MINERAL TAX INCENTIVES, MINERAL TAX INCENTIVES AND THE WYOMING ECONOMY PROGRESS REPORT

December 1, 2001

 

 

            This progress report covers the 8-month period March 1, 2001 to November 30, 2001.  During that time, we have worked on three aspects of the project.  First, we have completed development of a model that can be used to estimate effects of federal, state, and local tax changes on the Wyoming oil industry.  The original model developed pertained to the oil and gas industries combined, however, some tax incentives adopted (or at least considered) by the Wyoming Legislature pertain to the oil industry, while others pertain to the natural gas industry.  In any case, the new model will increase the precision of estimates of effects of tax changes on the oil industry.  Second, we have updated and thoroughly reanalyzed the data used in the original report to establish the extra cost of drilling on federal land because of more stringent enforcement of environmental and land use regulations.  Third, we have begun to construct a new model of the Wyoming coal industry and to update the data sets used to implement it.  Details about these three work products are provided below. 

 

Work on the new Wyoming oil industry model was begun in May 2001, with the assistance of Ryan Maddux, a UW undergraduate economics major who was supported by an EPSCoR summer research fellowship.  As indicated above, this model now is complete and we have turned it over to David Black, as provided in our contract.  The model can be used to show the effects of all tax incentives previously granted to the Wyoming oil industry, as well as the effects of hypothetical tax incentives or tax relief that might be considered in the future.  For example, the model was used to work out the effects of a once-and-for-all reduction in the state oil severance tax by 2 percentage-points, which reduces the state effective rate from 5.2% to 3.2% and the total effective tax rate (including ad valorem taxes) in the state from 11.9% to 9.9%.  Results show that the tax reduction increases production over the next 40 years by a total of 19 MMbbls total, or 2.3% above the no-tax-change case.  With regard to drilling, the effect of the tax reduction is somewhat greater.  Over the next 40-years the tax cut contemplated would result in additional drilling of 504 wells. This figure represents an 8% increase in total wells drilled as compared to the no-tax-change case.  The largest change associated with the 2 percentage-point reduction in state oil severance taxes appears to come from severance tax collections.  Applying a discount rate of 4%, the tax change results in a decline in the present value of Wyoming severance tax collections from $609 million to $381 million, a decline of over 37%.  Alternatively stated, Wyoming would forego $452,381 in present value of severance tax revenue for each of the additional 504 wells drilled.  Because severance taxes are deductible in computing federal corporate income tax liabilities, tax payments to the federal government increase by $31 million (5.5% above the no-tax-change case).  Also, the 2 percentage-point severance tax decrease transfers state revenue to local governments because of the production stimulus.  Discounted local production taxes increase by $16 million or 2% above the no-tax-change case. 

 

Our reanalysis of drilling costs in the Wyoming Checkerboard shows that average real drilling costs are higher on federal land than on private land by $201,000.  We examined drilling costs in the Checkerboard because the land ownership pattern there provides an experimental control for at least three important potential differences between federal land and private land that may be difficult to directly observe: (1) differences in remoteness of the two types of land (2) differences in depth of reserves on federal land, vs. private land, and (3) differences in quantity of environmental resources on federal land vs. private land.  In light of effects controlled by restricting attention to the Wyoming Checkerboard, the drilling cost premium identified on federal land is cautiously interpreted as the result of increased stringency of application of environmental and land use regulations.  Evaluated at mean real drilling costs for the Checkerboard between 1987-99 ($965,000/well), this premium represents a cost increase of about 21.7%.  We also find that the drilling cost premium on federal land increases with well depth.  For relatively shallow wells (those at a depth of 9600 feet or less), the average real drilling cost on federal land is about $53,000 higher than on private land.  For wells drilled to depths of between 9600 and 12,300 feet, the cost difference is    $96,000, and for the deepest wells, the cost difference is $268,000.  A possible explanation for why the cost premium increases with well depth is that deeper wells require more time to drill and on federal property, drilling is more likely to be interrupted by the more stringent application of environmental and land use regulations prevailing there.  These regulations impose seasonal bans on drilling aimed at protecting archeological sites, big game winter range, and habitat for several species of birds and raptors.  Thus, particularly on federal property, deep wells must be drilled incrementally in possibly inefficient phases that can stretch over a year or more.  It may be of interest that our findings are consistent with the testimony of James T. Hackett, CEO of Ocean Energy, Inc. at the March 15, 2001 U.S. House of Representatives Subcommittee on Energy and Mineral Resources chaired by Rep. Barbara Cubin.  Finally, we plan to fully develop implications from our estimates for drilling and production of oil and gas, once our models have been fully updated with the most recent data available.  As noted below, this will be done later in the Spring of 2002..

   

 

We also have worked on improving our model of the Wyoming coal industry and have completed much of the statistical work needed to implement it.  In particular, we have updated our data on mine costs and railroad rates pertaining to the Powder River Basin.  Also, we have extensively analyzed the rail rate data to better understand rate-setting patterns.  In light of this analysis, it seems clear that railroads have discretion (power) in setting freight rates.  Further analysis, to be conducted in spring of 2002, will show the extent to which this market power may have partly led to declining mine-mouth prices of coal during the past 15 years when markets for Powder River Basin coal expanded and pushed eastward. 

 

We would be happy to entertain questions about our progress to date.  A final report on these projects will be submitted on or before June 30, 2002.  This report will contain estimates from updated versions of all models prepared to date.  Final updating of models will be conducted in Spring 2002 so that the most recent data available are used.  Also, to provide a clearer idea of the material to be submitted in the final report, we have attached copies of two papers that describe our work over the last 8 months in greater detail.  These papers will be revised into report chapters and submitted along with a detailed executive summary.