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

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.