Fracking Finance: Oil and Gas Extraction Tax Revenue in North Dakota

Following the expansion of hydraulic fracturing (fracking) and horizontal drilling techniques, the United States has now entered the so-called “shale era”—a period of increased production of oil and gas from shale rock. Accompanying this shift in production is a transformation in production regulatory policies. Questions of which level of authority—federal, state or local—should regulate this activity hover above the more specific concerns of environmental risks posed by the emerging field of fracking.[i] While the federal government has continually struggled with fracking regulation,[ii] states and localities have emerged as prominent regulatory players in the shale era.

One way in which states and localities have asserted their regulatory role in fracking matters is through the adjustment of their oil and gas taxation and revenue allocation systems. Taxes and fees on the oil and gas industry may include local property taxes on oil and gas, leases of state and federal land, or severance taxes or impact fees.[iii] The focus of this post is specifically taxes on the extraction of oil and gas and the reallocation of their revenues.

Severance taxes, also known as production taxes or extraction taxes, establish a fee at the point of extraction of natural resources, like oil or gas, often based on the value or volume of the resource extracted.[iv] As the United States has entered the shale area, numerous states have lowered their severance tax rates to remain competitive and encourage shale development.[v] In addition to changing their severance tax rates, states have also shifted their allocation structures in innovative ways that expand beyond traditional patterns of dumping revenue into their general funds.[vi]

North Dakota is an example of a state that is taking innovative steps towards reallocation of severance taxes. North Dakota is the fifteenth largest producer of natural gas in the United States (2012)[vii] and the second largest producer of crude oil in the United States (July 2014).[viii] Additionally, in 2013 North Dakota earned approximately $2,457,530,000, or 46.38 percent of its total tax revenue from severance taxes on oil and gas.[ix] North Dakota has recently adjusted its oil and gas severance tax allocation structure to use its revenues in ways that allow it to preserve wealth generated from production, address state conservation issues, and mitigate local environmental concerns related to extraction.

In 2010, North Dakota changed its oil and gas production tax revenue structure by allocating 30 percent of its revenues towards a new state “Legacy Fund.” This change sought to protect state wealth by putting away revenue into a fund and investing the principal. The earnings cannot be utilized until 2017, so this upcoming legislative session may review particular options as to how the state may use the fund’s earnings.[x] This preservation of wealth contrasts with using the revenue for immediate expenditures, like state general fund revenues. While important for state functioning, immediate expenditures do not save for the future or allow the state to carefully consider how to use the revenues from their resource profits; the Legacy Fund, in contrast, ensures the longevity of wealth generated from the oil and gas production boom.

Beyond this, North Dakota also enacted a number of provisions, such as HB 1278 and SB 2014 in 2013, which helped to address state conservation issues. These two bills specifically adjusted the allocation of North Dakota’s oil and gas severance tax revenues towards the outdoor heritage fund and the energy conservation grant fund. The outdoor heritage fund seeks to provide grants to state agencies, tribal governments, political subdivision and nonprofit organizations to work towards a number of directives including the improvement, maintenance and restoration of water quality, as well as conservation of natural areas for recreation.[xi] The energy conservation grant fund provides energy conservation and efficiency grants to political subdivisions.[xii]

Despite North Dakota’s recent conservation-friendly actions, these strides have been limited by North Dakotan residents. In the recent election, approximately 80 percent of North Dakotans voted “No” on Measure 5 (the “North Dakota Clean Water, Wildlife and Parks Amendment), a pro-environmental measure that would have redirected five percent of the state’s oil extraction tax revenue to conservation efforts. These efforts included a Clean Water Wildlife and Parks Trust and a Clean Water, and Parks Fund.[xiii] The fossil fuel industry spent over one million dollars fighting Measure 5, likely because the measure would make it more difficult to attempt to roll back severance taxes in the future.[xiv]

North Dakota’s adjustments have also worked to mitigate local environmental concerns related to extraction. HB 1358 (2013) increased the amount of oil and gas revenue allocated to local governments so that localities would be able to better address the impacts—like road repair, or water quality—associated with extraction. However, a recent study by the Duke University Energy Initiative found that ”these new revenues have been insufficient to manage service demands associated with the rapid growth in population and truck traffic” related to oil and gas production; they recommend that even a “larger portion of these revenues . . . be redirected to local governments to better manage near-term local needs.”[xv] This means that despite the progress North Dakota has made towards financing local government needs, evidence shows that these revenues may not be sufficient to address all the issues that localities are facing.

While it is clear that hydraulic fracturing and shale gas production is growing in the United States, there is still uncertainty about how the federal, state and local governments will react to increased need for regulation as well as shifts in energy production and potential growth in oil and gas revenues. Still, in the absence of large federal oversight, states have emerged as prominent players in the fracking arena. So far, states like North Dakota have indicated that they are exploring a number of interesting policy solutions; yet, questions remain as to how much revenue states are willing to use for conservation measures and local needs.

 

-Rachel L. Hampton is a General Member on MJEAL. She can be reached at rlaurenh@umich.edu.

 


The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

[i] Christina Bonanni, “Concerns Raised by the Wave of Hydrofracking in the US,” Michigan Journal of Environmental & Administrative Law (April 10, 2014), http://www.mjeal-online.org/concerns-raised-by-the-wave-of-hydrofracking-in-the-us/.

[ii] Jeff Jay, “Can We Get Some Help Over Here? Federal Regulators Continue to Struggle to Police Fracking,” Michigan Journal of Environmental & Administrative Law (Nov. 19, 2012),  http://www.mjeal-online.org/381/.

[iii] Daniel Raimi and Richard G. Newell, Oil and gas revenue allocation to local governments in eight states, Duke University Energy Initiative (Oct. 2014), http://energy.duke.edu/sites/energy.duke.edu/files/files/Oil%20Gas%20Revenue%20
Allocation%20to%20Local%20Government%20FINAL.pdf
.

[iv] Cassarah Brown, State Revenues and the Natural Gas Boom: An Assessment of State Oil and Gas Production Taxes, National Conference of State Legislatures (June 2013), http://www.ncsl.org/research/energy/state-revenues-and-the-natural-gas-boom.aspx.

[v]Barry G. Rabe and Rachel L. Hampton, The Politics of State Energy Severance Taxes in the Shale Era (2014). APSA 2014 Annual Meeting Paper. Available at SSRN: http://ssrn.com/abstract=2452848.

[vi]Id.

[vii] U.S. Energy Info. Admin., Rankings: Natural Gas Marketed Production, 2012, http://www.eia.gov/state/rankings/?sid=US&CFID=17601569&CFTOKEN=c2b240025f69613f-84B41E84-237D-DA68-24A02116C92A2D42&jsessionid=8430b6a0323c6dbcb00a6120502e54731bd2#/series/47. (last visited Nov. 17, 2014).

[viii] U.S. Energy Info. Admin., Rankings: Crude Oil Production, July 2014 (thousand barrels), http://www.eia.gov/state/rankings/?sid=US&CFID=17601569&CFTOKEN=c2b240025f69613f-84B41E84-237D-DA68-24A02116C92A2D42&jsessionid=8430b6a0323c6dbcb00a6120502e54731bd2#/series/46. (last visited Nov. 17, 2014).

[ix]Rabe and Hampton, supra note 5.

[x] State of North Dakota, Office of State Treasurer, Government Funds, http://www.nd.gov/ndtreas/governmentfunds.htm (last visited Nov. 17, 2014).

[xi] North Dakota Industrial Comm’n, Outdoor Heritage Fund, http://www.nd.gov/ndic/outdoor-infopage.htm (last visited Nov. 17, 2014).

[xii] North Dakota 2020 & Beyond, Legislative Update, (May 2013), http://www.nd2020andbeyond.com/2020LegislativeUpdate.pdf, at 2.

[xiii] Ballotpedia, North Dakota Clean Water, Wildlife and Parks Amendment, Measure 5, 2014, http://ballotpedia.org/North_Dakota_Clean_Water,_Wildlife_and_Parks_Amendment,_Measure_5_(2014) (last visited Nov. 17, 2014).

[xiv] Ari Phillips, Why Big Oil Just Spent More Than $1 Million Fighting A North Dakota Ballot Measure, ThinkProgress.org (Oct. 28, 2014), http://thinkprogress.org/climate/2014/10/28/3584989/north-dakota-oil-measure-5/.

[xv] Raimi and Newell, supra note 3 at 11.

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