Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

More info on the triggers for drop in ND oil tax rate

There are two triggers for dropping the tax on oil in North Dakota. These were put in place back in 1987 to encourage production. With the dramatic drop in oil prices, these two triggers are now of interest.

2/5 – Reuters – Clock starts ticking on $5.3 bln tax break for North Dakota oilTo create incentives to drill, the ND legislature has built-in two layers of reduced taxation on oil when prices drop.

My understanding as mentioned previously:

Little trigger:

  • Average WTI price is below $55 for a month
  • Extraction tax drops to 2% from 6.5% for a specific amount of oil produced (first 75,000 barrels per the Reuters article)
  • Applies to wells completed after the trigger (Reuters article says this will run from February through June)

Big trigger:

  • Average WTI price is below $52.59 for five consecutive months (see next comment)
  • Extraction tax drops to 0% for all new wells for 2 years of production and drops to 4% for older wells (see next comment)
  • Applies to all wells, even if completed before trigger

Article says the average WTI price was $47.98 a barrel in January.

The little trigger was pulled in January, per the Reuters article. Looks right to me, so that tax reduction is now in effect for wells completed in February.

The clock is running on the big trigger. January will be the first month.

2/9 – Million Dollar Way – Filloon on Possible Tax Breaks for Bakken Operators – More detail on the big trigger.

North Dakota tax on oil consists of 5% gross production tax and 6.5% oil extraction tax, for total of 11.5%.

Here’s the scoop on the extraction tax, quoting Seeking Alpha:

The extraction tax has a built-in tax break if oil drops below an inflation adjusted limit set at $55.09/bbl. for 2015. If the realized price of WTI is below that number for 5 consecutive months, then the 6.5% tax is dropped for the first 24 months of the well’s life. After the 24 months are up, the tax is reinstated, but at a 4% rate for the well’s life, not 6.5%. Keep in mind, a well will produce for 35 to 40 years, so the effective tax break would cover that period of time.

New tidbits for me:

  • The big trigger point is inflation adjusted, currently 55.09.
  • Extraction tax drops to zero for 2 years and then is 4% instead of 6.5% for the remainder of the well’s life.

Production life

The Seeking Alpha article has a tidbit on production life of a Bakken well:

…current horizontally fracked wells produce 19% of total resource in the first year. Half of all production occurs in the first 5 years,

Converting that to precise numbers means:

  • 19% – first 12 months
  • 31% – in years 2 through 5
  • 50% – in years 6 through 30 or 40.

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