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Oil boom: Proposal could complicate ambitious budget

The final days of the last session of the North Dakota Legislature were filled with drama over the price of oil.

Mere pennies could have meant the difference of millions of dollars available for state coffers under a complex tax formula.

Now, two years later, the oil and gas industry will be asking legislators to revamp the oil extraction tax, an important source of funding for water projects and education.

The proposal, backed by the North Dakota Petroleum Council, is billed as a way to simplify and stabilize the tax -- but officials warn that it also likely would reduce tax collections.

That could complicate Gov. Jack Dalrymple's ambitious budget proposals for 2011-13, which include setting aside $958 billion for Oil Patch infrastructure improvements, among other big ticket items.

"Let's create a fair, predictable and flat rate," said Ron Ness, president of the North Dakota Petroleum Council, which represents the industry.

North Dakota's taxation of oil combines a 5 percent production tax with a 6.5 percent extraction tax, a total of 11.5 percent.

The proposal, which hasn't been put forward yet in detail, calls for eliminating complicated price "triggers" and adopting a flat rate below the current 11.5 percent total for new wells.

"Our tentative number is about 9.25 percent," Ness said, adding that the current rate would apply to existing wells.

Selecting what he calls a mid-range rate would strike a tradeoff that would benefit both the state and industry by making the tax more predictable and more stable, Ness said.

Also, he added, rising production should offset any hit to state revenues from a lower rate.

"The issue is our production continues to grow," Ness said. Daily oil production, which was 236,176 barrels in January, is expected to be around 350,000 barrels at the end of the year, and is forecast to reach 425,000 by June 2013.

Also, for the coming two-year budget, forecasts call for oil prices, hovering last week around $90 a barrel, to exceed $100 a barrel by 2012.

Moody's Analytics, the state's economic forecaster, expects oil prices to remain above $70 a barrel over the next two years.

"We don't know any details of the (industry) proposal," Dalrymple said. "Our budget is built on our existing oil and gas tax structure."

The proposal will require careful study to determine whether it would cause revenue problems for state budgeting, the governor said.

If the proposal resulted in reduced revenues for the 2011-13 budget, "That would be a problem," Dalrymple said.

Legislators also will give the proposal close scrutiny.

"I think the oil industry makes a great case that the oil tax structure needs to have simplicity and predictability," said Sen. Ray Holmberg, R-Grand Forks, chairman of the Senate Appropriations Committee.

"But I am not convinced there will be a large reduction in those taxes because that revenue is going to be counted upon to handle the real infrastructure needs, especially in the West."

Tax Commissioner Cory Fong, who also awaits details on the proposal, said it likely would not be "revenue neutral," -- but would reduce revenues.

Still, he agreed that an oil extraction tax with greater simplicity and stability would be an advantage for the state, but said the loss of revenue could strain the state budget in the short term.

Once the legislation is filed, his office will work on a fiscal note analyzing the budgetary impact. A key variable will be the price of oil. If current predictions hold, strong prices mean triggers now in place to grant lower extraction taxes in the event of chronic low prices wouldn't apply.

"It's going to have some cost in the short term," Fong said. "Long term the state could see some benefit."

The oil and gas industry could invest more in the state if its costs are more predictable, Fong added. "The word I hear more often than anything else is certainty, certainty, certainty," he said.

Springer is a reporter for the Fargo Forum and Chuck Haga, who contributed to this story, writes for the Grand Forks Herald, both are owned by Forum Communications Co.