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HomeMy WebLinkAboutMINUTES - 04091985 - 2.2 ' TO: �. BOARD OF SUPERVISORS Z Z- Phil Batchelor, Co_FROM: County Administrator Costa DATE: April 8, 1985 County SUBJECT:REFERRAL FOR REVIEW OF IMPLEMENTING GAS & OIL TAX SPECIFIC REQUEST(S) OR RECOMMENDATION(S) & BACKGROUND AND JUSTIFICATION RECOMMENDATION: Accept this status report and direct staff to continue research on this subject. FINANCIAL IMPACT: The financial impact of the imposition of a _gas and oil well tax is not determined at this time as a result of insufficient information. BACKGROUND: As requested by your Board on March 12, 1985, this office has been gathering information concerning the imposition of a non ad valorem gas and oil well tax. We have worked with the offices of the County Assessor, County Counsel, and other involved departments. The Board order was prompted by a request for information from Supervisor Torlakson regarding other California counties that may be levying a tax on gas and oil wells. The following general information is provided concerning the amounts of oil and gas production in our County and what could be generated in terms of taxes. Question: How many other cities and counties levy a tax on oil and gas wells? Answer: No other counties and only a few cities. The cities which levy such a tax do so for regulatory purposes rather than financing purposes. Question: How many producing oil and/or gas wells are there in Contra Costa County at present? Answer: The total number of gas wells in the County is ninety. Sixty-one are in production. The total oil and condensate wells in the County are forty-six. Thirty-three are in production. Question: What information can be developed on what proven reserves of gas and oil exist in the County? CONTINUED ON ATTACHMENT: YES SIGNATURE: v RECOMMENDATION OF COUNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE APPROVE OTHER SIGNATURE(S) ��� ACTION OF BOARD ON April 9, 1985 APPROVED AS RECOMMENDED X OTHER X REFERRED to the Internal Operations Committee (Supervisors Torlakson.and Powers) for further review. VOTE OF SUPERVISORS X UNANIMOUS (ABSENT — ) 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 SUPERVISORS ON THE DATE SHOWN. CC: Internal Operations Committee ATTESTED 9, /9,r..f County Administrator Pha BaWselor, Ciuk of Ow Board of Supervisors MW CIw"Administnty M36e/7-03 0Y DEPUTY J Answer: The estimated reserves as of 1984-85 lien date are 97, 149,051 million cubic feet of gas and 391 ,765 barrels of oil and condensate. Question: How much property tax is generated annually from gas and oil wells in the County? Answer: The County Assessor presently values the land separately to the owner at full value and mineral rights are assessed to leasee-operater .based upon capitalized net income projected over the remaining life of the well subject to Proposition XIIIA limitations. This means that current land value is assessed based on comparable land values in the area and mineral rights are separately evaluated based on the earning potential of the wells. The limitations imposed by -. Proposition XIIIA mean that reappraisal of the property is not taken on a periodic basis unless the land is sold or transferred, which permits the assessor to place a current value on the property. Question: How much property tax is generated annually at present from gas and oil wells in the County? Answer: The total full value assigned to gas and oil reserves in 1984-85 is $192,799 ,411. The total property tax dollars generated are unknown due to various tax rate areas which include oil and gas wells. Generally, if a one percent tax were imposed on the assessed value of the property and the gas and oil wells, the property tax dollars generated would be $1 ,927,994. Question: Results of discussions with County Counsel, the Assessor, and the Auditor-Controller concerning imposition of a non ad valorem tax that could be imposed on gas and oil well production? Answer: The Assessor advised the most typical non ad valorem tax on minerals are severance taxes, gross receipt taxes, or revenue interest taxes which are similar to royalty interest taxes. Terminology varies, however. For example, a severance tax in one jurisdiction may be the same as a gross receipts tax in another jurisdiction. County Counsel advises that great caution needs to be taken before construction of a proposition to be placed before the voters for the reason that many Constitutional prohibitions exist '= that may be violated. At this point, the most defensible tax appears to be a severance tax on the "privilege" of gas and oil extraction, based on the volume of gas and oil extracted. Question: What is the potential revenue that might be derived from levying a non ad valorem tax on gas and oil wells in the County? Answer: The Assessor' s Office points out that production in the County varies each year on the volume extracted from the ground and the price of the gas and oil extracted also is subject to change. Based on 1984 information, we would estimate that $100 million to $150 million per year in gross income is derived from sale of these products. It should be pointed out that the estimated life of the known reserves at the present time will be depleted within the next ten to fifteen years. There is always the possibility that new fields will be discovered and revenues would be affected accordingly. If a tax of 1/10th of one percent (a mil) were placed on these gross sales, the income derived would range between $100,000 and $150,000 each year. -2- COUNTY COUNSEL ADVICE: There are examples in a few cities wherein a regulatory fee has been levied by cities to pay for costs of regulation of gas and oil wells in their jurisdictions. For example, Long Beach imposes a fee of about 10 cents/barrel of oil in order to produce sufficient revenue to fund the city's regulation of oil production. The fee is not intended to produce tax revenues to fund other governmental functions. A revenue raising tax on gas and oil raises many legal issues and must be very carefully designed to overcome the many potential legal obstacles which could make the tax subject to legal attack. If the County is to give further consideration to establishing this tax, it is essential that a consultant having special expertise in the gas and oil extraction business be employed so that the County can draft an ordinance that will be practical and workable. For example, the consultant would advise on how gas is metered and how to make adjustments for varying temperatures and pressures so as to fairly equalize the tax burden. Also, County Counsel advises that depending upon the details of the tax, an attorney specially versed in oil and gas law may need to be employed. Based on the information gathered thus far, County Counsel suggests that your Board consider the possibility of hiring a consultant who is expert in oil and gas extraction as well as an attorney who is expert in oil and gas law to assist County staff in further research towards a voter approved special tax. SUMMARY OF PROBLEMS AND COSTS As indicated in this paper, there are a large number of problems and unknowns at this point. The following list highlights the areas of concern: 1. Legal questions include the method used in measuring gas volumes as the volume will vary according to the temperature and pressure of the gas or oil. Determination of volume is essential to establishing a fair method of taxing gas or oil. There is also the question of varying grades of oil and amounts of impurities and methodology used to adjust for these variances. 2. Further questions involve methodology to be developed in applying whatever tax is determined to be appropriate in the need to use experts in oil and gas extraction as well as attorneys who are also expert in oil and gas extraction. 3. It can be anticipated that whatever efforts are made to establish a gas and oil tax there will be strong opposition from oil and gas companies. 4. If a method could be developed, would the tax that would accrue to the County fully reimburse the County for its cost and provide enough income to make it worthwhile? 5. it is clear that the only way a gas and oil tax could be imposed would be to develop a proposition and place it before the voters of Contra Costa County and it would have to pass by a two-thirds vote. The estimated cost of an election if combined with an already scheduled Primary Election is $25,000. 6. The expert consultants that have been mentioned above would probably cost the County $200 to $300 per hour. Considerable County staff time would also be devoted to working out all of the details of developing the proposition and later, if it were successful, -3- developing an ordinance to regulate and administer the tax. 7. It is further anticipated that if the proposition were passed that legal action by the oil companies is a real possibility and could cause the County to impound whatever tax revenues were derived until litigation was completed. 8. There is no money budget in fiscal year 1984-85 to do necessary work involved beyond the current staff support, nor at this point have estimates been developed as to how much money would be necessary to accomplish the work outlined above. 9. As mentioned in the report, depletion of oil and gas reserves in Contra Costa County is estimated to be within a ten to fifteen year range and there are indications that volume being produced will not increase in this time period but will decrease unless new fields are discovered. CONCLUSIONS• Although there appear to be several problems associated with the pursuit of a tax on gas and oil, the question merits further review. Following your consideration of the information that has been placed before you, you may wish to provide further direction to this office. -4-