By Ernest Scheyder
WILLISTON, N.D. (Reuters) - North Dakota, the second-largest U.S. oil producer, has approved a sweeping reorganization of its oil tax code, cutting the overall rate and ending a tax break of more than $5 billion poised to hit in June.
Governor Jack Dalrymple signed the measure on Wednesday afternoon, his staff told Reuters, lowering the combined rate crude producers will pay by 1.5 percentage points.
The bill also eliminates, starting this December, a so-called "large trigger" tax break worth as much as $5.3 billion to oil producers over a two-year period if it ever took effect.
The large-trigger tax curtails oil extraction taxes during the first 24 month's of a well's life. It was meant to encourage production during periods of low oil prices.
"This will provide a more steady, predictable tax system over time," Dalrymple said in a statement to Reuters. "It's a trade-off between an unpredictable oil tax regime and one that's more consistent."
Sponsors in the state legislature said the new tax scheme will make it easier to forecast oil tax revenues, a prospect that has grown trickier as prices have dropped more than 40 percent since last summer.
The measure was introduced in the North Dakota legislature on April 17, toward the end of its biennium session. Opponents were irked, saying they had too little time to consider the measure's full ramifications.
North Dakota's oil producers said they were happy to find common ground on the tax measure.
"It was a compromise by all parties and we can now move forward with tackling the other big challenges of the Bakken," said Ron Ness, president of the North Dakota Petroleum Council.
The bill, which passed both houses of the legislature by wide margins last week, reduces the oil extraction tax to 5 percent from 6.5 percent starting Jan. 1.
The rate rises to 6 percent if crude prices average above $90 a barrel for three consecutive months.
The bill does not alter North Dakota's 5 percent gross production tax, a type of property tax on the value of an extracted mineral. The oil extraction tax is a levy on the industry itself.
Effectively, the North Dakota oil tax rate will fall to 10 percent, with the potential for it to hit 11 percent only if oil prices average above that $90 per barrel for three consecutive months.
Many had expected the "large trigger" tax break to hit in June, but given the recent rise in oil prices, it is no longer a foregone conclusion. Even if it were to take effect, it would offer mere months of tax savings to oil producers, several of whom have told Reuters the "large trigger" factors little into their budgets.
INDIAN TRIBE UNCERTAINTY
It was not immediately clear what the ramifications will be for oil produced on the Fort Berthold Indian Reservation, where roughly a third of North Dakota's oil is pumped each day.
The reservation, in effect a sovereign nation, has had a revenue sharing agreement with the state for several years.
Mark Fox, chairman of the Three Affiliated Tribes who live on the reservation, had pushed Bismarck officials to set the tax trigger at $70 per barrel instead of $90, arguing that oil prices are not likely to hit $90 anytime soon.
Fox could not be reached for comment.
If an agreement cannot be reached, the tribes could alter the tax scheme unilaterally on the reservations, effectively creating a dual tax structure that would be anathema to oil producers.
(Reporting by Ernest Scheyder; Editing by David Gregorio and Andre Grenon)