Headwaters Economics is an independent, non-profit research group based in Bozeman, MT. Their mission is to improve community development and land management decisions in the West. Headwaters blends innovative research techniques and extensive on-the-ground experience working with a range of partners across the West for more than 20 years. Here is Mark’s posting…
Headwaters Economics is using data from geoLOGIC Data Center and assistance from VISAGE to examine how US States differ in the amount and timing of tax collections on unconventional oil.
The current oil boom has brought extensive changes to the rural, sparsely populated region of western North Dakota. Despite the benefits of jobs, tax revenue, and royalties, many communities are feeling overwhelmed by the rush of rigs and workers from out of state.
Worries that current policy may not be making the most of this exceptional opportunity have prompted discussions in the North Dakota state legislature about how changes to tax policy could help the state and communities better manage the boom.
Applying data and assistance from VISAGE and geoLOGIC Data Center, Headwaters Economics has analyzed how North Dakota, Colorado, Montana, and Wyoming approach the collection and distribution of energy revenue in the context of the unconventional oil boom. The goal of the research is to provide decision makers in each state with good information upon which to make better decisions.
The following figure shows the type curve for an average Bakken horizontal oil well which produced 157,222 barrels of oil over the first 36 months of production, peaking at an average daily rate of 372 barrels in the second month and declining to a low of 78 barrels per day in the thirty-sixth month (Figure 1: VISAGE calculated the calendar day average oil production type curve based on North Dakota, single leg horizontal oil wells producing from the Mbakken stratigraphic unit)
Using a price of 98 per barrel , an average well will produce $15.4 million in cumulative production value in 36 months, peaking at $1.1 million in revenue in the second month and declining to $233,142 thousand in revenue in month 36.
We used this average well profile to illustrate the performance of four Western U.S. state’s tax structure. We compare the types of taxes levied, the effective tax rate, and the timing of tax collections relative to production.
Ensuring that revenue is available in the place, time, and amount needed will enable state and local governments to best facilitate and manage drilling and production activities. The following two figures show that relative to Montana, North Dakota captures tax revenue early in the drilling and initial production phase. In North Dakota, a sales tax recognizes revenue from drilling and support services, and two production taxes levied monthly ensure a short lag between production and revenue collections. North Dakota’s average effective tax rate is higher over the first 36 months of production at 9.9 percent ($1.5 million in cumulative tax revenue) compared to Montana’s average effective tax rate of 4.6 percent ($716,254 in cumulative tax revenue) over the same period.
Montana has no sales tax on drilling and support services, and grants an 18-month holiday on production from new horizontal wells, delaying significant revenue collection from new production for nearly two years from when impacts and infrastructure and services occur during the drilling phase.
Even with its comparative advantage in capturing more tax revenue more quickly from oil wells, North Dakota is experiencing difficulties in keeping pace with service and infrastructure needs. Montana, which collects less tax revenue in a less timely way than its neighbour, may have even greater difficulties responding to impacts of oil development when rigs eventually cross the border.
The click here for the full report which includes comparative data for Colorado and Wyoming, and additional analyses of how each of the four states tax unconventional oil and distribute the proceeds between state and local governments.