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Wanting a bigger slice of the oil revenue pie

Posted 2/04/14 (Tue)

By Neal A. Shipman
Farmer Editor

With McKenzie County and Watford City bearing the brunt of the oil and natural gas development in the Bakken Formation in North Dakota, city and county officials have long contended that the region is not getting a fair return of the state’s gross production and extraction tax revenues.
And now, thanks to a study that was done by Headwaters Economics of Bozeman, Mont., they have the data that they believe clearly shows, that unlike other oil-producing states, North Dakota is not returning a fair share of those tax revenues to the areas being most impacted by the energy development.
According to Linda Svihovec, McKenzie County auditor, during an average year, oil wells in McKenzie County on a typical year generate over $1 billion in revenue to the state of North Dakota. But the county is only getting back just under $80 million that is then shared between the county, the schools, cities and townships.
And while $80 million may seem like a lot of money, it doesn’t go very far when the county is looking to spend hundreds of millions of dollars on roads that are being torn apart by oil traffic annually. Or when the city of Watford City is looking at the costs of building new city streets and extending existing water and sewer lines up to two miles to serve a community that is growing exponentially.
“We’re just not getting enough of the money back that we need to make the improvements that we have to make,” states Brent Sanford, Watford City mayor. “We’re (McKenzie County) getting roughly 8.7 percent of all the severance taxes that are being paid by the wells in McKenzie County. The state isn’t taking care of us when you look at the in lieu of tax that the severance taxes were supposed to take care.”
And that is exactly what the Headwaters study showed.
“North Dakota does a very good job of collecting the oil and gas taxes,” stated Mark Haggerty of Headwaters Economics. “But it does a terrible job of getting the money back to the counties that are being impacted.”
In fact, according to Haggerty, who recently presented his findings to Watford City and McKenzie County leaders, North Dakota ranks fifth of the seven oil-producing states that were part of the study. The other states included Wyoming, Colorado, Montana, New Mexico, Texas and Oklahoma.
“For a state that collects so much money in oil taxes, it is interesting that the state of North Dakota shares so little with local government,” stated Haggerty.
According to Haggerty, Wyoming shares four times more of its oil and gas taxes with local government than does North Dakota, while Colorado shares three times more and the state of Montana shares two times more.
And without a greater percentage of oil money flowing back to the areas that are producing the oil, local leaders don’t feel that they will ever be able to adequately handle the needs.
“All of us have been in discussion on the need to build infrastructure,” stated Sanford. “But the state’s answer is for us to borrow to build the infrastructure. How can you do a bond issue when you don’t have a revenue guarantee. The bond market won’t deal with us.”
In order for the major oil patch counties, like McKenzie, Mountrail, Williams and Dunn, to begin catching up their infrastructure needs, Haggerty believes that three items need to be addressed by the North Dakota Legislature.
First, and foremost, North Dakota needs to return more of the gross production and extraction taxes to the local government. Second, the state needs to revisit the allocation formula it uses; and third, the Legislature needs to create a regional savings vehicle to provide for revenue to the impacted areas after production falls.
“You need to have the dollars at the right time and in the right amounts to deal with the impacts that are being felt out here,” stated Haggerty. “And you need the money to support the economic growth as well as have a savings account for the future.”
Part of the biggest problems facing places like McKenzie County, according to Haggerty, is the rapid growth of the oil industry.
In the Bakken, you are going to be seeing 30,000 to 40,000 wells being drilled,” stated Haggerty. “And with those new wells, the demand on infrastructure is going to escalate.”
According to Haggerty, there is little or no economy of scale in what is happening in the oil patch and the Legislature needs to recognize that.
“The impacts that the cities and counties are seeing multiply with increased development,” stated Haggerty. “When you have more trucks driving down the road, the impacts continue to go up. In reality, when you double your oil production, you’re probably doubling your impacts.”
Currently, North Dakota is sharing approximately 11 percent of the state’s gross production and extraction taxes with local government, but  Haggerty says that there is a compelling argument that the local share should be greater.
And according to Ron Anderson, chairman of the McKenzie County Board of Commissioners, McKenzie County is actually receiving less than seven percent of those funds.
“Because of the caps that are placed on our county, we’re not getting the full 11 percent,” states Anderson. “The lesser-producing counties are doing very well financially compared to the larger-producing counties.”
And according to Anderson, it is becoming very obvious where the impacts of the Bakken oil play are being felt.
“The Bakken is really much smaller than what everyone thinks,” states Anderson. “It is really in McKenzie, Mountrail, Williams and Dunn counties where all of the drilling is concentrated. That’s where 87 percent of the state’s oil is being produced.”
Which is why city and county leaders, like Sanford and Anderson, are hoping that the new study will help state leaders recognize that more money needs to be returned to places like McKenzie County and Watford City.
“We’ve got to find a way to get the money up front to build the infrastructure we need,” states Anderson. “We’re the ones who are living with the boom.”