Republican legislative leaders Monday outlined a proposed restructuring of the state’s oil taxes that closes a loophole for stripper wells, lowers the oil extraction tax rate and eliminates triggers in the event of sharp drops in oil prices.

Sen. Dwight Cook, R-Mandan, unveiled Senate Bill 2336 during a Monday afternoon press conference at the state Capitol. Cook said SB2336 addresses shortcomings in the state’s oil tax laws while providing long-term stability to the oil and gas industry.

“Oil taxes in general are a touchy issue,” Cook said.

SB2336 has four major provisions:

  • Any new wells drilled on a spacing unit that has a stripper well would not automatically qualify as stripper wells. The bill also raises the definition of a stripper well as one producing 45 barrels per day, up from 30. Currently if a new Bakken or Three Forks well is drilled on a spacing unit that has a stripper well, it automatically is taxed at the reduced rate. Stripper wells pay the 5 percent extraction tax but not the 6.5 percent production tax.
  • Would require operators to withhold income taxes from non-resident royalty owners.
  • Would provide incentives for oil activity in formations outside the Bakken and Three Forks.
  • Effective Jan. 1, 2017, the state’s oil extraction tax would be reduced from 6.5 percent to 4.5 percent. It also would eliminate a set of triggers enacted in the 1980s to address a sharp drop in oil prices. Under state law, incentives and rate reductions become ineffective after oil prices drop below a certain level for five consecutive months. That level, called a trigger price, is set each year and is based off of West Texas Intermediate oil prices. The trigger for 2013 is set at $52.20 per barrel.

“It’s an exemption that needs to go away,” Cook said of stripper well exemption. According to the SB2336 fiscal note the state would lose out on approximately $105 million in revenue during the next biennium if newly-drilled high-production wells were able to continue to benefit from the loophole.

Rep. Al Carlson, R-Fargo, said the fiscal impact during the 2013-15 biennium of enacting SB2336 would be approximately $28 million. In exchange for the lower oil extraction rate in 2017, he said, the industry “is giving up a lot in this bill.”

“This is a proposal that cries out for close scrutiny. We will continue to insist that oil companies pay their fair share to address the challenges that have arisen in western North Dakota due to the rapid development of our natural resources,” said Democratic legislative leaders in a statement. “If there comes a time when we need to re-examine our tax structure to keep North Dakota’s oil industry competitive, we will do so. For now, we should be fixing rutted roads and preserving our quality of life, not cutting taxes for oil companies.”

If enacted, SB2336 would bar wells drilled after July 1, 2013, from qualifying as stripper wells immediately, a loophole Carlson said needs to be addressed.

“Our stripper well tax policy is just plain bad tax policy,” Carlson said.

Carlson said SB2336 would ensure North Dakota has a competitive tax climate if other shale plays in the nation or around the globe take off.

Sen. Rich Wardner, R-Dickinson, said eliminating the triggers for drops in oil prices also is a solid step in the right direction. If the triggers kicked in, he said, it likely would take two years or longer for prices to climb high enough for them to go away again.

“By the time you get to the end of the two years, the major (oil) production is gone,” Wardner said.

Cook said the Legislature now has a clearer idea of the growth of production in the oil patch and now is the time to address tax issues.

“We know now what the Bakken is,” Cook said.

Sponsors of SB2336 along with Cook, Wardner and Carlson are Reps. Larry Bellew, R-Minot, David Drovdal, R-Arnegard, and Sen. David O’Connell, D-Lansford.

Reach Nick Smith at 250-8255 or 223-8482 or at nick.smith@bismarcktribune.com.