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ND lawmakers expect oil price trigger to cost state up to $200 million

BISMARCK - Senate Minority Leader Mac Schneider, D-Grand Forks, called it "somewhat of a foregone conclusion." Republican Sen. Lonnie Laffen, also from Grand Forks, said it's "a done deal."...

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BISMARCK – Senate Minority Leader Mac Schneider, D-Grand Forks, called it “somewhat of a foregone conclusion.” Republican Sen. Lonnie Laffen, also from Grand Forks, said it’s “a done deal.”

North Dakota lawmakers say they fully expect depressed oil prices to trigger a tax exemption Feb. 1 for newly drilled oil wells. Budget analysts estimated it would cause the state to miss out on an estimated $120 million to $205 million in revenue through June, compared with the latest revenue projection.

But lawmakers are far more concerned about the “large trigger” exemption that could mean billions rather than millions in uncollected oil extraction taxes.

“That’s a lot of money, but it’s not a major impact,” Rep. Jeff Delzer, R-Underwood, chairman of the House Appropriations Committee, said of the small trigger. “It’s not anything like the impact the big trigger could have.”


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The small trigger

 

The small trigger is pulled when the price of West Texas Intermediate crude set at Cushing, Okla., averages less than $55 a barrel for a single calendar month. The WTI price hovered at about $49 Thursday afternoon and hasn’t seen $55 since Christmas.

Once triggered, the exemption reduces the oil extraction tax from 6.5 percent to 2 percent on the first 75,000 barrels produced or the first $4.5 million of gross value during the first 18 months after completion. It applies only to new wells completed after the incentive is triggered, state budget analyst Kathy Strombeck said.

The tax commissioner’s office estimates the impact at $170,000 per well, based on 75,000 barrels at a price of $50 a barrel and a tax rate savings of 4.5 percent.

The effect would be $120 million in lost tax revenue if the exemption was in effect from February to June, assuming 650 wells now waiting for completion are finished. The exemption could cost the state another $85 million if 100 new wells are completed each month from February to June 30, when the incentive is set to expire in state law. (The exemption also would end if the WTI price averaged $72.50 or more for a single month.)

Delzer said the small trigger could have a greater impact if lawmakers decide to extend the incentive, a possibility raised during Thursday’s committee meeting.


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The large trigger

 

The large trigger is hit when the WTI price averages less than $52.59 for five consecutive months.

The exemption drops the extraction tax rate to 0 percent for all wells during their first two years of production, even if they’re drilled prior to the incentive kicking in. The rate drops to 4 percent on most older wells.

Strombeck said the exemption could take effect in June at the earliest, first impacting revenues in July.

If the exemption stayed on through the entire 2015-17 biennium, total oil and gas tax revenue collections would total about $2.7 billion at a production rate of 1.22 million to 1.4 million barrels per day at a price of $44 to $52 a barrel, according to preliminary estimates by the North Dakota Legislative Council.

 

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