15.9434.

01000

Prepared by the Legislative Council staff

OIL EXTRACTION TAX TRIGGER PRICE

This memorandum provides information on the oil trigger price, including oil prices and the potential effect on
oil extraction taxes.

OIL EXTRACTION TAX RATE

The oil extraction tax rate is 6.5 percent of the gross value of the oil produced at the well. However, oil
extraction tax rate reductions and exemptions are available for oil production based on the price of oil and for
certain wells, including stripper wells and wells completed outside the Bakken and Three Forks Formations.
There are no triggered rate reductions or exemptions that could apply to the 5 percent oil and gas gross
production tax. If the average monthly comparison price of a barrel of oil is less than the trigger price for five
consecutive months, certain oil extraction tax rate reductions and exemptions are effective until the average
monthly comparison price of a barrel of oil exceeds the trigger price for five consecutive months. More detailed
information on the rate reductions and exemptions related to the oil trigger price is included in the last section of
this memorandum.

TRIGGER PRICE DEFINITION

The trigger price, as defined in North Dakota Century Code Chapter 57-51.1, was set in 2001 at $35.50 as
indexed for inflation. The trigger price is determined by the Tax Department for each calendar year. The trigger
price is calculated by multiplying $35.50 by a base rate adjustment. The base rate adjustment is based on the
state fiscal year average of the industrial commodities producer price index as published by the United States
Department of Labor, Bureau of Labor Statistics. The base rate adjustment is calculated by dividing the current
state fiscal year average of the industrial commodities producer price index by the state fiscal year 2001 base
average of the industrial commodities producer price index (138.0).

TRIGGER PRICE
The trigger price calculated for calendar year 2014 is $52.06. The anticipated trigger price for calendar year
2015 is $52.58, based on the following:
The 2014 state fiscal year average of the industrial commodities producer price index is 204.4 as
calculated from the monthly indexes from July 2013 to June 2014.
The base rate adjustment of 1.4812 was calculated by dividing 204.4 by 138.0.
The trigger price of $52.58 was calculated by multiplying $35.50 by 1.4812.

COMPARISON PRICE
The price of oil used as a comparison to the trigger price is defined in statute as the monthly average of the
daily closing price for a barrel of West Texas Intermediate (WTI) Cushing crude oil minus $2.50. In November
2014, the monthly average price of a barrel of WTI Cushing crude oil was $75.65. As a result, the November
2014 price of oil used as a comparison to the trigger price was $73.15, or $2.50 less than the price of
WTI Cushing crude oil. The price of oil reported by the Department of Mineral Resources and used in Legislative
Council memorandums, unless otherwise noted, is the price of North Dakota light sweet crude as published by
Flint Hills Resources. The price published by Flint Hills Resources is the most reflective of North Dakota oil
prices, but is not used as a comparison to the trigger price. The schedule below provides information on monthly
average oil prices for the period June 2014 to November 2014.

West Texas Intermediate price

Flint Hills Resources price
Variance
Comparison price (WTI less $2.50)
Trigger price
Variance

June
2014
$105.20
$90.03
$15.17
$102.70
$52.06
$50.64

July
2014
$102.48
$86.20
$16.28
$99.98
$52.06
$47.92

August
September
2014
2014
$96.21
$93.09
$78.46
$74.85
$17.75
$18.24
$93.71
$90.59
$52.06
$52.06
$41.65
$38.53

October
2014
$84.47
$68.94
$15.53
$81.97
$52.06
$29.91

November
2014
$75.65
$60.16
$15.49
$73.15
$52.06
$21.09

POTENTIAL EFFECT ON OIL EXTRACTION TAX

If the average monthly comparison price of a barrel of oil is less than the trigger price for five consecutive
months, the following oil extraction tax rate reductions and exemptions are effective:
Oil production from a vertical well completed after April 27, 1987, is exempt from the oil extraction tax for
the first 15 months of production, after which the rate is 4 percent.
North Dakota Legislative Council

December 2014

15.9434.01000

Prepared by the Legislative Council staff

Oil production from a horizontal well completed after April 27, 1987, is exempt from the oil extraction tax for
24 months, after which the rate is 4 percent.
The tax rate for oil production from qualifying secondary and tertiary recovery projects is 4 percent.
The tax rate for incremental production from qualifying secondary and tertiary recovery projects is
4 percent. The reduced tax rate applies to incremental production after the 5-year or 10-year initial
exemption period, which is available for incremental production without regard to the trigger price.
For oil produced from a qualifying well that was "worked over," there is no extraction tax levied for
12 months, and thereafter the rate is 4 percent.
Oil production from a certified two-year inactive well is exempt from the oil extraction tax for 10 years after
certification, after which the rate is 6.5 percent.
For oil produced from a certified horizontal reentry well, there is no extraction tax levied for nine months
after the date the well is completed as a horizontal well, and thereafter the rate is 6.5 percent.
If the average monthly comparison price of a barrel of oil is less than the trigger price for five consecutive
months resulting in rate reductions and exemptions, then the average monthly comparison price must exceed the
trigger price for five consecutive months before the rate reductions and exemptions are removed.

North Dakota Legislative Council

December 2014