ND Oil, Gas Legislative Review

The 64th Legislative Assembly of the State of North Dakota wrapped up April 29. While this session did not take as many days as the 2013 session, most would argue it was as jam-packed with significant issues.
By Alexis Brinkman-Baxley | May 13, 2015

64th Legislative Assembly of the State of North Dakota wrapped up April 29. While this session did not take as many days as the 2013 session, most would argue it was as jam-packed with significant and controversial issues. As usual, this session covered a multitude of issues relating to every aspect of the oil and gas industry, but none more impactful than those of a financial nature. Impact funding and declining oil prices were the hot topics of hallway chatter from day one, and played a role in nearly every decision that was made. Revised revenue forecasts in February and March were an attempt to give legislators a base to work from, but it took all the way to day 71 and a major reform of North Dakota’s oil tax structure for there to be any certainty. Likewise, work for the North Dakota Petroleum Council continued to the very end. Following is a breakdown of the results of some of the top oil and gas industry issues addressed this session:

Western Infrastructure and Impact Issues
Just like last session, increased funding for oil-impacted cities, counties and townships was one of most pressing issues. Two proposals from the governor and Senate Majority Leader Rich Wardner (R-Dickinson) were among the first bills heard when the session kicked off, and committees in both bodies worked quickly to put together and approve a package in time for the 2015 construction season. SB 2103, Sen. Wardner’s Surge Bill, was signed by Gov. Dalrymple on Feb. 24, and included $240 million for the big 10 oil producing counties, $100 million for cities in the big 10 that collect $5 million or more per year in gross production tax, $172 million for hub cities and Watford City, $10 million for boundary cities, $112 million for cities, counties and townships outside of the big 10 counties, $450 million for state highways and county road construction requirements. Securing additional funding for the communities in western North Dakota was again a top priority for the NDPC. We believe this historic legislation should provide impacted communities with the resources they need.

HB 1176, the funding formula bill, took considerably longer to work out. Proposed by the North Dakota Association of Oil and Gas Producing Counties and supported by the Gov. the bill changed the production tax distribution formula and increased the local share to 30 percent. Amendments to an additional bill, HB 1377, increased the local share by another four percent depending on the counties’ use of additional road-use fees.

NDPC also worked to support additional staffing for many of the state agencies affected by oil and gas development, including the North Dakota Industrial Commission, North Dakota Department of Health, and the Highway Patrol.

Major reform to the oil and gas tax structure will likely turn out to be the most talked-about issue of the session. HB 1476 was proposed April 17. The initial bill implemented a flat tax of 9.5 percent and eliminated the current tax structure if the current system’s “big trigger” went on. Legislators worked quickly to move the bill in an effort to provide some stability and predictability for the next biennium. Following negotiations with the MHA Nation and Democrats, significant changes were made to the bill and the final version was passed one week after the bill’s introduction. The final version does the following:

• Regardless of whether or not the big trigger takes effect, the extraction tax will go to 5% on January 1, 2016 (total effective tax rate of 10%). The triggers will be eliminated from the tax policy. This gives industry a potential of 5 months to complete wells that would qualify for the triggered rate. Any well eligible for any exemption will only be able to take advantage of the incentivized rate until Dec. 1.

If the average price of a barrel of oil is above $90 (indexed for inflation) for 90 consecutive days, the extraction tax will increase to 6 percent, for a total effective tax rate of 11 percent. The rate will trigger back down to 5 percent following 90 consecutive days below $90. Essentially, the language creates a reverse trigger.

• Section 6 of the amended bill would allow the Gov. to negotiate a tax agreement with the MHA Nation if that agreement is based on the changes in this bill. Currently, the Governor has the authority to negotiate such agreements, but additional legislation has been approved (SB 2226) that will remove that authority and require approval from the legislative body, limiting those agreements to every two years when the legislature meets. This provision sunsets Dec. 31, 2016 and is meant to allow the Tribes to work with the state on the agreement between now and when SB 2226 goes into effect.

• Section 6 also allows MHA Nation to implement a tax sharing agreement on bulk delivery of dyed and undyed special fuels. This is not a new tax, just sharing of an existing tax, and an agreement that all the other reservations in the state are already have. That tax would be subject to the tax compact between the MHA Nation and state.

• Section 7 in a legislative study of the state-tribal tax agreement and allocation of those revenues including centrally assessed property and PILT taxes. The study must report back with findings and suggested legislation next session. This section is the result of a request from the Tribe. Currently, industry is making a payment in lieu of property tax (PILT) to the state on pipelines. The state then redistributes that money back to the county in which the pipeline is located. The county does not distribute any of those monies back to the MHA Nation if those pipelines pass through the Reservation. The MHA Nation has made statements about implementing a pass through tax if this doesn’t change.

At this time, we are not sure whether MHA Nation will choose to remain in the tax compact with the State. NDPC will be preparing a white paper on the new tax trigger in the coming months.

Other tax issues important to industry this session include a bill changing the corporate income tax apportionment structure (SB 2292) and incentives for enhanced oil and gas recovery using CO2 (SB 2318 and SB 2015).

Pipelines, Easements and Reclamation
All things pipeline were another major focus for industry this session. A number of bills dealing with pipelines, easement and reclamation passed this session. SB 2271, a result of work between industry, landowners and the N.D. Agriculture Department, develops a pipeline reclamation ombudsman program. The program will be run through the Ag Department, and local ombudsman will be tasked with working with landowners and companies to resolve pipeline reclamation issues and help educate the public on related issues.

HB 1358 is the most comprehensive pipeline legislation in recent history. The main focus of the bill was to address gathering lines, but it included a number of other pipeline-related issues. The legislation does the following:

• Requires operators provide NDIC with the following information for crude oil and produced water gathering lines placed into service after Aug. 1, upon request:

o Engineering construction design drawings and specifications.

o A list of independent inspectors expected to inspect the pipeline.

o A plan for leak protection and monitoring.

• Requires operators file an independent inspector’s certificate of hydrostatic or pneumatic testing within 60 days of placing crude oil and produced water gathering lines into service.

• Makes land or water impacted by oil and gas development before Aug. 1, 1983 eligible for reclamation through the abandoned oil and gas well plugging fund and authorizes the expenditure of $1.5 million from the abandoned oil and gas well plugging and site reclamation fund to do so.

• Allows NDIC to require a bond on crude oil and produced water gathering lines.

• Allows a surface owner to request a review of the temporarily abandoned status of a well on that status for seven years or more.

• Allows the NDIC to release the previously confidential information:

o Volumes injected into a saltwater injection well.

o Information from a spill report on a well site at which more than 10 non-contained barrels were released.

• Allows a surface owner to share GIS information pertaining to facilities on his/her land.

• Creates and funds a study of crude oil and produced water pipelines and the construction, monitoring and reclamation of them. (Includes a $1.5 million appropriation from the abandoned oil and gas well plugging and site reclamation fund).

• Authorizes the NDIC to adopt rules regarding crude oil and produced water gathering lines following the study.

• Creates and funds a pilot project to determine the best techniques for remediating salt and any other soil contamination from legacy spills (Includes a $500,000 appropriation from the abandoned oil and gas well plugging and site reclamation fund).

Additional bills increasing funding for the oil and gas well plugging and site reclamation fund (HB 1032), pertaining to pipeline 10-year plans, siting and fees (HB 1124, SB 2120 and SB 2123) and relating to one-call issues (SB 2347) were also passed this session.

Regulatory Issues
As usual, numerous regulatory issues were also worked on this session. Legislation addressing the disposal of solid waste and TENORM (HB 1113 and HB 1114), federal environmental issues like the Clean Water Act and Endangered Species Act (HB 1432), and NDIC orders (HB 1068 and SB 2343) was passed.

Additionally, the legislature approved HB 1390, creating a pilot project that will focus on commercial recycling of drill cuttings or water from a drilling operation. Following the pilot project, the Department of Health will have the authority to adopt rules governing operations of commercial drill cutting recycling facilities. The bill also removes the liability for recycled cuttings from the well operator.

Additional Issues
A number of other industry-related issues were addressed this session. A resolution encouraging Congress to repeal the ban on crude-oil exports was passed, and legislators spent time debating water, Tribal and Legacy Fund issues as well.

Author: Alexis Brinkman-Baxley
North Dakota Petroleum Council