American Oil and Gas Reporter - February 2015 - 34

State Legislative Reports

North Dakota Hit By Falling Oil Taxes
By Dan Larson
Special Correspondent
BISMARCK, N.D.-The biennial legislative session in North Dakota bolted from the
gate in January with tens of bills introduced
that would have direct or indirect impacts
on the state's oil and natural gas industry.
However, as noted in various media accounts, activity quickly ground to a near
standstill days later when the hurdles
presented by lost tax revenue began to settle in, and the likelihood a pair of industry tax incentives would be triggered by
lower oil prices combined with revenue
lost from the price decline was the big topic in the first weeks of the session, which
convened Jan. 6.
By midmonth, the North Dakota Petroleum Council reports, it appeared likely
one of the two triggers would kick in beginning in February while the other could
become effective if oil prices remained below $55 a barrel through May.
Other top issues this session, NDPC continues, include a follow through on pledges
of support for infrastructure projects in the
state's 17 oil-producing counties, changes
to pipeline planning requirements, tax exemptions for gathering lines, increased
pipeline application fees, and new land
reclamation rules. Bills also were filed that
would require larger fines for dumping
waste illegally, allow the state to spend a
portion of its "legacy fund," decrease personal and corporate income taxes, and add
funds to hire additional inspection staff and
state highway patrol officers.
Oil Price Impact
Legislators' greatest concern, however, was for lower oil prices, muses NDPC
President Ron Ness. From the opening day,
he confirms, leadership on both sides of
the aisle worried about how prices and the
resulting loss of revenue would impact the
budget. The specter of diminished revenue
after three straight biennia of increases was
heard in calls by North Dakota Democrats
to create a second, contingency budget, and
to study ways the state might avoid continuing volatility in tax collections resulting from changing oil prices.
Republicans, which hold a majority in
both the North Dakota House and Senate,
will address contingencies in their budget discussions, but "take a more conservative approach," says Senate Majority
Leader Rich Wardner, R-Dickinson.
According to Senate Minority Leader
Mac Schneider, D-Grand Forks, lower oil
34 THE AMERICAN OIL & GAS REPORTER

prices could result in $3.2 billion in lost
tax revenue if prices remain below $52 a
barrel through the biennium. An additional $2.4 billion will be lost over that time
if continuous low prices trigger extraction
tax exemptions, he adds.
Tax incentives alone could cost North
Dakota up to $820 million this year, if prices
remain below trigger points, according to
the state's tax department (see Table 1).
Ness says North Dakota's budget has
been driven by steadily increasing oil tax
revenue for the past decade. As production
has increased, so have tax revenue, royalty and bonus payments, and jobs.
He says the state's 5.0 percent oil and
gas production tax and the 6.5 percent oil
extraction tax resulted in $2.9 billion in
revenues, or roughly one-half of all taxes collected in the state in 2013. By comparison, he recalls, when the first Bakken
well was drilled in 2006, oil and gas tax
revenue was $180 million.
Surge Funding
Responding to continued calls for relief
in areas impacted by oil and gas development, legislation was introduced with
strong industry support to direct significant
amounts of state revenue to impacted areas.
Known as the "surge funding bill," SB
2103 calls for spending $845 million on infrastructure and schools, according to a summary provided by NDPC. The bill allocates
$300.0 million to the top 10 oil producing
counties, $215.0 million for hub cities and

Watford City, $140.0 million for other cities
in the oil patch, $8.75 million for schools,
and $181.25 million for cities, counties and
townships elsewhere in North Dakota.
"Our goal is to have this bill passed by
mid-February so that money is available,
and so political subdivisions can put out
bids by March 1," remarks Ness.
A separate infrastructure funding bill
introduced for Governor Jack Dalrymple
would allocate $550 million for state and
county highway projects, NDPC says. SB
2126 would not direct additional funding
to local governments.
"We expect the legislature to choose
one or the other quickly," Ness remarks.
"The surge funding bill spends money already in the bank, and our state highways
always get funding. The problem is what
is ahead in lost revenue. That uncertainty paralyzes the legislature."
To rally support for surge funding, he
says NDPC worked with community
groups in western North Dakota to transport dozens of residents to the Capitol in
Bismarck for a hearing Jan. 16 before the
Senate Energy and Natural Resources
Committee.
"Without this surge money, we won't
have a construction season this year," testified Mountrail County Commissioner
Greg Boschee.
TENORM and Pipelines
After reports of illegal dumping of used
filter socks brought attention to solid

TABLE 1
North Dakota Price Triggers
Small Trigger
Trigger on: WTI < $57.50 average for one month
Effect: 2% OET* for 18 months (even if prices rise), 75,000 bbl or $4.5 million
gross value, whichever is first
Estimated wells included: 650-1,100
Estimated savings: $170,000 a well at $50 oil
Estimated revenue impact: $120 million-$205 million
Due to expire July 1, 2015
Includes wells completed after trigger is on
Large Trigger
Trigger On: WTI < $55.09 for five consecutive months
Trigger Off: WTI > $55.09 for five consecutive months
Effect: Zero OET for first 2 years of production, followed by 4% EOT as long as
trigger is on for wells drilled since 1987 (nearly all producing wells)
Estimated revenue impact: $100 million a month
Reduces effective OET to 1%
Not triggered on since 2004
*Current Oil Extraction Tax Rate: 6.50%
Source: ND State Tax Commissioner
American Oil and Gas Reporter - February 2015

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