BISMARCK — The North Dakota Legislature approved a budget plan Friday, Jan. 15, that will govern the first half of its ongoing session, accounting for a substantial, pandemic-induced shortfall in oil tax revenue that has forced lawmakers to consider belt-tightening measures for the years ahead.

The Legislature has historically relied heavily on oil and gas taxes as a central driver of the state's revenue, but plummeting oil demand over the past year left lawmakers with a substantially smaller pool to work with.

The new budget forecast, which was approved by both the state's House and Senate Appropriations Committees on Friday, includes multiple large fiscal buckets typically filled by the oil industry that are empty for now for this biennium and the next.

Allen Knudson, a top budget analyst for the North Dakota Legislative Council, noted that competing multibillion-dollar bonding proposals before lawmakers this session will look to address some of these holes.

The new budget forecast comes as oil production in the state has slowly climbed over the past few months. U.S oil prices finally cleared $50 a day with the start of the new year, but Lynn Helms, the state's top oil regulator, has predicted a long road to recovery, stretching into late 2022 before production begins to resemble pre-pandemic levels.

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Still, the recent oil price increases and a revised forecast by IHS Markit consultants gave lawmakers a more optimistic picture this week.

"The outlook is a little more bright," said Knudson, who a week ago rang warning bells in a speech before legislators stressing serious financial challenges for the state if oil markets do not improve. On Friday, Knudson called the approved budget forecasts a "very good" starting point while noting, "We still have a long way to go."

Splitting the difference between an IHS Markit projection from this week and one presented to the governor's office in October, lawmakers approved a $3.95 billion general fund plan for the next biennium. They budgeted for oil prices to remain at $40 a barrel into 2023 and for production to level off from 1.1 million barrels a day to 1 million by the summer of next year.

Helms called these oil projections "very reasonable," though he noted that lawmakers are playing on the safe side, particularly with their forecasts stretching into 2022, when he expects state oil production to be trending upward.

"But when you look at these completion numbers that we're seeing, and the rig count and the oil price and some of these uncertainties, It's pretty reasonable to try to get on the conservative side of this production curve," he said.

North Dakota Director of Mineral Resources Lynn Helms testifies on Jan. 19, 2017, to the North Dakota Senate Appropriations Committee. Forum News Service file photo
North Dakota Director of Mineral Resources Lynn Helms testifies on Jan. 19, 2017, to the North Dakota Senate Appropriations Committee. Forum News Service file photo

The Legislature will have a chance to amend its forecast in March, a window that Helms said may allow for some time to gauge any additional upside coming out of the oil sector.

Oil production numbers for the month of November, the latest data available, held close to even at more than 1.2 million barrels per day. Helms noted that the recent price bump has put North Dakota "very solidly" back into the economic territory for well fracking to resume, a benchmark that the state hovered below for months of the pandemic.

Still, the timing of this price change with winter weather should keep fracking near a minimum in the first few months of this year, Helms predicted.

Industry activity should pick up as warmer weather returns this spring, Helms said, but the price conditions needed to incentivize new drilling are likely more than a year away. By late 2022, he said, production should be back to a consistent climb.

"I know that's not what the revenue forecast says, but (the lawmakers) always want to be on the conservative side of that curve," he said.

Readers can reach Forum reporter Adam Willis, a Report for America corps member, at awillis@forumcomm.com.