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9. Prepare for review by the Committee the outline of a
proposed ballot proposition that would impose a tax on
gas well production of between 5% and 10% of the
wholesale price of gas to be dedicated to health and
justice programs.
BACKGROUND:
On April 9, 1985, the Board referred to our Committee for further
review a report from the County Administrator on this subject.
Since that time additional data has been obtained which was
presented to our Committee in the form of the attached report
from the County Administrator dated September 6, 1985. Despite
the recommendation of the County Administrator, our Committee
believes that the potential exists to either impose a tax for
revenue purposes on gas production in the County, or to impose a
tax which will effectively halt further gas exploration and
production in the County, thereby conserving this scarce resource
for the future. In order to more thoroughly evaluate this
possibility our Committee met with representatives of many of the
gas and oil producers in the County and representatives of the
County Administrator and the County Counsel on September 9 , 1985.
Concern was expressed by Supervisor Torlakson for the possible
effect gas production has on the subsidence problem in the Delta.
He suggested that the proceeds from a gas well production tax
could be dedicated to financing recorder stations to monitor
subsidence of Delta land. Supervisor Powers suggested that he
would only support such a tax if it were used to support
countywide programs; namely, health and justice systems programs.
Representatives from the oil and gas well producers cautioned
that a tax could make gas production no longer competitive with
out-of-state producers, to which Supervisor Powers replied that
in his view preserving the remaining reserves for future
development was a benefit to the citizens of the County, and it
was not necessarily bad if a tax halted further exploration or
production in the County.
It was noted that the BTU value of a thousand cubic feet of gas
is priced at about $3 . 00 . The Committee members raised a number
of questions and indicated that they needed answers to those
questions before they could fully evaluate the need for a gas
well tax. The recommended actions above are designed to elicit
the information sought by the Committee.
J
OFFICE OF COUNTY ADMINISTRATOR
CONTRA COSTA COUNTY
Administration Building
Supervisor Tom Torlakson Martinez, California
To: Supervisor Tom Powers Date:
INTERNAL OPERATIONS COMMITTEE September 6, 1985
From: Phil Batchelor (?�) Subject: Tax on Oil and Gas Wells
County Administrator
RECOMMENDATION•
Acknowledge -receipt of this report and recommend that the Board
of Supervisors not impose a severance tax on oil and gas
production in this County at this time. We will continue to
monitor newly proven reserves and will make a further report to
the Board at the point that new information appears to justify
the imposition of a tax.
REASONS:
1 . The potential revenue to be derived from the imposition of a
severance tax does not justify the administrative costs of
developing a ballot measure, placing the issue before the
voters, monitoring production of gas and oil, and collecting
the tax.
2 . The substantial drop in proven reserves over the past year
against which a tax would be imposed and the time delay
before the tax would be imposed would not justify the
imposition of the tax.
3 . Substantial legal issues remain unresolved which would
require specialized and fairly expensive counsel to research
and provide the County with a firm legal footing on which to
proceed.
BACKGROUND-
Since 1981, the Board and County staff have discussed and
researched the feasibility of imposing a tax on oil and gas
extracted from wells operating within the County. The purpose of
this report is to review the information which has been gathered
over the last several years and to indicate some of the potential
ramifications of imposing such a tax.
Based on information obtained from the Community Development
Department in August, 1984 , there are eight active oil/gas fields
in Contra Costa County: Brentwood, East Brentwood, Dutch Slough,
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Knightsen, Oakley, South Oakley, Riverbreak, and Sand Mound
Slough. Our April 8 , 1985 report to the Board of Supervisors on
this subject indicated that at that time these fields comprised
90 gas wells, of which 61 were in production, and 46 oil wells,
of which 33 were in production. The estimated reserves as, of the
1984-1985 lien date were 391 ,765 barrels of oil and
97 , 149, 051 , 000 cubic feet of gas.
As of the 1985-1986 lien date, the estimated reserves were
389, 617 barrels of oil and only 20 ,083 , 454, 000 cubic feet of gas.
This represents a nearly 80o reduction in proven reserves of gas
in a period of one year. In addition, the number of gas wells
was 77 , 74 of which were in production and 37 oil wells , 34 of
which were in production.
LEGAL CONCERNS:
It is clear that imposition of the proposed tax would require a
two-thirds voter approval as a "special" tax pursuant to
Government Code Section 50077 . According to County Counsel
because a special tax is defined as a tax where the proceeds are
earmarked for a special purpose, it can be argued that any voter-
approved special tax on oil and gas production should be
earmarked for a particular fund rather than the General Fund.
County Counsel has advised that the safest way .to proceed would
be to implement a severance tax on the "privilege" of gas and oil
extraction, based on the volume of gas and oil extracted. As
pointed out in our April 8 , 1985 report, there are legal
questions regarding the method used to measure gas and oil
production and that it would be essential for the County to hire
a consultant having special expertise in the gas and oil
extraction business to assist the County in drafting an ordinance
that would be practical and workable. County Counsel has also
advised that depending upon the details of the tax, an attorney
specially versed in oil and gas law may need to be employed.
Regardless of the details of any such ordinance, inasmuch as
Contra Costa would be the first county in the State of California
to impose such a tax, it would most assuredly be the subject of a
court challenge. County Counsel has advised that such litigation
would probably take many years and that during . such time it may
be necessary for the County to impound the proceeds of such tax.
As an example, the voters in Sonoma County approved a tax on
geothermal wells in that county some five years ago. None of the
tax has been received yet because the issue is still involved in
litigation.
CURRENT TAXES:
It is important to note that gas and oil wells are presently
already subject to a property tax'. The County Assessor values
the land at full value based on comparable land values in the
area, and assesses mineral rights based on the Net Income
projected over the remaining life of the well. For the 1984-1985
-3-
year,
3-year, the total full value assigned to gas and oil reserves was
$192 ,799, 411 . The actual property tax dollars generated are
. . unknown because oil and gas. wells are located in various tax rate
areas. For example, however, a 1% tax imposed on the assessed
value of the property and the gas and oil wells would-,generate ,
about $1 . 9 million. For the 19.85-1986 fiscal year, this value
was reduced to. $61, 933 , 109 due to the reduced proven reserves. .
At this value, a 1% tax would generate $619 , 331 in property tax.
OPPOSITION:
Representatives from oil and gas interests have been alerted to
the fact that the Board is considering implementation of such a
tax and have stated their opposition. One of their arguments is
that no other business engaged in commercial enterprise in the
County is required to pay taxes on units of production in
addition to property taxes. Another argument is that the County
is currently receiving property taxes on the natural gas reserves
in place from the time of discovery to depletion. The proposed .
tax would be deducted as a cost in the property tax computation
formula tending to reduce the property taxon. natural gas. This
position is corroborated in a March 25 , 1985 memorandum prepared
by the County Assessor in which he states as follows :
"Imposition of any type of additional tax may reduce future
projected economic net worth of reserves and results' in a
reduction of reserve value, thus reducing the ad valorem tax" .
Another factor involves royalty payments made to landowners.
Costs such as the proposed new tax would reduce royalty payments
because the royalty owners must pay their proportionate share of
production taxes.
SANTA BARBARA COUNTY:
Earlier this year, Santa Barbara County was contemplating the
imposition of a tax up to 10 cents per barrel of oil processed
within the county to mitigate the impact of oil development
activities. The Santa Barbara proposal applied. .to oil only.
Based on an estimate of 50 million to 200 million barrels of oil
processed per year, the potential revenue. to the county, at 10
cents per barrel, would have been in the range of $5 million to
$20 million. Despite this substantial .potential revenue source,
Santa Barbara County has deferred further consideration of this
tax, and has no plans to again consider this item in the
immediate future.
POTENTIAL REVENUE:
As of the lien date for the 1985-1986 fiscal year, the estimated
reserve of. oil was. 389, 617 barrels. At 10 cents per barrel, this
represents total revenue for all remaining reserves of $38 , 962 .•
The estimated reserve of gas was 20 , 083 , 454 , 000 cubic feet. At a
tax rate of 1 cent per 1 ; OOO cubic feet, *the reserves represent a
' total potential revenue of $200, 835 if every bit of proven
reserves are withdrawn.
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