03905 Stripper wells 2 7-30-13 ddt
About a third of North Dakota’s oil wells are considered to be “stripper wells” – that is, marginal wells.
Those wells continue to operate at lower tax rates.
The 2013 Legislature considered an overhaul of tax policy – that would have ended the stripper well exemption, in exchange for a lower tax rate on future wells. Lawmakers rejected the idea, but made a few tweaks to the law.
As Prairie Public’s Dave Thompson reports, industry and regulators say there’s more work to be done on that law.
The state law on stripper wells says a well that is declared to be marginal would pay a lower tax rate. The current oil tax is 11 and a half percent. A stripper well pays five percent. And it’s based on production levels – for wells shallower than six thousand feet, the well has to produce 10 or fewer barrels per day to get the exemption. For wells from six thousand to 10-thousand feet, it’s 15 barrels per day. For wells deeper than 10-thousand feet, it’s 30 barrels per day. And for Bakken and Three Forks wells, it’s 35 barrels per day.
State Mineral Resources Director Lynn Helms says because of the cost of drilling a Bakken and Three Forks well, that stripper well threshold may need to be raised.
“As it stands right now, our knowledge shows that their operating costs are one and a half to two times other wells," said Helms. So based on that, you could perhaps justify 45 barrels a day to 70 barrels a day. I think as technology improves, we’ll be able to zero-in on what that real stripper well rate should be for a Bakken well. And I would expect that will be adjusted in the future.”
Lawmakers were also concerned about the permanency of the stripper well exemption.
“In other words, how do we get around what has been commonly called the ‘Gypsy Rose Lee’ rule – which is, ‘Once a stripper, always a stripper,’” said Helms. He says lawmakers tried to address that – by having his department do a yearly re-certification of stripper wells. He says the lawmakers worried that some operators may use some enhanced techniques to get more oil out of the marginal wells. But Helms says that would be nearly impossible to do.
“There are 2,974 active stripper wells in the state," Helms said. "So that would be an enormous job, to go back and review every single one of those once a year.”
When it was being proposed in the 2013 Legislature, Helms says his department did a test – and presented the result to lawmakers. “We found that only 5 percent of those wells actually went above their qualification rate during that year. So, 95 percent of that effort would be totally wasted.”
Helms says they also looked at the five percent, to see if their production is significantly above the threshold level. “And that number came up as one percent. So if we were to put this enormous amount of labor into this, we felt like – and this is what we told the Legislature – we would end up disqualifying one percent of the wells. So to re-certify 100 percent of the wells every year and end up with one percent of them losing their stripper well tax rate temporarily, is not something you can justify.”
Helms says the stripper well exemption keeps marginal wells operating, and that supports jobs.