Reporter's Notebook: Amid oil-tax debate, there's talk of the 'lie' of an oil boom

2013-03-10T00:00:00Z 2013-03-10T06:53:04Z Reporter's Notebook: Amid oil-tax debate, there's talk of the 'lie' of an oil boomBy MIKE DENNISON Gazette State Bureau The Billings Gazette
March 10, 2013 12:00 am  • 

HELENA — In last week’s hearing on a bill to raise Montana’s minuscule production tax on new oil-and-gas wells to help pay for impacts from booming oil development, we heard this statement: “There is no oil boom in Eastern Montana.”

In fact, the lobbyist who said those words in opposing the bill went so far as to call the notion of an oil boom in Eastern Montana “a lie.”

Oil-industry lobbyists, who came out strong against the bill, said essentially the same thing.

Say what? The oil boom in Montana is “a lie,” when you can barely find a motel room in Eastern Montana towns like Sidney, Bainville and Glendive, and their sewer-and-water systems are at capacity, and their police are logging hours and hours of overtime – all in response to the flood of oil-and-gas workers coming here to work and live?

Well, yes, say the industry and its supporters – and here’s what they meant in making that claim: The growing pains felt now by Eastern Montana’s communities are caused primarily by the drilling and exploration boom in North Dakota’s Williston Basin, spilling across the border into Montana.

Actual oil drilling and exploration in Montana is a fraction of what’s happening in North Dakota, they say, and raising the production tax on those wells will make drilling in geologically-challenged Montana even less attractive.

“Raising our taxes on oil wells and making it less economic and more difficult to drill in Montana doesn’t address the cause of the impact,” said Dave Galt, executive director of the Montana Petroleum Association.

So, are the oil industry boys shooting straight here? Or is the industry cooking up an argument to justify a generous tax break, and foist the cost of development impacts onto someone else?

To attempt to answer that question, it helps to look at the tax facts, the bills in question and who’s paying or going to pay for the very real impacts from the North Dakota-Montana oil boom.

In Montana, if you drill a new oil-and-gas well and hit pay dirt, you pay next to no tax on the first 12-18 months of production — only 0.76 percent on the value of oil or natural gas coming out of that well.

It’s been this way for almost two decades. This low rate is for the first 12 months of production on all wells and 18 months on horizontally drilled wells. After this tax “holiday” expires, the rate goes up to about 9 percent.

Half of the oil-and-gas production tax revenue goes to the state treasury; the other half is distributed to counties and school districts where the production occurred. Cities in oil-producing areas get virtually none of it.

The Legislature enacted this low rate in the mid-1990s to encourage oil-and-gas exploration in Montana. But things didn’t really take off until a decade later, when horizontal drilling and “fracking” helped discover the now huge oil plays in Eastern Montana and North Dakota. It also didn’t hurt to have escalating market prices for both oil and gas.

Oil-and-gas exploration peaked in Montana in 2006 and has been declining slightly ever since. The real boom has shifted to North Dakota, which has almost 15 times the number of drilling rigs. North Dakota also has a higher production tax than Montana, at 5 percent on the gross value of oil.

The bill heard last week, from Sen. Christine Kaufmann, D-Helena, would set the rate at 9 percent for all production from Montana wells and use money generated by this change to help Montana towns pay for impacts they’re seeing from the boom that’s mostly in North Dakota, but that is very much affecting them.

Kaufmann argued that Montana’s tax break is no longer needed and that the oil industry should help pay for impacts from the boom, which is generating huge profits for the companies.

Like it or not, Kaufmann’s bill isn’t going to pass. The Republican-controlled Montana Legislature is not going to raise taxes on the oil industry. In fact, officials from some of the towns that would receive the higher revenue don’t even support the higher tax.

Sidney Mayor Bret Smelser told me last week he used to favor getting rid of the “tax holiday” on new oil wells in Montana, but that he’s become convinced that Montana wells are less profitable because they’re on the edge of the Bakken formation, and therefore the low tax is a needed incentive.

Still, Smelser says towns like Sidney still need some big-time help dealing with the impacts — and it appears this Legislature will pass something to provide it. That “something” likely will take the money straight from Montana’s general treasury.

The oil industry argues it has paid plenty into Montana’s treasury in recent years. How much? In fiscal 2012, oil and gas production taxes paid about $100 million into the state treasury – 6 percent of the treasury’s total revenue that year. Individual income taxes make up the biggest amount, at 50 percent.

The industry also says it’s helped generate the substantial increase in state income taxes that also flow into the state’s general fund.

Some in the industry also have helped pay directly for the impacts they’re causing in Eastern Montana towns. In Bainville, for example, oil service companies are paying the entire bill to expand the small town’s sewer-and-water system to service a new “man camp” that will house 300-400 workers.

Is the industry paying its fair share for the cost of local impacts, while it reaps generous profits? They appear to think so. At last week’s hearing on the Kaufmann bill, Sen. Sue Malek of Missoula asked an oil company lobbyist if there was a middle ground on the initial tax rate, somewhere between 0.76 percent and 9 percent? The answer: No. We like it the way it is.

Industry lobbyists said it costs anywhere from $8 million to $12 million to drill a new well in Montana, and the payoff potential is less because of the geology, and the lower tax can make the difference between deciding to explore or not.

“If you want to change that (tax rate), it’s going to have an impact on what we do,” said Galt, the oil industry spokesman. “I’ve never said we won’t drill here. I’m just saying it will change the economics.”

Kaufmann, for her part, says she just doesn’t buy the argument that the lower tax makes or breaks a decision to drill. She also doesn’t think it’s accurate to say oil-and-gas is the main driver of Montana’s budget surplus.

“Part of the reason we have a large ending-fund balance (in the state treasury) is because we have skimped on essential programs, like education and health care,” she says. “It’s there for all sorts of reasons.”

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