Little Sovereign Wealth Fund on the Prairie – By Daniel Gross MAY 29 2014 10:16 AM


Raven Drilling, works on an oil rig drilling into the Bakken shale formation on July 28, 2013 outside Watford City, North Dakota.
Ray Gerish, a floor hand for Raven Drilling, works on an oil rig drilling into the Bakken shale formation on July 28, 2013 outside Watford City, North Dakota.

Photo by Andrew Burton/Getty Images

North Dakota is enjoying a flood of biblical proportions. Shale-drilling technology has liberated huge quantities of oil from the Bakken shale in the western part of the state. Production has surged from about 100,000 barrels per day in 2007 to nearly 1 million barrels per day this year—a tenfold increase.

But North Dakota, America’s latest petro-state, is handling its newfound wealth with the kind of modesty you might expect in a land where people live in giant open spaces and at the mercy of nature. Decades of boom and bust in agriculture have forged a culture of thrift, an abhorrence of debt, and a healthy mistrust of high finance. Alone among the 50 states, North Dakota has a state-owned bank. It never had much of a housing and credit boom, so it never had much of a housing bust.

So it’s not surprising the state is taking a conservative approach to its sovereign wealth fund, the North Dakota Legacy Fund.

At about $2 billion, the fund is a minnow among the more established resource-fueled public funds in the world. For decades, Norway has channeled its North Sea oil wealth into a fund that now contains $840 billion. Sovereign wealth funds based in Kuwait, Abu Dhabi, and elsewhere in the Persian Gulfhave become important fixtures in the global financial scene—buying companies, building skyscrapers, and financing massive projects. Several U.S. states have channeled resource revenues into common property. The Permanent Wyoming Mineral Trust Fund, which collects revenues from coal, oil, and gas extracted in the state, has about $6 billion in assets—about $10,000 for each of the state’s 576,000 residents. The interest and income it generates flows into Wyoming’s general fund, and helps the state get by without an income tax. The Alaska Permanent Fund created in the 1970s, has some $51 billion in assets. Each year, it pays out a dividend to citizens ($900 in 2013) to ease the sting and expense of residing in the state.

North Dakota, by contrast, has chosen to create a lockbox. The state had long imposed a 6.5 percent extraction tax and a 5 percent production tax assessed against the value of oil removed from its soil. The funds raised went into the general budget fund, or were channeled into trust funds to support schools or infrastructure.

But when fracking turned the Bakken Shale into Saudi Arabia on the high plains, the trickle of oil revenues turned into a gusher. Eager not to squander the state’s good fortune, North Dakota in 2010 created the state’s Legacy Fund through an amendment to the state constitution. The amendment stipulated that 30 percent of all extraction and production tax revenues collected should flow into the fund. Further, the money couldn’t be touched for seven years, until 2017—at which point the interest and income generated by the fund would be rolled into the state’s general budget. Money from the principal could only be spent if two-thirds of both houses of the state legislature approved. And no more than 15 percent of the principal could be spent in any two-year period.

The rainy day fund filled up much more quickly than anybody anticipated. From 2011–13, oil taxes produced nearly $4 billion for the state. By July 2013, the fund contained $1.23 billion.