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Nix The Fix PDF Print E-mail
Written by Chet   

flat-earth-society

[Updates in RED.]

As entertaining as it has been to watch some in the media being suckered by former governor Ed Schafer as he goes around the state trying to “fish-farm” our oil extraction tax rates with his heavily moola’d  Minneapolis headquartered “FixTheTax”  fake grassroots bus tour, we here at NorthDecoder.com thought perhaps a factual discussion of oil extraction tax policy would be a nice change of pace.

So far, Schafer’s strategy can be reduced to: 1) Omit mountains of important facts; 2) Take things out of context; 3) Flat out make shit stuff up; 4)  Advocate by misleading sloganeering bolstered by Schafer’s  fake grassroots website; a SayNothing site we won’t name; (Hint: There is a pending copyright lawsuit against it.) and the Hennen wing-nut radio, online and print networks, all of which are subsidized by big oil.)p

The bait was switched last week from Schafer to House Majority Leader Al Carlson when he appeared with a room full of oil lobbyists at a Senate committee seeking to add an amendment that reduces extraction tax rates to some bill the committee was hearing that day. Weeks ago we predicted this trick would be employed.  Not to say "we told you so," but... We told you so.

Al and Ed’s timing for this amendment is by design, and has a lot to do with how they know the media works. Or doesn't work. By not putting in a standalone bill to start with they avoid public hearings, thus public scrutiny. Then, by waiting until the hearing to show people the amendment the oil lobbyists have been preparing for weeks or months, they get to frame the media coverage of the transition from the fake grassroots bus tour to a one-sided policy proposal. Both of these experienced political operatives know full well our media doesn’t often investigate too much  Instead, our media often reports “this side said this” and “that side says that” - end of story. (If the issue is whether the world is flat or not, our media will get some quotes from someone who says the world is flat, and another from someone who says its round. In other words, the story the public reads won’t be about some crazy nuts that claim the world is flat despite all the evidence – just he said she said.)

A house majority leader can manipulate the process and media so the “world is round” camp can’t make their case and screw up the story the oil lobbyists want the public to get. What the ”world is flat” crowd wants, and got, was a storyline:

“North Dakota has the highest oil extraction tax rate in the lower 48 states, and some legislators want it lowered to keep oil companies from leaving the state”.  The democratic leaders said: “We haven’t had a chance to read the amendment” .

Our intellectually lazy mainstream media complicitely parrots this b.s. as if it's fact. See, for example, this TV "news" story at the KXNet website.

These games leave the public with the assumption that we have an unfair, confiscatory tax rate that will cause us pain if not addressed – and Al and Ed are good Samaritans trying to relieve our pain. When you manipulate the media, first with the bus tour and now this sneaky amendment, you’re hoping that the “other guys” don’t have a forum to present “facts” that show the public is being mislead.

The Fighting Sioux nickname bill had public hearings in both the House and Senate. By comparison, the single most important fiscal policy issue by far this session, one that impacts the tax rates the public pays with other (for example, property)in taxes, along with the future economic health of our state, is treated as an amendment to a bill and offered in such a way that only oil lobbyists know what is going on.

Since Al Carlson doesn’t seem to give value (or time) to facts and opinions that don’t come from oil lobbyists, we here at NorthDecoder.com will give voice to some of that information. But first, I would like to announce that we are taking up a collection so we can help fund the purchase of a new “Internets” invention called “google”, because apparently many in the North Dakota media haven’t heard of it.

False Impression number one -  “North Dakota has the highest oil extraction tax in the lower 48 states”.

The grand poobah of the "FixTheTax" message repeated directly and by surrogates over and over again until it’s now engrained in the media is that at 11.5% North Dakota has the highest extraction tax outside of Alaska. I decided to see if that was true by some simple google’n.   (Note to reporters:  If your PC has the “google” with some browsers you can find it on the top of your home page where it says “google”.)

Turns out, North Dakota is far from being out of line with its extraction tax rate. We’re going to have to get into the weeds on this because it’s complex, which is one reason oil lobbyists have been taking advantage of the public on this – nobody else understands this stuff very well. (And I am not going to claim expert status by doing google searches, but some things being said are easily exposed as false.)

Here’s the deal:  When people say our extraction tax is 11.5% they are talking about the combination of our production tax of 5% and our extraction tax of 6.5%. (Caveat 1:  The 11.5% is a “paper” rate.  Numerous exemptions and loopholes make the effective rate lower. For example, low producing “stripper wells” don’t pay taxes or have reduced rates. And new wells, the time when a well produces exponentially more oil, get a lengthy lower rate before the 11.5% applies.  For an overview of our production and extraction tax rates and exemptions click here

For purposes of the FixTheTax fraud on the public thing going on, here’s how the media is being used as a tool to dupe the public. Our extraction tax rate of 6.5% is actually below many if not most oil producing states. It’s only when you combine both our extraction tax and production tax and call it all (the 11.5%) an “extraction tax” do our rates look high.

You’re say’n, “Chet, that’s semantics, on paper if oil companies have to pay 11.5% then it doesn’t matter if someone just calls it all an extraction tax.” Point taken, but here’s the deal: most other states have more than one tax on oil extraction also, and that’s never mentioned by the FixTheTax propaganda machine.  Again, they combine the two taxes for ND, but then compare our combined rates to isolated taxes in other states and ignore other taxes on extraction those other states have which misleads the public into thinking our rates are higher. (ND – production tax (5%) + extraction (6.5%) = 11.5%. FixThe Tax then compares 11.5% to say WY’s 6% extraction tax to make the claim ND is way higher than WY.   But they fail to add in the 5.5-7.0% local property tax on extraction WY also levies, making their total tax on extraction 11.5-13%.)

Let’s use some examples:

Louisiana -  The Louisiana Oil and Gas Association breaks down that states extraction taxes like this for oil:

12.5 % - Full Rate Oil/Condensate
6.25% - Incapable Oil
3.125% - Stripper Oil Rate
3.125% - Reclaimed Oil

LOGA.la

In addition, local governments in LA levy property taxes on oil wells at a current rate of 40% of the well's value, which includes the value of well pipes drilled vertically but not horizontally.  (Source)  

So, when Ed Schafer says ND has the “highest extraction tax outside of Alaska” at 11.5% he must have missed LA, (and a bunch of other states by the way) and also seemingly forgot about other states property taxes, where in ND oil wells are exempted for property taxes.

Montana -  You’ve probably heard the FixTheTax line about the Bakken is also under Montana and they have an extraction tax rate of 9.5% which makes ND uncompetitive.   Mt’s extraction oil taxes are actually broken down between “working interests” (oil companies) who pay a percentage of production, and royalty owners that pay 14.80%, much higher than ND.   (Source)

What’s funny about making Montana comparisons and claiming ND has to compete with them  for tax rates is that in Montana they’re bitch’n amongst themselves that they can’t compete with ND.

Alaska & Wyoming -  These states seem to get mentioned a lot in this debate so let’s look at them.   Wyoming has a 6% extraction tax plus a county ad valorem tax (a local tax like a property tax that taxes the value of the minerals at the well-head). When adding the extraction and ad valorem tax together Wyoming’s total  extraction tax ranges from 11.5% to 13%. Again, how the FixTheTax crusade plays this is they say ND has an extraction tax of 11.5%  compared to Wyoming’s 6%.  They add our extraction and production taxes together to make it appear high, then they compare our combined rate of 11.5% to only part of others state’s rates to support their argument we need a tax-fix. Tricky isn’t it?  This stuff is clearly too hard for anybody in North Dakota's mainstream media to figure out.

Alaska is worth mentioning also. They have an extraction tax of 25% and some in the FixTheTax crowd are saying that Alaska’s tax rate is lowering their production. Actually that isn’t  true either. A couple years ago their rate was 22.5% and they raised it to 25%. Since then their new rig count has increase from 142 a year to 158 a year. The oil in the Alaska pipeline is less than before the new tax rate went on, but that is because a monopoly controls access to the pipeline and independent well drillers get charged high tariffs by the monopoly to use the it. One independent oil company called Great Bear has applied to put 1 million barrels a day into the Alaskan pipeline which now carries 600,000 barrels a day. So the production is there despite the new tax rate and claims of our FIxTheTax crowd.  (One could argue Alaska should use some of its oil tax revenue to build itself a state-owned pipeline to get production going.)

One final point about Alaska and Wyoming. In those states the federal government owns approximately 60% of the mineral interests. On those federally owned mineral tracts Wyoming takes approximately 55% of the mineral value, and Alaska tales 60%.    When comparing ND to these states the FixTheTax story line also seems to forget that other states have much larger stakes in the minerals themselves – thus there total take from minerals per well can dwarf what ND takes. I am going to suggest reading this article about AK and WY (click here) because it has great background on oil taxes in general and I believe the stats cited are accurate and seem to match what I have seen in official reports.

Another item that policymakers should read is titled State Tax Policy and Oil Production: The Role of the Severance Tax and Credits for Drilling Expenses.  This intense academic review of the issue gets sort of math-wonky, but important things are said in the narratives. Particularly, from their “Overview of State Taxation of the U.S. Oil Industry” starting on page 6:

Key taxes on nonrenewable resource development levied by state and local governments can be divided into three main groups: taxes on production, property and income. (See Ed, you can’t just take one out of context, you have to look at them all combined and not just combine them in ND to make us look bad.)

In its simplest form, the production or severance tax is levied on the gross value (or volume) of production of the resource as it is ―severed from the ground. The severance tax is the most widely adopted state tax specifically applying to the U.S. oil industry and will receive the most attention in the discussion below. State and local governments also levy property taxes on the assessed (quasi market) value of equipment above ground and/or reserves beneath the ground.  (Except, Al and Ed, in ND we have no property taxes on wells or minerals like other states do in addition to their extraction taxes.)…

…..Nominal severance tax rates varied widely across states as well. All states except California levied a severance tax against the value of production. As mentioned in Section 1, California now is considering whether to adopt such a tax. In Alaska and Montana nominal tax rates can exceed 10%....Severance taxes are generally levied against the ―net value of production, where each state has its own definition of this concept. Some states such as Wyoming tax the value of production at the well-head (i.e., the top of the well), while others like Utah tax the value of production at the well-foot (the bottom of the well), which in effect allows a deduction for lifting costs. Most states subtract royalty payments (computed as a percentage of gross value of production) for production on public land in computing net production value for determining severance tax liabilities (Louisiana does not). Public land royalties are relatively more important in Alaska, Colorado, New Mexico, Utah, and Wyoming than in other states due to their large shares of publicly owned land. State energy tax codes are subject to frequent changes as well: For instance, Alaska now allows producers to take a credit against severance tax liabilities for capital expenditures used in exploration and development…

…In New Mexico and North Dakota, the severance tax is actually the sum of two or more different levies on net production value. In Colorado, severance taxes are paid at graduated rates that depend on the gross income of operators, and in Alaska, Oklahoma, and Utah prevailing rates depend on the price of oil. In Colorado, Kansas, and Wyoming, local governments levy a substantial tax against the value of energy production. Although this tax is generally called a property tax by tax administrators, it is in effect a severance tax levied by local governments.

Many states have granted innumerable exemptions and credits against state severance tax liabilities for special situations that may be encountered by operators. Production from stripper wells (wells that produce less than 10 barrels per day), for example, is taxed at lower rates in some states than is production from better producing wells. Production from wells employing secondary or tertiary recovery methods is sometimes taxed at lower rates as well.

…While local governments in most states utilize some form of a property tax on oil and gas extraction equipment, property taxes on reserves are levied only in relatively few states such as California and Texas….(Ed, I haven’t seen you mention that “most” states, not ND however, also levy property taxes on wells.)

…State and local tax burdens on oil producers are endlessly compared in state tax commission and legislative hearings as industry representatives make their case for more favorable tax treatment. Yet, because of variations across states in the application of severance and other taxes, a comparison of nominal tax rates is not particularly useful. A judgment based on a comparison of nominal rates that one state‘s severance tax, for example, is higher than that in another state might easily be reversed once the potentially numerous exemptions, credits, incentives, deductibility, and other special features of tax law are accounted for. Instead, more meaningful comparisons across states can be obtained by computing effective tax rates expressed as the ratio of taxes collected from a particular tax to the value of production. The calculation of effective tax rates fully accounts for, without enumerating, state-specific aspects of tax treatment faced by producers and facilitates comparisons between states because the value of production is used as a common denominator. …(Ed, in the part I bolded, are they saying you shouldn’t make policy by comparing one state to another without considering all the taxes as a whole? Hint: Yes, they are, but you keep running the same con-game on our citizens like you did in your most recent letter to the editor.)

False impression number two – “If we don’t lower our extraction taxes the oil companies will pick up their ball and glove and go to other states”

First, as demonstrated above, there isn’t anything out of line about our extraction tax rate.   Second, I found during my search that this line about oil companies pulling out because of a tax rate is uniform, stock, tactical language that goes back decades.   When you hear it for the first time like many of us are, it’s concerning.   It becomes laughable when you see that it gets used over and over again every time a state tries to deal with their tax rates.   Oil companies have a well-worn file cabinet full of these arguments they pull out for their shills, like Schafer, when needed.    Probably the best of the many examples I found of this was from an energy company insiders’ interview when Colorado was considering raising their extraction tax a few years ago.  The article is titled: Raising severance taxes won’t deter oil and gas drilling, says expert :

TCI: Many say that increasing the severance tax will drive the oil and gas companies out of Colorado. Is this true?

MD: Oil and gas companies do not necessarily consider the tax rate a major factor when choosing where to drill and where to go for product. The case in point is that [Alaska Gov. and Republican vice presidential nominee] Sarah Palin raised the taxes to 25 percent in the state of Alaska, and there is nobody in the industry that doesn’t want to drill in the Arctic National Wildlife Refuge. That tells me these companies are willing to go there for product even though Alaska’s tax rate is the highest in the nation. Colorado is at the low end in terms of taxing oil and gas. If we were to raise our rates to bring us in line with Utah or Kansas, we would simply be in a comparable position to states around us. It is not going to deter oil and gas companies or make them go away. Because if they go to another place, such as Wyoming or New Mexico, they will be paying a higher tax rate.

TCI: Point taken. But some have argued that Colorado’s natural resources are difficult to extract, and so it’s unwise to unduly burden the oil and gas industries.

MD: It is not any less difficult to get the gas out of the ground in areas of southwest Wyoming or northern New Mexico, and yet the companies are still drilling in those areas. … The oil and gas companies all say the same thing: “If you do this, we will leave or go somewhere that is less taxing.” That is just not true. Oil and gas companies say the same thing in Wyoming. They tell people: “We are going to leave Wyoming because it is too expensive. We are going to go to Colorado instead.” But in Colorado they’re saying, “We are going to go to Wyoming because it is less complicated and less taxing there.”

TCI: Oil and gas companies are fighting Amendment 58 tooth and nail and have dropped $10 million into defeating the measure. What do you make of that?

MD: It is a threat to our state to say, “Look, we want to be able to not pay taxes on our income.” If any other industry said this, like if the veterinarians said, “If you don’t lower our taxes or leave us be, then we will leave,” I am not sure that they would get the traction that oil and gas does. … If Amendment 58 passes, the oil and gas companies will lose $300 million out of $10 billion in profits. We are talking not a significant amount, and it is shared among 465 companies and 5,000 or 6,000 mineral owners. Of course the top ones are going to pay the majority. The top five are BP, Nobel, EnCana, Williams and Pioneer, and they will fight the hardest against 58. The industry has always been very adamant about change. They believe if one state does it, the other states will jump in line, like, “If they raise it in Colorado, they will raise it in Wyoming.” They fought an increase in severance tax in California, and they beat it.

Colorado Independent 

The fear mongering Schafer and his FixTheTax cronies are doing is nothing new and a complete prepackaged fiction. Oil companies will stay in the Bakken even if we raised our tax rates substantially, like other states have. Why did that guy rob the bank? Because that’s where the money was. Why are oil companies jamming into the Bakken? Same reason; that’s where the money is.

False impression number three – “If we don’t lower our extraction tax oil companies will just drill the well and cap it to hold their lease and then go and drill and extract oil in other states that have lower tax rates”.

This argument is so transparently stupid I thought about not even addressing it.   We have record producing wells and record oil prices and oil companies are going to cap the well and go to some other state, which most likely doesn’t have lower tax rates than we do once you make proper comparisons?  Good one. The reason some wells might be drilled and capped is we don’t have any more infrastructure or workers to move any more oil. It has nothing to do with taxes.

Harold Hamm of Continental Resources, the state’s largest oil extraction company, isn’t getting all the oil he can out of the ground because of transportation and problems with flaring gases, not taxes:

“Continental has restricted initial production rates on a significant number of its Bakken wells to minimize natural gas flaring and in response to constraints in transportation capacity primarily related to periodic severe winter weather conditions”….”[With new technology] we expect the Bakken to drive our growth for many years”  

BakkenShale.net

Wait a minute, Hamm showed up at the Senate hearing last week with Al Carlson and testified that if we don’t reduce our extraction tax rates the black plaque will strike us.  He operates in multiple states, yet he’s saying in this investor piece I linked to that we are driving his growth under our current tax rates?  What gives?  (Note to reporters:  That google really is a wonderful thing.)  Our current extraction taxes don’t seem to be keeping Hamm from getting oil out of the ground after he drills the wells:

 

“The North Dakota portion of the Bakken, Continental's fourth quarter 2010 production was  17,834 Boepd, an increase of 113 percent over the total for the fourth quarter of 2009.  The Company participated in completing 77 gross (26.4 net) wells in the North Dakota Bakken  in the fourth quarter of 2010, with initial production rates averaging 1,002 Boepd during single-day test periods. During 2010 as a whole, the Company completed or participated in completing 222 gross (71.1 net) wells in the North Dakota Bakken, bringing its total wells drilled in this part of the play to 475 gross (150.2 net) wells at December 31, 2010.

Ulitzer.com

This independent stock analysts’ assessment of Continental stock is also instructive:

High Returns

Continental Resources estimates that its internal rate of return on wells drilled to the Bakken will range from 25% to 65%. The company uses a NYMEX oil price of $60 a barrel in the low case and $100 a barrel in the higher return scenario. The analysis also assumes a $6.5 million cost to drill and complete a well, and a EUR of 518,000 BOE. 

Continental Resources is also looking to cut costs and has developed a method to drill 8 wells from a single pad on a 1,280 acre spacing unit at a 10% cost reduction from normal drilling techniques. The method also reduces the surface disturbance, which is an advantage during a time when there is heightened sensitivity to environmental considerations.

Continental Resources has just reported the first completions under this development method. The four wells had an average initial production rate of approximately 1100 BOE per day.

Investopedia.com

What they’re saying here is under the worst case scenario Hamm’s company expects a 25% return on investment (profit) per well.   And, Hamm expects that to get better (more profits) because he will be reducing his expenses by 10% with some new drilling techniques.   The world-wide average rate of return for oil extraction is 30-33%. (WyomingReview.com) So, once Hamm saves 10% on expenses he will be at or above the world-average profits for oil extraction in the Bakken under the worst case scenario. But we’re being mislead into believing that our current tax rates are crimping Hamm’s lifestyle?

I wonder if you went out to a family farmer or rancher that has invested, say, $3 million in land and equipment in their operation and said: “Under the worst case scenario with your $3 million investment you will realize a 25% profit after taxes and expenses, is that a fair return?”  I am just guessing, but I doubt that farmer would be enlisting a former governor to circle the state in a bus making up all sorts of doom and gloom fables to make the public feel bad. I also doubt that farmer would think it proper to work with a bunch of lobbyists behind the scenes on an amendment that nobody besides the house majority leader gets to see and then craft a media duping strategy and try and tacked that amendment onto some other bill without public hearings - where somebody might contest some things being said.  

I am just say’n. 

I think farmers would have more respect for the people of North Dakota than Al Carlson, Ed Schafer, and Harold Hamm have and would at least realize that people other than oil lobbyists might have an interest in what happens in our state.   But that’s just me, I am probably off-base on this because I think the world is round.

[The Grand Forks Herald picked this up.  Nice to see someone in the mainstream media understands, at least, that it's not as easy as the ex-governor makes it out to be.]]


Comments (5)add comment

Marty said:

There Will Be Blood II
I liked Daniel Day Lewis's portrayal of Daniel Plainview so much more than Schafer's.
 
March 21, 2011
Votes: +2

Deal Mein said:

...
In 2007 Alaska raised the oil tax from 22.5 percent to 25 percent. In 2008 the state issued a one time "resource rebate" of $1,200 to eligible state residents, in addition to the annual dividend check ($2,069 in 2008 ) that residents receive as their part of the state’s oil wealth. www.factcheck.org/2009/12/sara...lishments/
 
March 21, 2011
Votes: +0

nimrod said:

Bought 'n paid fer
and, US production is high enough that it exceeds the capacity of refineries to process the crude and exceeds the existing storage capacity. Massive increases in oil storage units are being built in OK by the oil pipeline companies. Farmers - Ed is as credible as the Minneapolis Chamber of Commerce was in the 1920s - 30s.
 
March 21, 2011
Votes: +2

Chet said:

Some love...
Surprisingly, someone at the Grand Forks Herald read this and understood it. Kind of a shocker. (Click here to read.)

Now if the Bismarck Tribune could just hire someone smart enough to understand something half as complex as this issue.
 
March 23, 2011
Votes: +1

What the Heck said:

Kudos
Thanks, Chet for your dedication to fact finding and informing the public.
 
March 23, 2011
Votes: +2

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