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Senate | May 20, 2014 | Committee Room | Senate Finance

Full MP3 Audio File

Ladies and gentlemen, it's 5:00, the meeting will come to order. We are out of recess and back in full swing. I'm going to ask that we hold the majority of our comments or that we focus on the financial portion of this bill this evening, please. And when Senator Rucho is ready, he will present the proposed committee substitute or the commerce committee substitute for SB 786, Senator Rucho. [SPEAKER CHANGES] Members of the finance committee, sorry for the delay in getting all the paperwork ready, but we are focusing on keeping a good schedule and trying to be out of here sometime around mid June. Sorry. No, this meeting will be over by mid June. We did have a two hour debate on the subject of entire sections of the energy modernization act. It offers North Carolina energy independence. It offers us a diverse economy with economic growth revenues, good quality jobs. The bill, as it's designed, goes a long way to improving a lot of concerns, whether it be prohibiting waste water injection into the ground, or all of the other questions that came about where that's been discussed already. Mrs. Chairman, if we could begin the discussion and explanation of the financial portions of this bill and then we can respond accordingly to questions. [SPEAKER CHANGES] Thank you Mr. Chairman, the first finance related provision is in Section 11 of the bill, which, if the members have it in front of them, the 2nd edition is on page 13. So Section 11, this would amend a provision changed in 2011 or 2012 which established a 3000 dollar fee upon application to drill a well. The 2nd edition would amend that provision to provide that it was $3000 for the first well drilled on a pad and $1500 for each additional well to be drilled on that same pad. [SPEAKER CHANGES] Moving on to the tax portions of the bill, part six is the severance taxes. This can be found on pages 19 through 24. This repeals the existing severance taxes which were enacted in 1945 and they haven't been modified since 1973. And the state is currently not collecting any revenues under these statutes. This bill creates a new way of taxing the severance of energy minerals from the state. And if you wanna turn to page 5 of summary, there's a chart that shows you the tax rates. And I'm gonna first go over the tax rates. Oil and condensates will be taxed at 2% for 2015 through 18, 3.5% for 2019 through 2020, and 5% for 2021 and thereafter. Marginal gas, which means gas produced by a well that's incapable of producing more than 100 ?? of gas, these types of well will need to be certified by the Mining and Energy Commission to be certified that they are this type of well and that they are eligible for this preferential rate. So these are gas wells that produce very little gas, so they are given a slightly lower rate. So, marginal gas is .4% for 2015 through 18, .6% for 19, 20, and .8 for 2021 and there after. So all other gas has a slightly different mechanism for which it's taxed. 2015 through 2018 is .9% and that applies to all gas, but starting in 2019, there is a variable rate based on the price for MCF, similar to the graduated income tax where the first $3 in 2019 through 2020 is subject to .9%. Any price paid from 3 to 4 is 1.9 and any price paid above 4 is 2.9. And as you can see through 2021 through 2023 the rate goes up. It starts at .9% for any price paid under $3 and goes up to 5% for any price paid over 7. And then for 2023 and there after, the price is again .9 for any price paid for $3 and under and up to 9% for any price over $10. Now the tax base varies based on the type of minerals that are being severed. For oil and condensates, the tax base...

is the gross price paid for gas. It is the delivered market value. And, what this does is allow that the costs that are incurred from getting the gas from the wellhead to market are deducted from the gross price and that is the delivered-to-market price. So, that is the price on which that rate applies. The taxes administered similar to the sales tax, the liability is the producer, the liability lies with the producer of the tax. And, the producer is the entity that first extracts the mineral from the soil or the water of the state. Returns and taxes are due either monthly or quarterly based on the total liability of the producer and a bond or letter of credit is required of producers that fail to file a tax or file a return or make a payment of a tax due. Also, permits for this will be suspended if an entity fails to file a return or pay a tax. There's also no new local taxes allowed so no new privilege taxes or any other taxes that would be imposed by the local government on the energy development. And, there is a property tax exemption for the presence of energy minerals. So, except for when a permit has been issued. So, if the property has energy minerals on it, they will not factor into the property valuation until a permit is issued to allow the exploration of those minerals. I'm gonna quickly go over two studies that also relate to property taxation. Section 20 of the bill directs the local government division to study how other states value energy minerals for the purpose of property tax and it directs that the division to establish guidelines for counties to value the minerals to ensure that there's consistent and fair taxation throughout the state. And, Section 21 is a study that asks the Joint Legislative Commission on energy policy to study the development of the energy industry and how property tax revenues will be affected by the development of the energy industry. It also will examine how the industry will affect property enrolled in the PUV or the Present Used Value program. And, it will also study ways to limit the growth of property tax revenues resulting from increased property valuations that are a result of energy production. Now, I just will note that this is a study of provisions that were in an earlier version of the bill. You may have heard about the provision that would cap local government revenues at 80% of property tax revenues. That has been taken out of the bill and that is no longer in the bill. This is a study to study that sort of same sort of thing. The last tax portion of the bill, on page 28 of the second edition, Section 30. And, this is regarding the motor fuels tax. As you are aware, we have a per gallon tax on motor fuels that's currently 37.5%. For alternative fuels, the Secretary of Revenue can actually calculate an alternative rate and this actually sets the alternative rate for two types of alternative energy. Compressed natural gas and liquefied natural gas. It sets the gas gallon equivalent for compressed natural gas and the diesel gallon equivalent for liquefied natural gas. [SPEAKER CHANGES] Thank you. Senator Rucho. [SPEAKER CHANGES] Thank you members of the committee. Senator Newton, Senator Brock and myself will respond to him and to any questions in regards to the ??. [SPEAKER CHANGES] Thank you members of the committee. Questions for Senator Apodaca. [SPEAKER CHANGES] Thank you Mr. Chairman. Senator Rucho, the first item we talked about was the perf well fee being changed from $3000 to $1500. [SPEAKER CHANGES] Yes. [SPEAKER CHANGES] Is it my understanding I believe from what I heard Senator Newton say earlier, this would actually bring more money into the state. If they're on the pad, we get to charge for each individual well where if it was just one pad it would be one fee. [SPEAKER CHANGES] Well, actually that may be a misunderstanding. Before it was $3000 per well regardless of how many wells were on a pad. Now, it's gonna be $3000 for the first one and $1500 for the follow-on. Part of that was industry asking questions of why do they have to pay the same fee for each additional well when ?? and others aren't gonna have to do a whole lot more. It's already sighted the pad and most of the heavy work's been done. [SPEAKER CHANGES] All of the work has been done. It's just a matter of registering that next well on the pad. [SPEAKER CHANGES] Senator McLaurin. [SPEAKER CHANGES] Thank you Mr. Chair. Question about the-, we've got information that 33 states, including North Carolina, currently impose a severance tax. How many of those states, and maybe staff would know this and maybe you do. How many of those states also do have some type of a local tax that is imposed on the operators. Again, I'm just trying to think of it in-. I have a local government background. Are you aware how many of those states

Have some type of a local government tax. [SPEAKER CHANGES] Unfortunately I'm not aware of how many. I know some states share some of the local taxes and some states allow locals to have taxes but I don't off the top of my head know how many that have a specific local tax, regarding this industry. [SPEAKER CHANGES] Follow up? [SPEAKER CHANGES] Would that be something that you could do some research on? I think that'd be of interest to the members of the committee and as we move forward with this process just to see what other options local governments have for generating some revenue. Thank you. [SPEAKER CHANGES] Mr. Chairman? Senator Carney, you know we were in Arkansas together and they apparently have property taxes down there, on the equipment that exists within that county, during let's say January first of the year and apparently everybody fights about when the rig is going to be shifted over there so we can be looking at a number of those issues, okay? [SPEAKER CHANGES] Thank you. Senator Ford. Excuse me, Senator Ford, did you want to weigh here? [SPEAKER CHANGES] If I could, very briefly. I think it's also, on Senator Ruccho reminding us about the equipment and so forth. When this occurs, there's a great expansion in the tax base. When the permits are issued, as you talked about in commerce, those minerals then become on the tax rolls and subject to taxation. So the local governments are going to have a lot of opportunity to have property tax resources. [SPEAKER CHANGES] I understand. Thank you. [SPEAKER CHANGES] Senator Ford? [SPEAKER CHANGES] Thank you, Mr. Chairman. As it relates to the taxable portions of this piece of legislation, how would you say that our tax rates would compare to those states that are doing similar or the same type of drilling? [SPEAKER CHANGES] You're talking about like severence taxes? [SPEAKER CHANGES] I'm referring to the severence tax as well as the other portions of the bills that are taxable. How do we compare to those other states that are doing similar or the same type of drilling in those states? And it's, Mr. Chairman, it's relative, loaded question as relates to, I want to see how competitive we're going to be as relates to what we're doing and the rate that we're taxing it at. [SPEAKER CHANGES] There's a lot of variety in the tax rates. It can range from 2% up to 14%. This would be on the lower end of that spectrum. I will also say that the original severence tax that was proposed last year had a higher default rate, but a similarly low incentive rate for what were called high-cost wells. And there are a lot of states that do that, where they give an incentive rate for certain wells. And this is basically to horizontally fractured wells. Because what we think at this point is most of the wells will actually be these types of horizontally fractured wells, we eliminated the higher default rate because it wouldn't actually apply to anyone, and just have the incentive rate. And there are other states such as Texas and Arkansas that also have incentive rates. We are the only state that has this exact sort of tiered tax based on the price. There are other states that have somewhat of a variable rate but they're not identical to this. This would be a tax on the lower end of the spectrum. [SPEAKER CHANGES] Follow up, Senator Ford, or are you good? [SPEAKER CHANGES] And we discussed this in the last session with the congress, but if you noticed if our rates in 15-18 are relatively low to be an attraction to getting activity here, and actually looking at it and seeing what we indeed have in our areas of shale gas. And then you notice going out, the out years, there is a significant increase because that small market type rate and even to the point of escalating the rate as the price of natural gas goes up. So we're adjusting as the market will allow us to do. [SPEAKER CHANGES] Senator Daniel. [SPEAKER CHANGES] Thank you Mr. Chairman. Senator Ruccho, I'm trying to figure out how to phrase this question. The bill as it's written says that property can't be taxed that doesn't have a permit assigned with that parcel. I know with forced pooling, I presume we're going to have squares like they do in North Dakota, where you've got 640 acres that are pooled together. Would there only be one acre that has a well on it that has a permit, and therefore we would only tax, or would we be taxing the entire 640 acres proportionally? [SPEAKER CHANGES] I would assume and that's a risky thing, but I would assume that if, the way the local government would interpret this is that basically if you have

Forced pooling, and you have a permit issued it would apply to all the properties that are in that forced pooling. However, this is also one of the issues why we've asked the local government, teh division at the department of revenue to look at this. So we want to make sure that that is clear. But that is, I would assume that if the permit was issued it would be to all the properties that applied, not just for the actual well head is situated. [SPEAKER CHANGES] And if I could add, Senator Daniel, I think that makes a lot of sense to me too, because those property owners within that unit, once that permit's issued and the resource starts coming out of the ground that's when they're going to also experience the royalty checks. And so that would be the logical time to begin that. [SPEAKER CHANGES] Follow up. [SPEAKER CHANGES] I guess this is sort of a different subject, but I know some states have caps, or made a minimum royalty amount that companies can put in a lease. Has that been something that y'all have considered? [SPEAKER CHANGES] Thank you Mr. Chairman. Yes, in 2012 the General Assembly enacted a floor of 12.5% royalty. [SPEAKER CHANGES] Members of the committee, any further questions? Comments? And now we will entertain Senator Hartzel. [SPEAKER CHANGES] Would the severence tax apply to the ?? the courts find from the Pennlan Valley property near Spruce Pine? [SPEAKER CHANGES] Senator Hartzel, would you like to answer your own question? [SPEAKER CHANGES] Well, I would, and I would hope that it would, but I seriously doubt that it does, but I don't know whether that quartz which forms a basis for a lot of this, the computer chips. Thank you. I'm old, I'm forgetting these things. I'm really serious. It's a very valuable mineral quality that's the finest in the world and we don't tax any of it at the moment, as far as I know. Isn't that right? [SPEAKER CHANGES] Yes sir. This severence tax only applies to oil gas and ??. It does not apply to any other sort of what you'd consider natural resources of the state. It doesn't apply to ?? It doesn't apply to quartz. It does not apply to any of those things. [SPEAKER CHANGES] Follow up, sir? [SPEAKER CHANGES] Well I'm aware, quite honestly, of some folks who have figured out a way to use quartz to generate energy. With some coatings and utilizing some battery sources. [SPEAKER CHANGES] That may be out of the scope of the discussion of ths one. [SPEAKER CHANGES] Okay, thank you Senator Hartzel. Any further discussion or debate from the committee? The chair will entertain a motion by Senator Clark Jenkins. [SPEAKER CHANGES] I would move for favorable report. [SPEAKER CHANGES] There's a motion for favorable report. Can we have a second? Seconded by Senator Curtis. All those in favor please say Aye. Opposed No. Motion carried. Meeting adjourned. Thank you very much.