Lawmakers Weigh Tax Relief for Oil and Gas, Again

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A well site in the Bighorn Basin. (BLM Wyoming/FlickrCC)

By Dustin BleizefferWyoFile

When it was conceived, the draft bill to temporarily cut by half the 6% production severance tax on oil and natural gas was intended to help spur drilling and production in Wyoming as the industry slowly recovers from the oil-price crash of 2020.

Now, proponents — including Gov. Mark Gordon — say the bill is also necessary to help bolster an industry bracing for more restrictive policies under the Biden administration over the next four years. Gordon recently highlighted House Bill 11 – oil and gas production tax exemption as part of his initiative to boost Wyoming’s energy, tourism and agriculture industries.

Anything Wyoming can do to incentivize continued production and new oil and gas drilling is going to be critical for the industry, Petroleum Association of Wyoming President Pete Obermueller said.

“It will help to incentivize people to make the decision to reinvest and restart in Wyoming, as opposed to Texas or North Dakota or Oklahoma or any competitor states — all of which are cheaper to drill in already than Wyoming,” Obermueller said.

As proposed, HB 11 would come at an estimated cost of about $13.5 million in foregone revenue, according to the bill’s fiscal note.

Critics of HB 11 say it’s not good fiscal policy to voluntarily forgo revenue in the midst of the state’s spiraling revenue crisis — particularly for a finite resource. Lawmakers often consider tax exemptions for the state’s extractive industries when market conditions sour, but rarely examine whether an exemption truly meets the intended purpose of preserving or boosting jobs and production, Sierra Club Wyoming Chapter Director Connie Wilbert said.

“These have come up over and over and over,” Wilbert said. “Reducing severance taxes does not boost production or increase employment. All that it does is reduce revenue. Period.”

What’s in HB 11

HB 11 was created and passed by the Joint Minerals, Business and Economic Development Interim Committee in the fall of 2020 during a historic low point for the industry.

The draft bill was introduced at the beginning of the 2021 Legislative session and is now before the House Minerals Committee.

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A drilling rig north of Casper. (Dustin Bleizeffer/WyoFile)

In current form, the measure would reduce the state’s 6% severance tax on production to 3% for up to six-months in any qualifying year. The exemption applies only to production from wells “drilled on or after January 1, 2021, and to the renewed production from [wells] … that were shut-in on or before July 1, 2020 and that are reactivated during the period in which the exemption is in effect.”

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The exemption would apply to sweet crude oil if the West Texas Intermediate spot price (a major market oil price indicator for Wyoming crude) reaches $45 per barrel or more on the preceding monthly average. The same parameters apply to sour crude oil at a market price of $38 per barrel or higher, and to natural gas at a price trigger of $3 per mcf (one thousand cubic feet of gas).

Setting the trigger for a production severance tax exemption to kick in when market prices are above a certain level is a new approach. Typically, lawmakers consider tax exemptions for when market prices are low.

That’s the design of HB 243 – Oil and gas tax-new production, which passed into law in 2020; the exemption kicks in when the rolling market price average for oil is below $50 per barrel for oil and below $2.95 per mcf of gas. That means if HB 11 were to pass in current form, oil and gas producers would have access to one severance tax exemption when market prices are on the high side and another exemption when prices are on the low side.

Both approaches are valid, Obermueller said. The rationale behind HB 11’s high-side price trigger is it gives operators an extra incentive to choose Wyoming as higher prices entice them to resume drilling and production operations.

“Nobody is likely to drill when the price per barrel is $30,” Obermueller said. “But when the price reaches $45 per barrel, now you’re at the point where people are starting to decide to reinvest and to restart and make those investments.”

Sen. Cale Case (R-Lander), chairman of the Senate Revenue Committee, generally doesn’t support severance tax reductions for the minerals industry, he said. Case especially objects to the high-side price trigger design of HB 11.

“The idea has been that when prices go up, we both share in the profits,” Case said. “Here, when prices go up [industry] shares in the profits and we don’t. That’s a change in philosophy.”

Andrew Finley of Goolsby, Finley & Associates, an oil and gas consulting and project management firm based in Casper, said the production severance tax reduction in HB 11 might not be a major deciding factor in whether to drill a new horizontal oil well. The capital cost for those wells can reach $5 million, and sometimes more. However, the exemption would be extremely helpful, Finley said, if applied to existing wells still producing at marginally economic levels.

Sen. Cale Case (R-Lander)
Sen. Cale Case (R-Lander)

“We have a lot of historic production — long-lived wells currently producing — and those wells would benefit more from this type of tax holiday than new wells,” Finley said. The catch is, those marginal wells already in production would not enjoy a tax exemption under HB 11.

Obermueller of PAW is more optimistic that the HB 11 exemption would help entice producers to drill new wells in Wyoming. Initial production from a new well is significant enough that any reduction in the production severance tax might help tip the scales in Wyoming’s favor when it comes to deciding where to spend capital as oil prices recover, he said.

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More than 80% of oil and gas companies active in Wyoming qualify as “small operators,” Obermueller added. Any tax increase or decrease has significant implications when it comes to retaining employees or investing in new drilling.

“We have the highest effective oil and gas tax rate of all the oil and gas states in the country,” Obermueller said. “We’re double Colorado, and almost three times New Mexico, and then the cost of [developing oil and gas on] federal lands adds significant costs that private lands states don’t have to deal with.”

Aid for oil and gas

Several tax holiday and aid programs have sought to help oil and gas producers nationwide and in Wyoming.

In response to falling oil prices and pressures from the pandemic last spring, the Bureau of Land Management implemented a 60-day federal royalty relief program, reducing the royalty rate of 12.5% to .5%. Wyoming recorded the highest number of federal oil and gas leases approved under the program, according to a U.S. Government Accountability Office report in October. That’s due, in part, to the fact that most drilling that occurs in Wyoming is on federal land and for federal minerals.

In the fall of 2020, Gordon launched the Energy Rebound Program, setting aside $15 million then a total of $30 million of the state’s CARES Act relief funds to help producers cover costs to complete wells that had already been drilled, in addition to costs for plugging and reclaiming oil and gas wells.

The Wyoming Oil and Gas Conservation Commission suspended the state’s conservation tax for the first six months of the pandemic in 2020. Revenue from the tax supports WOGCC operations and the state’s orphan well program.

Last year, lawmakers passed HB 243 slashing the state’s oil and gas production severance tax to 4% for the first six months of production from a new well, then to 5% for the next six months. The exemption applies to wells drilled between July 2020 and December 31, 2025. Foregone revenue under HB 243 could add up to $27.6 million between 2021-23, according to the bill’s fiscal note.

Wyoming’s active drill rig count fell to zero on June 26 — only the second time in the state’s history. In November, state oil production was down 20% compared to the same period the year before, while natural gas was down 13%, according to state data.

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Pete Obermueller of the Wyoming Petroleum Association attends the signing and weighs in on the impact of the executive order protecting wildlife migration routes. (Andrew Graham/WyoFile)

U.S. oil prices dipped below zero in May and have since recovered to just over $58 for West Texas Intermediate crude. Producers have begun inching toward new drilling in Wyoming, filing 293 new applications for permit to drill in January compared to 49 the month before, according to the latest WOGCC status report.

That doesn’t mean things are returning to normal, however, according to the industry consultant Finley. “It’s a pretty slow recovery. It’s dead right now,” he said. “I had 10 employees before the [2020] price drop and then COVID hit, and I’ve got two right now. We’re having a very hard time staying busy.

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“With the change in the administration and changes in policy, that’s adding to the uncertainty in the industry,” Finley added.

Do fossil fuel tax exemptions work?

Opponents of HB 11, which include the Wyoming Outdoor Council and the Powder River Basin Resource Council, say it’s unwise to offer the oil and gas industry another tax exemption — particularly in the context of a long-term revenue crisis with no solid plans for how to reform Wyoming’s tax and revenue structure.

Wilbert of the Wyoming Sierra Club chapter said that each time Wyoming lawmakers assess whether severance tax breaks actually benefit the broader economy via employment and production they get the same answer: it doesn’t.

The Mineral Tax Incentives, Mineral Production and the Wyoming Economy study, often referred to as the “Gerking report” for the study’s lead author, Shelby Gerking, concluded that various state severance tax reductions do not have a significant impact on employment and production.

“It is the best information, and the only information we have, that looks at this exact question: What effect do severance tax rates — raising them or lowering them — have on production and employment?” Wilbert said. “If the Legislature wanted fresher information, it could bring that study up to date. But the reality is, the Legislature didn’t like what that study produced and they have ignored it since the day they got it.”

In fact, the Legislature did commission another study, Legal and Fiscal Frameworks: Best Practices, in 2018. It examined, among other things, the same questions about severance tax reductions and came to the same conclusion: Tax rates generally do not discourage oil and gas activity. Instead, geology and market prices predominantly drive them.

“I think there’s a desperation that people want to help the mineral industry because it’s battered,” Case said, adding that both tax studies also counter the notion that Wyoming’s tax burden on the oil and gas industry is a deterrent.

“Our measly small percentage [tax exemption] isn’t going to matter,” Case continued. “We have a good tax structure for the industry and a safe environment for them to operate in.”

Obermueller contends that neither of the Legislature’s tax studies adequately assess the new realities of the oil and gas industry today.

“[The Gerking] study is so stale that it’s probably unusable,” Obermueller said. “[It found] for their particular mode of analysis, tax incentives on the back end work, they just don’t work enough for their liking.”

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A decrease in production severance tax will help retain jobs and production today, Obermueller said. Perhaps more effective, though, are assistance efforts like Gov. Gordon’s Energy Rebound Program because it helps reduce high up-front capital costs to drill a well. “And that’s only become more true as drilling has become much more expensive,” he said.

Wilbert said the assumptions and justification for HB 11 simply don’t add up.

“We need to be making these decisions on factual information,” Wilbert said. “It just makes absolutely zero sense to lower taxes and reduce revenue right now — of all times — when we are in such dire straits for revenue already.”

 

 

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