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HomeMy WebLinkAboutMINUTES - 10291985 - IO.1 -To. TO: BOARD OF SUPERVISORS Contra FROM: INTERNAL OPERATIONS COMMITTEE Costa DATE: October 28 1985 County SUBJECT: , Tax on Oil and Gas Wells SPECIFIC REQUEST(S) OR RECOMMENDATION(S) & BACKGROUND AND JUSTIFICATION RECOMMENDATIONS: 1. Acknowledge receipt of the report of our Committee. 2 . Take no further action regarding the imposition of a tax on oil or gas wells. 3 . Remove this 'item as a referral to our Committee. BACKGROUND: On April 9, 1985, :the Board referred to our Committee the report from the County Administrator on this subject. We have requested additional financial information from the County Administrator' s Office and have received reports dated September 6 and October 22 , which are attached to this report. These reports conclude that the potential costs of administering a tax, and the probable legal costs probably exceed the possible proceeds from such a tax, particularly since such a tax would have to be placed on the ballot and receive a two-thirds affirmative vote before it could be imposed. At the rate that gas is presently being withdrawn, there will be little currently known reserves left by the time a tax could be imposed. For these reasons, we have reluctantly concluded that a tax is not feasible given the currently known reserves, the rate at which gas is being extracted, and the lead time necessary to get voter approval and implement the tax. CONTINUED ON ATTACHMENT: YES SIGNATURE: RECOMMENDATION OF COUNTY ADMINISTRATOR CO MENDAT ON OF BOARD COMMITTEE X APPROVE aT!MER SIGNATURES) Tom Torlakson; T Power ACTION OF BOARD ON C 0 er 29, 1985 APPROVED AS RECOMMENDED X OTHER I VOTE OF SUPERVISORS X UNANIMOUS (ABSENT I ) I HEREBY CERTIFY THAT THIS IS A TRUE AYES: NOES: ' AND CORRECT COPY OF AN ACTION TAKEN ABSENT: ABSTAIN: AND ENTERED ON THE MINUTES OF THE BOARD OF SUPERVISO,,RS�� ON THE DATE SHOWN. County Administrator. CC: County Assessor ATTESTED County Counsel - - -- -- ------ PHIL BATCHELOR, CLERK OF THE BOARD OF SUPERVISORS AND COUNTY ADMINISTRATOR M382/7-83 BYE Ali k�� l/t-C�,,� DEPUTY 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, -2- 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 i -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 1985-1986 fiscal year, this value was reduced to $61 , 933 , 109 due to the reduced proven reserves. At this value, a 116 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 tax on 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 , 000 cubic feet, the reserves represent a total potential revenue of $200,835 if every bit of proven reserves are withdrawn. PJB:clg j OFFICE OF COUNTY ADMINISTRATOR CONTRA COSTA COUNTY Administration Building Martinez, California Internal Operations Committee October 22, 1985 To: (Supervisors T. Torlakson and Date: T. Powers) Phil Batchelor, Tax on Oil and Gas Wells From : County Administrator Subject On September 10, 1985 the Board of Supervisors, on recommenda- tion of the Internal Operations Committee, directed the County Administrator to obtain certain additional information related to the feasibility of establishing a tax on gas well production. Following are the specific questions asked by the Committee and information obtained to date: 1. How much of the proven reserves of gas are located in cities as opposed to the unincor- porated area of the County? Attachment A shows the number of producing oil and gas wells within the County and the estimated reserves as of December 31, 1984. Only one or two of the gas wells are located within the City of Brentwood. It is estimated that 97% of the estimated gas reserves are located in unincorporated area. 2. How much would a severance tax reduce property taxes? (Is there a dollar-for-dollar offset or only a fractional offset? ) Discussion with staff of the County Assessor revealed that it is not possible to answer this question on a generalized basis. An economic analysis of each well would have to be undertaken to determine the effect of the imposition of a severance tax. First of all, the proposed severance tax rate would have to be known. Secondly, the total amount of the severance tax for each well would be added to the deductible operating costs for that well thereby resulting in a lower taxable value. Attachment B displays two hypothetical cases of how a 5% severance tax could affect the calculation of the mineral right taxable value. 3 . What is the trend in the discovery of new reserves of gas? Attached as Attachment C is a list of new oil and gas discoveries in the State of California for the last five years. The number of new discoveries has increased dramatically during this time. The discoveries made were two in 1980, two in 1981, eight in 1982, Internal Operations Committee 2 . October 22, 1985 eight in 1983 , and 22 in 1984. The discoveries are categorized as new fields, new areas, new pools, or extensions of sources. The last discovery in Contra .Costa County was the extension of the Oakley South Gas Field. Staff of the County Assessor' s Office has advised that the existing reserves of gas within the County are being depleted much more rapidly than new discoveries are being made. 4. Do any comparable severance taxes exist in other states and, if so, what has their experience been in terms of the impact of the severance tax on production and exploration? Attached as Attachment D is a summary of severance tax practice in other states. No information has been obtained on the impact of such tax on production and exploration. In general, local juris- dictions do not have authority to levy a severance tax and, if they do, such tax is in-lieu of a property tax. 5 . What are the potential legal costs of putting together a sound ballot proposition and defending any potential legal challenges to it? What are the potential costs of a technical expert consultant in oil and gas law who would assist in designing sound methodology for imposing a tax? Taking these two questions together, any answer is purely specula- tive and subject to great variation. County Counsel has advised that at least $10,000 would probably be required for assistance in the development of a ballot measure. This includes development of a methodology imposing the tax. The cost of defending legal challenges is extremely difficult to estimate. County Counsel has advised that there is no question that the oil companies would mount a major legal offensive against this kind of tax and would pursue the matter through the Appellate Courts. Cost of legal defense would be at least $50 ,000 with a potential for going much higher. 6. What are the likely administrative costs of such a tax on gas well production? Ongoing administrative costs of administering such a tax are esti- mated at $8,000 to $10,000 per year, including the cost of staff and computer time. Internal Operations Committee 3 . October 22, 1985 7 . How much in royalties are being paid to owners of agricultural lands as opposed to lands available for development? No information has been obtained on this question inasmuch as it would require a significant amount of staff time and the ability to obtain accurate personal income data is questionable. GEB/aa ATTACHMENT A CONTRA COSTA COUNTY OIL AND GAS WELLS AND ESTIMA TED RESERVES Field No. Producing Wells Estimated Reserves @12/31/84 Oil Gas Oil (Mbbl) Gas (MMcf) Brentwood 45 645 3 ,291 Brentwood East 9 5,518 Dutch Slough 19 10 ,545 Los Medanos 17 6,422 Oakley 2 2,994 Oakley South 11 20 ,070 River Break 10 2, 393 Sand Mound Slough 2 1, 602 Rio Vista 1 TOTALS 45 71 645 52,835 Source: 70th Annual Report of the State Oil and Gas Supervisor, California Department of Conservation ATTACHMENT C OIL AND GAS DISCOVERIES 1980 - 1984 Year County No. and Type if Discovery 1980 Monterey 1 - Extension Kern 1 - New pool Total 2 1981 Kern 1 - New pool Contra Costa 1 - New area (Los Medanos) Total 2 1982 Kern 1 - New pool Los Angeles 1 - New pool Colusa 1 - New pool Contra Costa 1 - Extension (Oakley South Gas) Glenn 1 - Extension Sacramento 1 - Extension San Joaquin 1 - Extension Yolo 1 - Extension Total 8 1983 Santa Barbara 1 - New Field 1 - New Area Kern 2 - New pool 2 - Extension Sonoma 1 - New field Yolo 1 - Extension Total 8 1984 Los Angeles 2 - New pool 4 - Extension Santa Barbara 4 - Extension Ventura 2 - Extension Kern 3 - Extension 1 - New pool 1 - New area San Joaquin 1 - Extension Solano 2 - Extension Sutter 1 - Extension Yolo 1 - Extension Total 22 SOURCE: 70th Annual Report of the State Oil and Gas Supervisor, California Department of Conservation. ATTACHMENT D STATE COMPARISON OF OIL AND GAS SEVERANCE TAXES The following information was obtained from a 1981 report prepared by the American Petroleum Institute, entitled State and Local Oil and Gas Severance and Production Taxes. State Comments Alabama The State levies a 4% tax on production of crude petroleum and natural gas. The tax is based on the gross value of the oil or gas at the point of production. The tax is in-lieu of ad valorem tax. Local severance taxes are prohibited. Alaska The state levies an Oil and Gas Regulation and Conservation Tax and a Production Gas. The Production Tax is in-lieu of other tax (e.g. , ad valorem) . Local severance taxes are prohibited. Arizona The state levies a 2-1/2 percent transaction privilege tax on the production of oil and gas. Arkansas The state levies a 5% tax on oil and a tax of three tenths of one cent per 1, 000 cubic feet on natural gas. The tax is based on the market value of the product at the time and point of severance. No other privileged or excise tax in addition to the severance tax may be imposed upon the rights to utilize natural resources. California State levies a charge on oil and gas well operators to support the State Division of Oil and Gas. There is an additional charge on well operators in subsidence areas. Several cities levy oil and gas well production taxes. Colorado The state levies an oil and gas conservation tax and a severance tax upon the gross income of crude oil, natural gas and oil. There is no authorization for the imposition of local severance taxes. a. State Comments Florida The state levies a severance tax of 5% for gas and 8% for oil on the gross value at the point of production. State law provides that ad valorem taxes shall not be increased because of any producing oil or gas well or equipment appurtenant thereto, situated on the land. Local jurisdictions are prohibited from levying any excise or license tax in addition to the state state severance tax. Georgia The state may levy a tax not to exceed 5 mills per barrel of oil produced and one-half mill per 1,000 cubic feet of gas produced. There are no provisions respecting a local severance tax. Idaho The state may levy a conservation tax of up to 5 mills per barrel of oil or 50,000 cubic feet of gas produced. There are no provisions respecting local severance taxes. Indiana The state imposes a tax of one percent on the value of all petroleum products at the time of severance. There are no provisions respecting local severance tax. Kansas The state levies a production tax on gas and oil. There are no provisions respecting a local severance tax. Kentucky The state imposes a tax of 4. 5% of the market value of all natural resources including gas and crude petroleum. Authority for counties to levy a tax of not more than. one percent of market value of crude petroleum produced was repealed in 1980 . Louisiana The state imposes a variety of taxes on petroleum products but with regard to the imposition local taxes, the state constitution provides that no severance tax shall be levied by any local subdivision of the state and that no further or additional tax or license shall be levied or imposed upon oil or gas leases or right, nor shall any additional value be added to the assessment of land, by reason of the presence of oil or gas therein or their production therefrom. 3 . State Comments Maryland There are no provisions respecting state-wide severance taxes. One county levies a 7% tax on the business of collecting, distributing and producing natural gas. Michigan The state imposes a severance tax of 6. 6% of the gross cash market value of the production of oil and a similar tax of 5% on gas. State law provides that the severance tax levied by the state shall be in-lieu of all other taxes, state or local. Mississippi A tax of 6 cents per barrel or 6% of value at the point of production, whichever is greater, is imposed on the business of producing or severing oil. There is a state imposed gas severance tax at the rate of 6% of the value thereof at the point of production. There are no provisions respecting a local severance tax. Montana The state levies a gas and oil severance tax but there are no provisions respecting a local severance tax. Nebraska The state levies a tax on all oil or natural gas at the rate of 2% of value at the time of severance. There are no provisions respecting a local severance tax. Nevada The state imposes a conservation tax on producers of 5 mills per barrel of oil and 5 mills per 50,000 cubic feet of natural gas. There are no provisions respecting a local severance tax. New Mexico State imposes an oil and gas severance tax on 5 cents per MCF of gas and 45 cents per barrel of oil. Also imposed are a conservation tax, emergency school tax and an ad valorem tax. North Carolina The state levies severance tax of not to exceed 5 mills per barrel of oil and not to exceed one-half mill on each 1,000 cubic feet of gas. Proceeds of the taxes are to be used solely for administration of oil and gas conservation act. There are no provisions respecting local severance tax. 4. State Comments North Dakota The state levies a severance tax of 50 of the gross value at the well upon all oil and gas. This production tax is in-lieu of all ad valorem taxes by the state or any of its political subdivisions. There are no provisions respecting a local severance tax. Ohio The state imposes a tax for the severance of natural resources of 3 cents per barrel of oil and one cent per 1,000 cubic feet of natural gas. There are no provisions respecting local severance tax. Oklahoma The state imposes a tax equal to 70 of gross value of petroleum produced. State law provides that the production tax shall be in-lieu of all taxes by the state, counties, cities, towns, townships, school districts, and other municipalities. Oregon State levies oil and gas tax not to exceed 6 percent of market value. South Dakota State levies a severance tax of 4-1/2 percent of the taxable value. Tennessee A severance tax of 1-1/20 of the sell price is imposed on oil and gas. The state and other local political subdivisions are prohibited from imposing other taxes on oil and gas. Texas Texas levies a variety of taxes on oil and gas production. No city, county, or other political subdivision may levy a tax unless specifically permitted to do so by the Legislature of the State of Texas. Utah The state levies an oil and gas severance tax at 20 of value at the well. There are no provisions respecting a local severance tax. Virginia The state has no severance tax on oil or gas. Counties and cities are authorized to levy taxes up to one percent upon the gross receipts from severing coal or gases in-lieu of an ad valorem tax on minerals. 5 . West Virginia State levies a conservation tax on oil and gas leases of 3 cents per acre. Business and occupation tax is levied based on the value of oil and gas produced. Wyoming State levies a severance tax of 40 of the value of the gross product extracted on petroleum, natural gas and any other fossil fuel minerals. . There are no provisions respecting local severance tax. 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