Schafer Column: Raising The Cost Of Oil Production In North Dakota Is A Bad Idea

oil pump sunset

I always find it interesting how Republican Senators can figure out ways to raise revenues when we have a huge surplus and don’t need the dough. Case in point, state Senator Dwight Cook’s proposal for oil tax reform.

Here are some thoughts:

The E&P companies will be required to withhold income taxes for royalty owners in an effort to raise $4 million. This is not a real number, just a cash flow issue as those awful out of state folks eventually pay the tax even if it isn’t withheld. Also, if an operator has to do the withholding, reporting and distribution of the money, that doesn’t come for free so we will be raising the costs of doing business in North Dakota.

The stripper well issues do need to be corrected, but why do it in a way that raises revenues? It can be done at a revenue neutral level, but Senator Cook talks about the need to raise $83 million of revenue from changing the threshold for stripper well status. Why? They certainly aren’t hurting for revenues this session.

The incentive for drilling outside the Bakken is not needed. If one would just track what is happening in ND, it is easy to see that the drilling activity outside the Bakken will increase. The Bakken is ending the discovery phase and entering the operating phase. This means the boundaries have been identified and we know where the oil is and isn’t.

As we move to operations, where are the next discoveries going to come from? There is a lot of leasing activity to the south and west of the Bakken in the Tyler formation areas and also in the southwestern part of the state in the Lodgepole formation. E&P companies are not leasing minerals to sit on them; they are planning on drilling holes. So the activity of mineral leases, capital formation and geological studies which leads to discovery outside of the Bakken is already happening. Providing “incentives” is not necessary, especially at the expense of raising taxes in the Bakken.

The $23mm net tax increase the Senator talks about is fuzzy math. That can only happen if the companies that are drilling in the Bakken move outside the boundaries to take advantage of an 18 month tax holiday. I am all for tax decreases as incentives to explore, but let’s not fudge the numbers to make it look like tax increases are somehow lowering costs to produce.

Continental Resources just completed a well over 4 miles deep to test the third bench of the Three Forks. It produced a nice flowing (1,000 BBL/day) well with the sweet crude that ND is known for. They are going to drill a dozen more this year to test the 2nd and 3rd and 4th benches of the Three Forks and will discover much more oil than previously thought existed in the formations under the Bakken.

Why not incent the companies to drill out that oil? The infrastructure is already in place, the roads are being built up, the collection tanks and pipes are already in place. More activity will lead to more collection pipes for natural gas so we can get a handle on the flaring, and there will be less traffic and less environmental impact since the pads are already in place and we just need to drill deeper.

Do we need incentives to move out of the Bakken? I think we will spend a bunch of money needlessly. The backers of this bill don’t understand the industry, can’t read the trends and are flailing around trying to look like they are actually doing something for the good of North Dakota.

Increasing the cost of doing business when it becomes less economically feasible to extract the oil in the ND geological formations doesn’t seem like a very smart way for us to go in my opinion.

Ed Schafer is the former Governor of North Dakota and served as Secretary of Agriculture in the George W. Bush administration.

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  • Kevin Flanagan

    I miss Ed; when he was governor, the most I paid in state income taxes was 14% of what I paid in federal income taxes.

    • ec99

      Hey Kevin, remeber when the switch to a tax table was supposed to be revenue neutral? Guess they sold us all a bridge.

      • Kevin Flanagan

        I knew what they were up to, much to their annoyance. Now they have given me the weapons to beat them about head with. Numbers don’t lie.

  • Roy_Bean

    We just can’t get away from the tax-the-rich mentality. Even the Republicans are trying to run the whole state at the expense of the oil patch. Barry O has dragged the country so far to the left that it doesn’t even seem wrong.

  • borborygmi

    Status quo , sounds good to me.

    • Ed Schafer

      Hey Dallas! Maybe you should go back and read the news articles about the proposed tax simplification legislation. It INCREASES taxes to the oil industry, where do you get the $500mm in savings? Great idea on taxpayers getting some money back from oil revenues. I am pleased that North Dakota has the Legacy Fund in which we are collecting revenues just like Alaska. Hopefully we will find ways to get that money to the people if Legislators don’t figure out how to move the money into the budget! And I sure hope some day I see the millions from the oil industry you mention! That would be great!

      • somebodysomewhere

        High Five, Ed!

  • Dallas

    This is a joke. The bill in question was written by the oil industry and now we have the former governor, who’s being paid millions by the same industry, complaining about it. It’s a phony argument to make us think they’re going to get hurt, when in fact, if Mr. Cook’s bill passes, the industry will save about $500 million a year. .
    The President of Whiting oil recently said in a televisiion interview that his company makes good money in ND at $30 a barrel. Oil now sells for near $100 a barrel and you don’t think they shiould pay for schools, roads and law enforcement? Get real

    Maybe the taxes should in fact be raised. Hey, everyone in Alaska gets a check because of oil revenue. If it’s good enough for Sarah Palin, good enough for us.

    • Rob

      You clearly don’t understand the situation in Alaska. The oil development is on state land. The development here is on private.

  • ec99

    One certainty about elected officials at all levels of government is that their is never enough revenue nor spending.

  • John_Wayne_American

    The wanting to expand outside the Bakken formation is a head scratcher.. why? does some legislator have mineral rights in Mott or New Salem? Why spread the mess out over a bigger area? if everything was developed collection lines etc. and things were stagnating then incentivise more wildcatting, till then finish whats on your plate before you ask for a second helping.

    • ec99

      You cannot be suggesting that a member of our citizen legislature would ever act out of self-interest, can you?

  • Dallas

    Ed: You wear a suit nicely. However, you didn’t write the first piece and you can’t add.
    Before it became public you were feeding at the indusgtry trough, you were touring the state in a big bus trying to sell this BS. You claimed then the industry wasn’t paying you. Get real.

    • Rob

      This isn’t the same as the fix the tax proposal. The overall outcome here is more taxes on oil.

      The state doesn’t need the revenues.

    • Ed Schafer

      Oh Dear Dallas. I don’t even know what you are talking about with first pieces and adding. You should be pleased that I don’t support tax breaks for oil companies drilling outside of the Bakken. I don’t think it is a good use of taxpayers’ money. As for the “Fix the Tax” effort, I was contacted by an organization to be the spokesperson for a tax simplification effort, which it seems, we are still talking about. The only oil company that I know of who wrote There certainly may have been other oil companies who contributed to the effort, but why wouldn’t they? Everyone supports lower taxes. Didn’t you vote to eliminate property taxes? Think what you will, but hopefully we can keep the best interests of the people of North Dakota in the forefront!

  • Mike

    Greed is easier to practice than frugality.

  • Lynn Bergman

    Respectfully, the bill calls for reducing the taxes from 11.5% to 9.5%. Governor, the industry is going to have to take the distasteful with the delicious. Please quietly accept the reduction from 11.5% to 9.5%… or it can go away in a heartbeat.
    We all have to ask ourselves, are we selfless conservatives or selfish conservatives? The answer, of course is somewhere in between for most of us… so we can improve on the selfless portion.

    • Ed Schafer

      Good point Lynn. Let’s not loose sight of the objective which is to promote a more competitive tax structure for our state! E

    • Rob

      I don’t think the good parts necessarily outweigh the bad.

      The case to lower and simplify the extraction tax is self evident and shouldn’t have to be bundled with a bunch of tax hikes.

  • Lianne

    Mr. Shaefer, are you working with Senator Cook or others to tweak this bill into one that is the best for the oil companies and our state? I look at the amount of tax generated by oil and I cringe. I understand the need for infrastructure, both new and rebuilt, but i don’t believe that the entire state should live off the oil companies. I certainly am no expert on the intricacies of this complex system, but at the same time I am for the least amount of tax needed to maintain roads, etc. That should be the goal.

  • awfulorv

    Speaking of flailing around, how’s that fish farm coming along?

    • Ed Schafer

      Sold the fish farm in 1997 and paid all the bills!