May 6, 2009

New law could boost state’s oil activity

By Tina Foreman
Farmer Staff Writer

Oil production in North Dakota has dropped from a rig count high of 98 to a rig count of 38 as of Friday, May 1, 2009. The main cause for the drop in rigs is the drop in the price of oil.
At the request of the North Dakota Petroleum Council, North Dakota Governor John Hoeven expedited the signing of Oil Tax Bill (HB-1235) to help bring the rig count up in North Dakota. Because the bill carried an emergency clause it became active immediately.
 “The bill is essentially a triggered incentive,” says Ron Ness, president of the North Dakota Petroleum Council. “The bill gives tax incentives to companies for drilling when oil is below $70 a barrel.”
North Dakota's top oil tax rate is 11.5 percent. The legislation cuts the percentage on new wells to 7 percent unless one of the benchmarks is met.
The revamped set of incentives for North Dakota oil producers began on May 1, 2009, and will continue providing tax breaks for newly-drilled wells as long as oil prices stay below $70 a barrel.
“In order for companies to take advantage of the new tax incentives, the horizontal well must have been spud after May 1, 2009,” adds Ness. “The tax holiday is designed to offer incentives for Bakken drilling during times when the price of oil makes drilling the Bakken marginally cost effective.”
According to the new tax provisions, the lower rates will end when a well pumps at least 75,000 barrels of oil or $4.5 million worth of crude. If those benchmarks are not met, the incentives will expire once a well has been pumping for 18 months.
“Every well out there averages $4.5 million in taxes over a lifetime,” states Ness. “That equals a positive outcome for producers, mineral owners and the state. If there aren’t any wells drilling then there isn’t any new oil tax revenue coming in. So even if there is a bit of a tax revenue hit, it’s still better for the state than if the number of active oil rigs continues to decline.”
The Horizontal Tax Holiday will deactivate when the West Texas Intermediate average price is above $70 per barrel for one month. Any well drilled after the first of the following month would not receive the holiday and would pay the 6.5 percent extraction tax or a total of 11.5 percent until such time as the statutory incentives are reinstated due to low oil prices.
“We think this is a really good thing,” adds Ness. “There are concerns that it will hurt the state, but we think it will help bring drilling back up and in turn keep oil tax revenue coming into the state.”
The new legislation expires in June 2012, although wells drilled before the deadline could continue getting tax benefits for two years beyond that.