BISMARCK-Barring a substantial drop in crude prices before the end of May, North Dakota’s oil industry probably won’t see a tax cut potentially worth almost half a billion dollars over the next six months, the state’s tax commissioner said Tuesday.
The so-called “large trigger” exemption will take effect June 1 if the price of West Texas Intermediate crude oil at Cushing, Okla., averages below $55.09 a barrel for a fifth consecutive month in May.
But the average price so far this month was $59.46 at the close of markets Monday. To trigger the exemption, the WTI price would have to average below $52.65 for the rest of the month, state Tax Commissioner Ryan Rauschenberger said.
The WTI price was hovering around $61 a barrel Tuesday afternoon. The longer it stays above the trigger price, the lower prices must dip for the rest of the month to hit the trigger, he said.
“So, at this point, it looks like we probably won’t,” he said.
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North Dakota Petroleum Council President Ron Ness said operators “are realizing it’s not going to hit,” and some who were waiting for the exemption to complete wells will likely put them off until 2016.
The state had an estimated 900 wells waiting on completion services at the end of February, according to the Department of Mineral Resources. An updated figure is due out today.
“I think most of those are going to sit,” Ness said.
The trigger lowers the state’s extraction tax from 6.5 percent to 4 percent for existing wells and exempts new wells entirely for 24 months.
Last month, Republicans pushed a delayed bill through the Legislature that will eliminate the trigger on Dec. 1 and permanently cut the extraction tax to 5 percent on Jan. 1.
The state also has a 5 percent oil gross production tax, so the overall oil tax rate will drop from 11.5 percent to 10 percent next year, unless prices average above $90 a barrel for three consecutive months, in which case it would be 11 percent.
If crude prices slip this month and the trigger takes effect on June 1, it will be in place for at least five months and possibly six, through the end of November. Once the trigger engages, prices must average above $55.09 for five consecutive months for the exemption to end.
If the trigger doesn’t take effect, the industry will pay roughly $80 million per month more in extraction taxes, which could amount to $480 million over six months, or more if crude prices climb, Rauschenberger said. Extraction tax revenue flows into several state funds, some of which pay for property tax relief and water, road and other infrastructure projects.
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Ness said the exemption “would have been a big stimulus this year.”
“You’ve got a lot of companies out there with employees and labor. They’ve been trying to keep them on with reduced hours. And so we’re going to see now in June and July what they do,” he said.
Eugene Graner, president of the Bismarck-based brokerage firm Heartland Investor Services Inc., links the drop in oil prices to a rise in the value of the U.S. dollar. With the summer travel season approaching, he said he believes the WTI price will peak in May and June, and he doesn’t expect sustained prices to exceed $65 a barrel through 2016 and possibly 2017.
“This is not a blip,” he said Tuesday, speaking to a few dozen people at the North Dakota Republican Party’s monthly luncheon in Bismarck. “We are only 10 months into what is likely a three-year cycle.”
