North Dakota utilizes tax incentive scheme to encourage oil production

According to the North Dakota Industrial Commission, the amount of crude oil produced in the state has decreased dramatically. Whereas 1.2 MMb/d of crude oil was produced in the state in December, only 37 Mb/d was produced in January. In addition, the number of wells completed in the state also dropped. Commentators have speculated that the drop in production and well completions is the result of low crude oil prices. However, companies may simply be biding their time until North Dakota tax incentives are triggered.

Two taxes apply to the majority of the crude oil produced in North Dakota. The gross value of crude oil produced in the state is subject to a 5% gross production tax (GPT) and a 6.5% extraction tax. Crude oil produced on American Indian land is exempt from the GPT. During times of low crude oil prices, North Dakota has waived or, at a minimum, lowered the extraction tax applicable to crude oil.

One tax incentive employed by North Dakota is the Small Trigger. The Small Trigger became effective in February 2015. The North Dakota Legislature created the tax incentive to encourage the drilling of new wells and increase crude oil production. The tax break is available whenever the monthly average price for West Texas Intermediate (WTI) crude oil is below $57.50/Bbl. Rather than imposing a 6.5% tax, the extraction tax lowers to 2% for the first $4.5 million or 75 MBbl produced, whichever is first. This tax break continues up until the first eighteen months once a well is completed and only covers wells finished after February 1, 2015. The tax incentive is only available until June 30, 2015. If the average WTI price rises above $72.50/Bbl, however, the tax break would no longer be available.

If crude oil prices remain lower than $55/Bbl, another tax incentive referred to as the Large Trigger would go into effect. Under the Large Trigger, if the price of oil drops below $55.09/Bbl, the 6.5% tax on extraction will be waived. The tax incentive is not triggered until the monthly average WTI price falls below the threshold for at least 5 consecutive months. If triggered, the tax incentive would be available until the average monthly oil price rises above the threshold for five consecutive months. For the first 24 months after the incentive is triggered, the incentive permits oil producers to avoid paying the entire 6.5% extraction tax on old and new producing wells. After the initial 24 month period, the Large Trigger reduces the extraction tax to 4%.

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This post was written by Barclay Nicholson ( or 713 651 3662) and Johnjerica Hodge ( or 713 651 5698) from Norton Rose Fulbright's Energy Practice Group.