral acres. Whereas 90 percent of the trust land surface and mineral ownership is dedicated to the common schools (K-12), there are nine other trusts that receive revenue from a variety of land management activities. Table 1 depicts all of the trust beneficiaries and the revenue (includes interest earned from the permanent fund) distributed to them and the respective permanent funds in FY 2005 (MT DNRC 2005a). The revenue distributed to the common schools represented approximately 10 percent of their FY 2005 state-funded budget.




Figure 1 (MT DNRC 2005b) displays total gross revenue generated from land management activity for the past six years. As is evident in Table 2, the greatest amount of net revenue was historically generated from surface management (agriculture, grazing, timber, and special uses). However in FY06, this has changed--the greatest amount of revenue will be generated from mineral/subsurface uses, which includes oil and gas production.

Oil and Gas Activity in Montana

The Montana Board of Oil and Gas Conservation Commission (MBOGC) tracks and reports on activity and production generated from all land ownership within the state. Production, well development, and issuance of board orders are summarized in Table 3.

The increase in oil and gas activity in Montana has clearly been dramatic. In the last three years, oil and gas production increased by 94 percent and 22 percent, respectively, while the number of new well permits and board orders more than doubled.

The level of exploration activity is primarily affected by two factors: economics and technology. An increase in commodity value, such as the recent upswing in both oil and gas prices, obviously generates additional revenue from current production. More important over the long term is the additional revenue that producers reinvest into exploration in new areas and additional development in existing areas.

Hydrocarbon-based oil and gas are a non-renewable resource, in that the asset is consumed as it is produced. Oil and gas producers therefore continually seek to replace or increase their asset base by acquiring, exploring, and developing new reserves of oil and gas. Increased prices lead to increased investments by companies in exploration and development, which in turn leads to increased production and reserves.

Technology can also have a significant impact on exploration and development activity. Over the past few years, technological advances provided the ability to analyze seismic data in three dimensions. Use of 3-D seismic data allows producers to locate smaller, undeveloped geologic structures capable of trapping oil or gas. This technology has been particularly successful in the development of additional gas reserves and production from existing fields.

The most significant technological development is the ability to drill and complete "horizontal" wells. A horizontal well starts out the same as a conventional well. The well bore is drilled vertically down from the surface to the target formation. Then the producer turns and controls the direction of the drill bit and continues drilling a hole horizontally through the oil-bearing zone. These horizontal portions of the well commonly extend one to two miles laterally and allow much more oil to be commercially produced.

This technique has been tremendously successful in developing new oil production from the Bakken formation in eastern Montana, and is responsible for the tremendous increase in oil production in the state (Figure 2, page 8).

State Trust Land Oil and Gas Activity and Revenue

Oil and gas revenues generated from leasing state school trust lands have increased substantially over the past three years. Table 4, page 9, summarizes revenue, production, and average commodity price. Fiscal 2006 data are either preliminary or estimates based on year-to-date information.

Revenues to the state trusts from oil and gas leasing fall into three major categories: rentals, bonuses, and royalties. Rentals must be paid each year in advance to continue to hold the lease. Rentals are based on the acreage leased. The initial base rental is $1.50 per acre, which is equivalent to an annual payment of $960 for a typical 640-acre section of land. Rental revenue, therefore, increases as the amount of acres leased increases.

A bonus is a one-time, up-front payment over and above the first-year rental, offered through a competitive bid process. Bonuses are bid on a per-acre basis. Like rentals, more acreage bid generates more bonus revenue. The driving force for bonus revenue is the amount per acre interested individuals or companies are willing to part with in order to secure the lease. This obviously depends on the amount of competition for a given area, but also depends on how much the individual or company has available to dedicate to acquisition of new properties. Bonus revenue is therefore highly variable from sale to sale, area to area, and even tract to tract. In the last two years, competitive bidding by industry has generated bonus revenues not seen since the early 1980s. Three recent lease sales rank in the top 10 based on total bid revenue, and are the top three based on bid per acre (Table 5).

Royalties are paid on producing leases and, like severance taxes, are a percentage of the gross value of the oil and gas production. Gross value is determined by multiplying volume produced by price per unit. An increase or decrease in either the volume produced or the price per unit of production directly impacts the amount of royalty paid to the state school trusts. For example, a 25 percent increase in price generates a 25 percent increase in royalty for a given volume produced. A 25 percent increase in volume produced will also generate a 25 percent increase in royalty at a given price. If both price and volume produced increase by 25 percent, the combination produces a 56 percent increase in royalty.


Increases in oil and gas rentals, bonuses, and royalties equate to greater revenues generated from state trust lands. These increases in revenues, which equate to roughly a $20 million increase between FY05 and FY06, represent the cornerstone of funding for K-12 education in Montana. Trust land management revenues and the interest earned from the permanent fund, are the first dollars used to fund K-12 education. How increases in trust revenues will influence education funding in the future is ultimately a policy decision by the Legislature.


Adair, Ann and Scott Rickard. 2006. Economic & fiscal impacts of Montana's petroleum and natural gas industry. The 2006 Treasure State Journal. Winnipeg, Manitoba, Canada. Del Communications, Inc.

Gruver, Mead. 2006. Wyoming schools, flush with cash from natural gas, go on spending binge. Independent Record. June 17, 2006. p. 4A, cols. 3-6.

Montana Board of Oil and Gas Conservation (MBOGC). 2002 Annual Review. Helena, MT.

Montana Board of Oil and Gas Conservation (MBOGC). 2003 Annual Review. Helena, MT.

Montana Board of Oil and Gas Conservation (MBOGC). 2004 Annual Review. Helena, MT.

Montana Department of Natural Resources & Conservation (MT DNRC). 2005a. Trust Land Management Division Annual Report. Helena, MT.

Montana Department of Natural Resources & Conservation (MT DNRC). 2005b. Return on Asset Report. Helena, MT

Schultz, Tom and Tommy Butler. 2003. Managing Montana's trust lands. Montana Business Quarterly. 41 (4):8-14.

Schwartz, Nelson D. 2006. The biggest company in America ... is also a big target. Fortune. 153 (7):77-88.

Schwartz, Nelson D. and Jon Birger. 2006. Slick operators: How hedge funds, traders, and big oil are really driving prices. Fortune. 153(10):72-81

Souder, Jon A. and Sally K. Fairfax. 1996. State trust lands: history, management, & sustainable use. Lawrence, Kansas: University Press of Kansas.

Tom Schultz and Monte Mason are Helena-area residents.
Table 1
Revenue Generated for the Trusts and Permanent Fund Balances
in Fiscal Year 2005

 Gross Revenue Expense

Common Schools $75,156,136 $9,730,675
University of Montana 230,364 5,208
Montana State University--Morrill Grant 600,074 0
Montana State University--Second Grant 2,235,800 472,367
Montana Tech of UM 920,459 62,217
State Normal Schools 1,489,963 297,986
School for the Deaf and Blind 488,186 95,750
State Reform School (Pine Hills) 656,882 124,733
Veterans Home 11,155 326
Public Buildings 1,314,940 461,769
Totals $83,103,959 $11,251,071

 Net Revenue Fund

Common Schools $65,425,461 $392,819,245
University of Montana 225,156 1,499,962
Montana State University--Morrill Grant 600,074 3,586,237
Montana State University--Second Grant 1,763,433 8,472,888
Montana Tech of UM 8,582,422 4,545,537
State Normal Schools 1,191,977 6,003,215
School for the Deaf and Blind 392,436 2,952,164
State Reform School (Pine Hills) 532,109 3,217,164
Veterans Home 10,829 16,742
Public Buildings 853,171 N/A
Totals $71,852,888 $423,113,154

Source: MT DNRC, 2005a.

Table 2
Montana Department of Natural Resources and Conservation
Trust Net Revenue by Source, Fiscal Year 2005

 FY 2001 FY 2002 FY 2003

Ag. & Grazing $13,127,720 $12,097,023 $13,072,974
Forest Mgmt. 3,531,233 4,996,012 3,138,699
Minerals Mgmt. 20,147,435 8,745,150 11,310,736
Special Uses 982,423 1,097,211 1,206,388
Total $37,788,811 $26,935,396 $28,728,797

 FY 2004 FY 2005

Ag. & Grazing $12,372,517 $14,157,290
Forest Mgmt. 4,783,274 9,075,011
Minerals Mgmt. 15,169,914 22,971,621
Special Uses 3,425,774 2,800,883
Total $35,751,478 $49,004,805

Source: MT DNRC, 2005b.

Table 3
Montana Oil A Gas Activity [MBOGC Statistics]

 Calendar Year

Production 2002 * 2003 * 2004 * 2005 (^)

 Oil (bbls) 16,980,447 19,375,455 24,699,015 32,876,018
 Gas (mcf) 86,879,025 86,722,976 97,962,768 108,555,464

Producing Wells
 Oil 3,561 3,611 3,747 3,959
 Gas 4,537 4,812 5,195 5,554

New Well Permits 610 834 840 1,306

Board Orders 213 354 395 522

* MBOGC Annual Reviews (2002-2004); (^) MBOGC Preliminary

Table 4
Oil A Gas Activity--Montana State Trust Lands

 Fiscal Year (July 1-June 30) Two-year

 2004 2005 2006 * Increase

Rentals $2,294,281 $2,664,376 $3,463,310 40%
Bonus 897,950 3,894,659 13,198,432 1390%
 Oil 4,856,287 7,971,654 14,764,990 177%
 Gas 2,846,849 4,574,992 6,612,576 137%
 Total $10,895,367 $19,105,681 $38,039,308 238%

Average Price
Oil ($/bbl) $31.02 $44.69 $56.02 81%
Gas ($/mcf) $3.95 $5.09 $7.17 82%

Oil (bbls) 1,122,987 1,400,063 1,725,000 54%
Gas (mcf) 5,720,200 7,240,046 7,250,000 27%

Leases 2,852 3,300 4,100 44%
Acres Leased 1,196,772 1,371,830 1,700,000 42%

Source: MT DNRC 2005a.

* Fiscal year 2006 data estimates extrapolated from year-to-date
information currently available.

Table 5
Montana State Lands Oil & Gas Lease Sale Statistics
in Lease Sales by Total Revenue

Rank Sale Month Year Month Acres

 1 JUNE 3-4 1980 6 435,271.61
 2 SEPTEMBER 1 1981 9 287,540.02
 3 SEPTEMBER 9-10 1980 9 393,060.59
 4 MARCH 7 2006 3 101,922.81
 5 MARCH 2-3 1981 3 369,776.95
 6 DECEMBER 4 1979 12 263,978.90
 7 SEPTEMBER 7 2005 9 89,825.29
 8 DECEMBER 2 1980 12 254,272.10
 9 MARCH 4 1980 3 120,230.06
10 MARCH 1 2005 3 51,572.16

Rank Sale Month Tracts Total Avg Bid

 1 JUNE 3-4 1,016 $15,173,583.92 $34.86
 2 SEPTEMBER 1 659 $9,825,164.76 $34.17
 3 SEPTEMBER 9-10 829 $7,519,620.31 $19.13
 4 MARCH 7 248 $6,279,636.33 $61.61
 5 MARCH 2-3 936 $4,675,543.59 $12.64
 6 DECEMBER 4 553 $4,351,011.40 $16.48
 7 SEPTEMBER 7 205 $3,628,318.71 $40.39
 8 DECEMBER 2 560 $3,532,867.19 $13.89
 9 MARCH 4 236 $2,715,300.04 $22.58
10 MARCH 1 122 $2,185,162.52 $42.37
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Comment:Oil and gas production from Montana's state trust lands.
Author:Schultz, Tom; Mason, Monte
Publication:Montana Business Quarterly
Date:Jun 22, 2006
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