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Could Utah earn more than $300M a year from drilling?

Published February 9, 2012 8:14 pm

Energy • Consulting group argues higher taxes wouldn't drive away oil, gas companies.
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Utah's oil and gas taxes and royalties are raking in more than $300 million a year in an era of record production, but an economic consulting group says the state could earn much more by charging higher taxes.

The state made $306 million last year from all oil and gas revenue streams, according to the Utah Division of Oil, Gas and Mining, while production wells reached an all-time high at 10,300.

The Beehive State could — and should — levy a larger share of those resources, said Mark Haggerty of Headwaters Economics, a Montana-based nonprofit that has recently made news with studies touting the value of recreation economies such as Moab's and national monuments such as Utah's Grand Staircase-Escalante.

"It's wealth leaving the state," Haggerty said, and more of it could go into a Utah permanent fund without discouraging industry activity.

Industry representatives argue that Utah's tax rate must be low to attract investment in a relatively difficult place to drill.

Utah's effective tax rate — the portion it controls, not including federal royalties split with the state — is the lowest in the Rocky Mountains at 3.3 percent, Haggerty said. Wyoming, which had 19 percent of the region's drilling activity to Utah's 14 percent last month, has a tax rate of 11.4 percent. On the Great Plains, North Dakota has even more new drilling under way — 438 active rigs punching new wells to Utah's 36 — with a 10.1 percent tax rate.

"The states that have the highest amount of drilling rigs working in them [also] have the highest tax rates," Haggerty said Thursday while briefing The Salt Lake Tribune's editorial board on its latest update of a continuing study of Rocky Mountain oil and gas development.

One reason: Companies follow commodity prices and resources. Oil prices are up, gas prices are down, so companies are moving rigs to a booming oil play in North Dakota.

Another reason, Haggerty said, is that companies can write off a portion of state taxes when they pay their federal taxes. Higher state taxes don't necessarily translate to significantly higher taxes overall.

"We don't see any reason," he said, "why you shouldn't be at the same level as your peers."

That could mean hundreds of millions of dollars more each year, because total state tax revenue, not counting federally set royalties, is about $123 million under the current rates.

Utah's large percentage of federal lands makes low tax rates necessary to spark drilling, said Lee Peacock, executive director of the Utah Petroleum Association. There are extra steps involved in leasing and permitting wells, he said, compared to the private lands that hold most of North Dakota's oil boom.

"The Legislature has studied this extensively over the last several years," Peacock said. "The consistent decision has been that the state's severance tax needs to be extremely competitive to attract investment to a state like Utah."

The tax rate is "not the deciding factor, but it is a factor in a company's decision where to invest capital."


Twitter: @brandonloomis —

State tax rates and oil/gas production value

Wyoming • 11.4 percent, $3.6 billion

Montana • 10.5 percent, $2 billion

North Dakota • 10.1 percent, $6.6 billion

Colorado • 4.4 percent, $6.7 billion

Utah • 3.3 percent, $3.9 billion

Source: Headwaters Economics




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