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Published January 21, 2013, 02:22 PM

Exemption for oil wells costing state $50M a year

BISMARCK, N.D. (AP) — The oil industry is protesting a bill that closes a tax loophole that the state Tax Department says is costing North Dakota about $50 million in revenue each year.

By: JAMES MacPHERSON,Associated Press, Associated Press

BISMARCK, N.D. (AP) — The oil industry is protesting a bill that closes a tax loophole that the state Tax Department says is costing North Dakota about $50 million in revenue each year.

The exemption for so-called stripper wells was intended to keep low-volume wells producing in times of depressed prices, providing jobs and at least some tax revenue for the state. It also advanced technology in the oil patch over the past three decades by allowing companies to experiment with new drilling techniques.

But the law also excuses higher-producing wells from paying extraction taxes because they are near the weaker wells and drilling in the same oil pool.

Ron Ness, president of the North Dakota Petroleum Council, told the House Finance and Tax Committee on Monday that cutting the exemption amounts to a higher tax rate on oil companies. Already, tax analysts forecast that the state will collect more than $5 billion in oil and gas taxes over the next two years.

"The oil and gas industry is paying more than its fair share of taxes to North Dakota," said Ness, whose group represents more than 400 companies working in the state's oil patch. "This bill represents a tax increase."

Stripper wells are broadly defined in North Dakota as those that produce fewer than 30 barrels of crude daily.

Those wells are exempt from the state's 6.5 percent extraction tax, but not a 5 percent production tax. Voters approved exempting stripper wells from the extraction tax in 1980, and the Legislature amended the exemption a year later to include the leased area — or spacing — on which the well was located.

But spacings can be as large as 1 square mile, which is enough room for several wells that could meet the tax-exempt designation. Once a well or spacing meets the stripper criteria, it holds the designation forever.

Attempts to cut the exemption have failed in the past three legislative sessions.

Rep. David Drovdal, R-Arnegard, introduced the bill to cut the exemption for the fourth time this session. He said the 1980s-era law was well-intentioned at the time but new technology has allowed companies to drill gushers in areas that were thought to be marginal.

Each well should be classified based on its own production, not its location, said Drovdal, whose district is in western North Dakota's oil-producing region. Drovdal also is a member of the House Finance and Taxation Committee, which took no action on the bill on Monday.

"It's not about raising taxes," Drovdal told The Associated Press. "It's a matter of fairness."

Lynn Helms, director of the Department of Mineral Resources, said North Dakota has about 8,100 wells and 2,800 of them are classified as stripper wells. Of that sum, about 500 are higher-producing wells but carry the stripper well designation.

Helms said tax exemption for stripper wells has helped reward companies for taking risks in marginal areas.

But the exemption also has become one of the most complicated oil taxes because it doesn't always differentiate between an "80-pound weakling and an 800-pound gorilla," Helms said.

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