Oil taxes 101
Published July 22, 2013 | July 2013 issue
Oil and gas revenues in North Dakota are generated in several forms. The largest of these comes from an 11.5 percent severance tax on the gross value of oil and gas produced at the wellhead.
This tax is actually two separate taxes: a 6.5 percent extraction tax and a 5 percent production tax. Technically, the production tax is not a severance tax, but rather a substitute for local property taxes, and helps fund direct aid to producer counties. However, the percentage of tax revenue that is returned to producer counties is small, and as such it acts more like a severance tax because most of the money stays at the state level.
The state also receives money from oil activity on state-owned land. First, the state receives lease-bonus revenue—one-time payments from producers for exclusive rights to drill on designated parcels of public land. Once production starts, the state (actually, a state trust) earns royalty payments equal to12.5 percent to 18.75 percent of gross production value, depending on the county of extraction. Producers then pay severance taxes to the state on the remaining percentage of production value. So a $100 barrel of oil produced on state lands in core Bakken counties would incur a royalty payment of 18.75 percent, along with an 11.5 percent state severance tax on the remaining value of $81.25.