Report: Low federal royalties on oil, gas costing Montana, Western states

2013-06-20T07:32:00Z 2013-06-21T00:36:09Z Report: Low federal royalties on oil, gas costing Montana, Western statesBy TOM LUTEY tlutey@billingsgazette.com The Billings Gazette

Taxpayers are being sold short on royalties from oil and gas drilling on federal lands, according to a report to be released Thursday.

The report by the Center for Western Priorities faults the federal government for not increasing its 12.5 percent federal royalty rate on oil and gas production. Unchanged since the 1920s, the rate is lower than Western state royalty rates.

Mirroring state rates in the Rocky Mountain West would have generated an additional $800 million to $1.2 billion in revenue last year, according to the center’s economic analysis. Half of that revenue would have gone to states where the oil and gas activity took place. Montana’s share would have been $5.7 million to $8.6 million.

“There’s lots of different things this money could be used for,” said Trevor Kincaid, Center for Western Priorities executive director.

CWP doesn’t advocate for spending increased federal royalty revenue a particular way but does suggest that reducing the national debt or addressing the impacts of oil and gas development on affected communities would be possibilities.

Montana’s royalty rate is 16.67 percent, the same rate used by Wyoming, Utah and Colorado. What’s interesting, Kincaid said, is that having a lower royalty rate than neighboring North Dakota’s 18.75 percent doesn’t appear advantageous for Montana.

At any government level, increasing the taxpayer’s share of the oil and gas revenue is difficult.

“It does seem like the federal government is, along with the states, getting shortchanged here,” said Walter Archer, of the Western Organization of Resource Councils. “The prices of these nonrenewable resources continues to increase. Seems like maybe the states and federal governments should both be getting a bigger share of that.”

Archer and others lobbied the Montana Legislature to raise the production tax on oil and gas earlier this year on the grounds that state revenue from oil and gas wasn’t keeping up with the basic costs of affected communities and wasn’t enough to offset environmental impacts.

The Montana Legislature earlier this year soundly rejected an attempt to set the state’s oil and gas production tax at 9 percent for all wells. Money from the tax was to help oil boom communities cover rapidly increasing infrastructure and law enforcement costs.

Oil lobbyists balked at the increase, saying that Montana’s oil plays weren’t as productive as North Dakota's. Lower tax rates are necessary to make drilling in Montana worthwhile.

However, federal and state taxes on oil and gas are low and not likely to drive drillers away, said Mark Haggerty, of Bozeman-based Headwaters Economics.

If the return on investment in North Dakota is 40 percent while the return in Montana is 30 percent, oil producers aren’t likely to pass on Montana crude, Haggerty said.

“At least at the state level, we know the difference in severance tax is not an important factor in whether any play gets developed,” Haggerty said.

Oil boom communities do need help covering the infrastructure costs associated with oil development, Haggerty said. Montana communities along the North Dakota state line have been hammered by the demands of the oil economy, but have yet to see the revenue needed to repair roads, expand sewer plants and hire police. Most of the oil development is in North Dakota, where revenue won’t be spent on Treasure State wear and tear.

Federal royalties could help with those community infrastructure costs, perhaps by creating a fund to address infrastructure needs during the early stages of an oil boom, when the community burden is heavy, but government revenues from oil and gas production are light, Haggerty said.

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