Contention over taxes on ND’s “marginal” well production
By Sid Pranke
With the 2012 election cycle now over, newly-elected and incumbent North Dakota lawmakers will begin politicking at the State Capitol when the next legislative session begins on Jan. 8. One issue likely to be parsed again this regular session is how North Dakota taxes the oil industry. A contentious topic is current state tax law governing oil wells and well properties designated as stripper wells or stripper well properties. A stripper well is described as a marginal, low-producing well that exempts oil producers from the state’s 6.5 percent oil extraction tax. Oil from stripper well properties only are subject to the state’s 5 percent oil production tax.
Critics of the extraction tax exemption on stripper well properties contend that new fracking technologies have created high-producing wells on many stripper properties, and that the tax law has become a loophole tempting for oil companies to exploit.
Tax laws exempting these stripper wells were enacted decades ago, long before hydraulic fracturing technology allowed for the Bakken boom.
The statute that defines stripper wells and stripper well properties has three categories to qualify: Over a 12-month consecutive period – wells at a depth of 6,000 feet or less that did not exceed 10 barrels of oil per day; wells at a depth between 6,000 and 10,000 that did not exceed 15 barrels per day; and wells more than 10,000 feet that did not exceed 30 barrels per day. Bakken wells generally are at a depth of roughly 10,000 to 11,000 feet.
In fiscal year 2011, 43 percent of oil-producing wells in North Dakota were qualified as stripper wells, according to statistics from the North Dakota Office of State Tax Commissioner. Of those designated stripper wells, 261 wells were considered high-producing wells that produced more than the limits established by statute. Most of the 2011 high-producing wells designated as stripper wells were operated by Continental Resources Inc., followed by Denbury Onshore, LLC.
During the 2011 legislative session, State Sen. Ryan Taylor introduced a bill that would close the loophole for high-producing stripper well properties, saying that the state is losing significant revenue that could further benefit oil-impacted areas. Lost revenue based on the stripper well extraction tax exemption was estimated at about $60 million in 2011. Taylor said he thinks that figure is twice as high now, due to increased oil production in the state.
Taylor said in a recent interview he has no problem with the stripper well tax exemption as the law was originally intended.
“They were low-producing wells and they lived out their life. We wanted to ‘incentivize’ them, getting that last bit of oil if they got below 30 barrels a day,” he said. “And then somewhere along the line, they added stripper well properties and that means the spacing unit.”
Taylor said a common spacing unit size is 1,280 acres. “If there’s a stripper well on those 1,280 acres, then any new well on those whole 1,280 acres gets the same incentive, and that new well might flow at 500 barrels a day,” he said. “And even though it’s not a stripper by any means, it’s 500 barrels a day and it’s paying 5 percent (in oil taxes) instead of 11.5 percent.”
Three Republican state senators (Stan Lyson, John Andrist and Gary Sukut) co-sponsored Taylor’s 2011 bill, but ultimately did not support it. “They bailed on us,” Taylor said. “They understood it at first, but for whatever reason, the support evaporated,” adding that political pressure was probably a factor.
Ron Ness, president of the North Dakota Petroleum Council, testified against the 2011 bill. Both then and now, he believes changing the exemption for stripper well properties would represent a tax increase, not close a so-called loophole.
Ness said during his 2011 testimony that production from “marginal” stripper wells account for 8 percent of North Dakota’s oil production. “Marginal oil wells represent 18 percent of our nation’s domestic oil production,” Ness said during his testimony. “This bill does not encourage investment.”
The bill also was opposed by the North Dakota Chamber of Commerce – the group also views getting rid of the exemption as a tax increase. Bill Shalhoob, who represented the Chamber during legislative testimony in 2011, said, “It is a tax increase at a time when state coffers are substantial and we should be cutting taxes, not raising them to create more excess revenue.”
The N.D. Petroleum Council plans on trying to revise oil tax laws during the next legislative session, but its focus will be on making oil tax laws “simpler and more competitive,” Ness said.
One plan involves trying to make overall oil taxes less tied to the current price of crude oil, Ness said; the group wants to make oil taxes more of a flat tax. His group will help craft legislation to that effect by early January, Ness said.
Taylor insists the oil extraction tax exemption for stripper well properties is a loophole, one that doesn’t fit the times of a booming North Dakota. In addition, he said it’s not fair to companies who don’t use the loophole to their advantage.
“It doesn’t really put folks on a level playing field. If you decide to use this loophole, it would put you at an advantage to other companies that weren’t using the loophole,” Taylor said. “Every Bakken well becomes a ‘stripper’ at some point. They’ll get down to 30 barrels a day.”
David C. Thompson, a Grand Forks attorney and author with an interest in seeing closing the stripper well “loophole” closed, said the law is archaic. “It’s being used opportunistically,” Thompson said. “The law was never designed to be used where you have high-recovery techniques of fracking.”
Thompson, along with his assistant Erik A. Escarraman, released an online report at http://www.scribd.com/doc/109332442/Political-Campaign-Money-From-Big-Oil-Governor-Jack-Dalrymple-and-North-Dakota-s-Class-C-Felony-Bribery-Statute in October that was critical about possible political interests involved with stripper well properties, campaign contributions and the North Dakota regulatory process.