Drillers Saving $120 Million / Well Due To Reduced Tax Rate -- Bakken.Com -- June 30, 2015

Disclaimer: I often make simple arithmetic errors. I also post quickly which often results in factual and/or typographical errors. I correct them when I find them or am alerted to them. If this information is important to you, go to the source. I have no formal background

A huge "tip of the hat" to a very astute reader who questioned the math in this article. I agree. First, the article being reported by Bakken.com -- the headline: Bakken tax trigger saves oil companies $120 million per well.

A significant number of wells have been completed while North Dakota’s small oil tax trigger was in effect, says Tax Commissioner Ryan Rauschenberger.

According to the Bismarck Tribune, the small tax trigger ends at the end of June and throughout its duration, oil companies completed close to 600 wells. The small trigger, which went into effect February 1 due to low oil prices, reduced the extraction tax from 6.5 percent to 2 percent.

For each well completed during this period, oil companies saw an average tax savings of roughly $120 million. However, the tax break only applies to the first 75,000 barrels produced.

According to that article, the oil companies "are saving $120 million per well." And then, the writer goes on to say that the tax savings only relates to the first 75,000 bbls of oil per well.

Let's do the math: $120 million / 75,000 bbls = $1,600 / bbl of crude oil. If the tax rate was 0% on the first 75,000 bbls of oil, and the price of oil was $1,600 / bbl, then the oil companies would pocket $120 million in tax savings per 75,000 bbls of oil. Obviously that's incorrect. By a huge margin.

Here's the original article from The Bismarck Tribune:

Tax Commissioner Ryan Rauschenberger says he’s surprised by the strong number of wells that were completed in the past five months while a small oil tax trigger was in play.

The trigger ends Tuesday, but in the meantime, oil companies fracked 586 wells and Rauschenberger expects another 20 could be added by the deadline.

The small trigger went into effect Feb. 1 because of low prices, lowering the extraction tax from 6.5 percent to 2 percent. Overall, oil companies will realize somewhere around $120 million in total tax savings on those wells. The tax break is only on the first 75,000 barrels and ends at the end of this year.

Okay, now let's do the math.

• 586 wells x 75,000 bbls x 4.5% savings  x $/bbl = $120 million
• $ / bbl = ($120 million)/(586 x 75,000 x 4.5%)
• $ / bbl = $120 million / 1,977,750
• $ / bbl = $60 / bbl

Much more reasonable.

In other words, the oil companies saved $120 million / 586 wells = $200,000 / well.

Significant? Yes.

$120 million / well? Hardly.

Considering a well only costs $10 million to drill/complete, a $120 million tax savings per well would be pretty remarkable.

More from the article:

Raschenberger said other factors besides the trigger encouraged companies to complete the wells, including the state's one-year deadline to complete wells after drilling and reduced service costs as the number of drilling rigs continues to decline in a low-price market.

There were 72 rigs drilling as of Thursday, down more than 110 rigs since Christmas. Some 950 wells were reportedly drilled but not fracked as of the end of April, according to the North Dakota Department of Mineral Resources.

This is the last time the small trigger will go into effect. The Legislature took it off the books in favor of an overall reduction in the extraction tax from 6.5 percent to 5 percent, which goes into effect Jan. 1 on all wells.

Some time ago a reader asked about the source for the state's requirement that wells be completed within one year after drilling. Here's another source. 

By the way, back to that statement: For each well completed during this period, oil companies saw an average tax savings of roughly $120 million.

Knowing that  the article might disappear into the ethernet, here's a screen shot from Bakken.com: