Analyzing oil numbers in Montana and Dakota

We are often asked whether or not Montana is developing its resources as effectively as our neighboring states, North Dakota in particular. There are a variety of theories that suggest our tax structure is a disincentive, or our environmental laws too strict, or that the federal government is too involved, or a host of other suggestions.

The Montana Petroleum Association would like to open a dialogue to look at these different theories, starting with taxes, and provide a view from our perspective.

Trying to determine if Montana has a good or bad tax structure for business is not an easy task. Let’s take a more detailed look.

Montana’s tax rate on oil production is 9.76 percent of the value of production on a well. North Dakota’s tax rate on production is 11.5 percent. Wyoming is similar with a total rate of approximately 12.56 percent. Each state has differences which make them difficult to compare, but this provides a good approximation.

In addition, Montana incentivizes the drilling of new oil and gas wells by offering a reduction of the rate to 0.76 percent for the first 12 months of production on a vertical well and 18 months for a horizontal well. This incentive was passed by the Montana Legislature in 1993 to thwart the downward trend in drilling activity and is hugely responsible for the uptick in the drilling of horizontal wells.

Even with the reduced tax rates on initial production, oil and gas drilling in Montana lags behind neighboring states. In fact, permits for new wells outside of the extreme northeast part of the state (predominantly in Richland County) are at lows not seen since the early 1960s.

While North Dakota has around 200 drilling rigs at any given time, Montana’s average rig count is approximately 10. Last year, the Montana Board of Oil and Gas Conservation issued 297 drilling permits, compared to 468 in Wyoming and 2,678 in North Dakota.

Montana is producing just less than 80,000 barrels of oil per day from a variety of formations, Wyoming produces an average of 176,000 bpd, and North Dakota tops the charts at roughly 1 million barrels of oil daily (from the Energy Information Administration).

Investment competition exists between areas like the Bakken in North Dakota and Montana, the Eagle Ford in Texas and other known and recently discovered shale reserves across the country.

Thanks to new technologies, predominantly horizontal drilling used with hydraulic fracturing, the United States has progressed from a state of resource scarcity to energy abundance.

While production taxes are favorable in Montana, the same cannot be said of other Montana taxes. We have large disparities on major infrastructure investment, such as pipelines. Large pipeline systems are centrally assessed and are taxed more than four times the rate of similar systems in North Dakota and South Dakota. North Dakota’s property tax structure and overall business climate promote large industrial projects.

Aside from tax structure and regulatory environment, the geology of Montana needs to be taken into consideration. Compared to North Dakota, Montana’s Bakken and Three Forks proven reserves are not as prolific as they are across the border in North Dakota.

As the formations extend west across the Montana border, the Williston Basin formation thins. Former Gov. Ted Schweitzer often explained this by stating that Montana is in “the shallow end of the swimming pool.”

States employ a variety of different tax mechanisms to generate revenue, making direct state-to-state comparisons difficult. Montana’s tax structure has provided at least one incentive to producers, resulting in significant new production, which kicks off a steady contribution of more than $200 million a year to state and local governments, in addition to large property tax, income tax and payroll tax payments.

Dave Galt is the executive director of the Montana Petroleum Association.