From time to time we’ve talked about the impact of expanded oil and gas drilling on regional infrastructure — the basic facilities and structures needed for a community to operate. These include road maintenance, schools, health care, law enforcement, sewage treatment, and so on.
When oil and gas drilling expands, infrastructure needs increase. More traffic means more road maintenance. More workers means more kids in school. A higher population means a greater need for health care.
If government is operating rationally, it provides support to local areas to help them pay the increased infrastructure cost as drilling expands. After all, there’s a mismatch between the costs and benefits of drilling. The economic benefits of oil and gas drilling spread out over a large area — jobs, increased energy supply, and so on. However, the infrastructure costs are local.
The Oil and Gas Production Tax Holiday
Montana government, quite simply, doesn’t function rationally. There is an Oil and Gas Production Tax, set at 9% of production revenue. As oil and gas revenues increase, this should produce an increasing stream of revenue for local governments to pay for the increasing costs of infrastructure. That seems rational.
In 1999 the Legislature passed SB530, an Oil and Gas Tax Holiday. The holiday provision reduced the tax from 9% of revenues to 0.5% of revenues for the first 18 months of operation of a horizontal well. At the time, oil was selling for $20 a barrel and the rationale was that this incentive was necessary to encourage oil and gas companies to drill in the State.
The reason the holiday is set for 18 months is that, for a horizontal oil well, the vast majority of the production occurs in the first 18 months. As you can see from this graph, production declines by 69% in the first year alone, and by about 80% after 18 months.
In a nutshell, the 18 month holiday is pretty close to a free pass on any significant taxes on a horizontal oil well.
I’ve seen no evidence to indicate that this incentive was necessary in 1999, but it is impossible to justify a need for it today, when the price of oil is over $100 per barrel (as of this writing) and there is a race to exploit oil fields all over the country.
By comparison to other states, Montana is one of only two oil-producing states with an oil tax holiday (Oklahoma is the other).
So, in this irrational world, Montana lets local governments foot the majority of the bill for the increased cost of infrastructure while the rest of the world benefits.
How horizontal wells increase the cost of road maintenance
Let’s take a look at just one fairly straightforward example of the infrastructure impact of increased oil production: roads. I’ve written about this before, and I recommend you take a look to see how the volume of truck traffic increases with every horizontal well.
There is a recent study from the Journal of Infrastructure Systems that quantifies the local cost of road construction and maintenance due to horizontal drilling. Two key findings of the study:
- The heavier trucks used in horizontal drilling operations cause exponentially more damage than smaller trucks. You can get into the analysis of load factor equivalencies in the study yourself, but the bottom line is that an 18,000-pound and 30,000-pound single-axle truck will do about 900 times and 7,500 times more damage than a 3,000-pound single axle pass, respectively.
- A conservative estimate of the infrastructure cost of road maintenance per well is $5-$10,000.
Using this estimate, and taking John Mork’s announcement that he plans to drill 50 wells (it will be much more if he finds oil), we can expect, by this conservative estimate, a road maintenance cost of around $500,000, give or take a buck or two.
And how much is Carbon County’s current budget for road maintenance? As I read their budget, it looks like it is about $130,000 for the entire County (see page 21).
Who’s going to pay?
Now where is that $370,000 shortfall coming from? Well, if not the State, then…
probably you. By my calculation, taxes for a family of four would need to go up by about $180 a year to pay for this. Not much different from what the oil baron who’s drilling the well across the road pays in taxes for the first 18 months of production.
And that’s just the cost of the roads. You’re going to have to pay more for cops and judges, waste disposal, schools and other things too.
Tomorrow we’ll look at what’s happened to infrastructure and taxes in Sidney, the capital of Montana’s portion of the Bakken. You’ll also hear from Bret Smelser, one of this blog’s favorite gasbags.