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North Dakota Senate Approves Some Bakken-Friendly Energy Bills

Last week the North Dakota Senate voted to support hydraulic fracturing and to extend oil tax breaks in the unlikely event that oil prices sharply decline, but turned down a proposal to reduce the top oil tax rate in exchange for higher production totals.

North Dakota is home to the liquids-rich Bakken Shale, where development has really taken off over the last few months.

The state Senate passed HB 1216, which states that "hydraulic fracturing is an acceptable recovery process in North Dakota," by a 46-1 vote on March 21. The measure still needs to be signed by House Speaker David Drovdal (R-Arnegard) before moving on to Republican Gov. Jack Dalrymple for his approval.

Meanwhile, a concurrent resolution -- HCR 3008, which urges Congress "to clearly delegate responsibility for the regulation of hydraulic fracturing to the states" -- was also passed by the Senate on March 21 and awaits Dalrymple's signature.

On March 23 the Senate also passed HB 1467, which adds an additional year to a 2009 law reducing the state's tax rate on oil. North Dakota's rate currently stands at 11.5% -- 6.5% for extraction and 5% for gross production.

John Walstad, code revisor for the North Dakota Legislative Council, told NGI's Shale Daily on Tuesday that under HB 1467, the first 75,000 bbl of oil or the first $4.5 million of gross value at the well, whichever is less, produced during the first 18 months of a new horizontal well would be eligible for a 2% tax rate on extraction, effectively lowering the overall tax rate to 7%. He added that the rate would be "triggered" if the price of oil falls under $55 a barrel for a full calendar month, and would become ineffective once oil exceeds $70 a barrel.

Walstad said the current law on exemptions was to expire in June 2012, but HB 1467 extends to deadline to June 2013. The bill still needs Drovdal's signature before moving on to the governor.

Kathryn Strombeck, spokesperson for the tax commissioner's office, said HB 1467 isn't expected to have an impact on 2011-13 biennium oil prices. In December the U.S. Energy Information Administration predicted that oil prices would remain above $75/bbl for the foreseeable future.

"However, if the forecast is incorrect and prices fall to the lowest threshold provided for in HB 1467 [$45/bbl], and remain there throughout the biennium, the oil price decrease alone would result in a drop in total oil tax revenues of approximately $800 million," Strombeck said. "In addition to that price-related drop in revenue, enactment of HB 1467 could result in an additional revenue loss of $600 million as the oil extraction tax rate triggered to zero. The forecast assumes this does not occur."

But on March 21 the Senate's Finance and Taxation Committee rejected a proposed amendment to HB 1467 by Rep. Al Carlson (R-Fargo) to incrementally reduce the extraction portion of state oil taxes in exchange for higher production totals.

"The committee did not adopt it and it did not go the floor for a vote," Walstad said, adding that Carlson's proposal would have reduced the extraction portion of state oil taxes by half-point percentage intervals. Starting at 6.5%, the extraction rate could have descended to 4% if North Dakota's oil production climbed to 700,000 b/d, making an overall tax rate of 9%.

According to the state Department of Mineral Resources, North Dakota produced 112,531,064 bbl of oil in 2010. Of that total, 85,075,338 bbl -- more than 75% -- were produced in the Bakken formation. The entire state also had an average of 309,670 b/d in 2010, about a 30% increase from the average of 218,432 b/d produced in 2009.

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