Numerous oil and gas-related bills have been introduced thus far in the 63rd session of the Montana legislature currently in session in Helena, and while Montana Petroleum Association Executive Director Dave Galt follows all of them closely, he recently spoke with Petroleum News Bakken and discussed those that he thinks are most important to his membership.
The key bills Galt identified fall into a variety of categories. Some deal with compensation for landowner surface damage, eminent domain and forced pooling, all of which Galt lumps together into what he considers to be “property rights” legislation. Other bills that Galt considers key deal with taxation, temporary leasing of water rights, financial relief to oil and gas-impacted communities, and carbon sequestration and enhanced oil recovery using carbon dioxide.
Property rights: surface damage compensation
House Bill 431, introduced by Rep. Austin Knudsen of Culbertson, is a surface damage compensation bill that would add to the existing oil and gas surface damage and disruption compensation statue the definition of “lost land value” as “the value of the highest and best reasonably available use, including the proposed use.” The bill would also require that the surface owner and the oil and gas developer or operator attempt “in good faith” to negotiate an agreement on damages.
Galt says this bill concerns the MPA because the proposed language can be ambiguous. “We all have an idea in our mind what fair value is. The intent of a surface damage law is to compensate the owner of the surface for damages.” At some point in the past, he says, the surface rights and mineral rights were severed, and for hundreds of years, courts in the U.S. have given the mineral owner the right to access those minerals. But the surface owner, he continues, has to be compensated for the damages to the surface and the interruption to the surface owner’s livelihood, “and sometimes there is a conflict between what everybody thinks is fair.” A hearing on the bill was scheduled for Feb. 15 in the House Federal Relations, Energy and Telecommunications committee.
Galt says Knudsen, who is from Roosevelt County in northeast Montana, lives in the heart of the area that is seeing the oil and gas development, and the people who live in that area see all the impacts, both positive and negative. On one hand there are the mineral owners, and on the other there are the surface owners, and Knudsen, says Galt, represents both. “My take on Representative Knudsen is that he is pro oil and gas, and he is also pro property rights, and every once in a while those trains cross tracks.”
Property rights: eminent domain
Sen. Debby Barrett of Dillon introduced Senate Bill 180, which would repeal eminent domain laws that were passed in the last legislative session in response to what the MPA had considered an incorrect court ruling on eminent domain case. SB 180 would strike the power of eminent domain for a public utility and for an entity that has been issued a certificate of compliance for construction and operation of a facility under the Montana Major Siting Act.
While the portion of SB 180 repealing a public utility’s power of eminent domain was removed before the bill was passed by committee, the portion that would repeal the power of eminent domain for holders of a certificate of compliance remains in the bill. That, Galt says, is a problem because the Major Siting Act leaves the actual siting of something like a major transmission line or pipeline up to the government and removes the ability to negotiate the route with landowners from the project’s sponsor. “So it’s difficult if the government’s going to tell you where to put it and you don’t have eminent domain, you might never get that project built.” The amended bill passed the Senate Energy and Telecommunications committee on Feb. 9 on a 7-6 vote.
Rep. Kelly Flynn of Townsend has introduced several eminent domain bills including HB 417 which would require that a “final written” offer must be rejected by a property owner before formal condemnation proceedings can begin. The bill also allows for further offers to be made to the property owner after the “final written” offer is rejected by the landowner.
The MPA does not support this bill. The “whole system,” Galt says, is set up to have a mandatory settlement hearing after the best and final offer is made and the matter is settled. That, he says, is set up to get a higher offer. “This really confounds the eminent domain process,” Galt says. A hearing on HB 417 was scheduled for Feb. 15 in the House Federal Relations, Energy and Telecommunications committee.
Property rights: forced pooling
Another bill introduced by Knudsen, HB 406, would add to the existing forced pooling statue the definition of an “owner with mineral rights” as “a person who owns mineral rights containing oil and gas resources,” and if such an owner refused to share in development or operation costs, then the penalty to that owner is reduced. The bill also exempts an “owner with mineral rights” from other certain costs, and increases from one-eighth to one-sixth the landowner royalty of the non-consent owner.
The MPA is also opposed to this bill. Galt says the reason for forced pooling is so one mineral owner who opts to hold out does not affect the ability of other mineral owners to develop the resources. The financial risk, Galt says, is being borne by the people who are actually investing capital in that well. “There’s the theory that if you go non-consent and you become a working interest owner in the well, without financial investment, you shouldn’t benefit from the risk that somebody else is taking on their financial investment.”
Montana increased the penalty on non-consent forced pooling in 1993, and Galt says that is very important. “People sometimes forget that in Montana the oil and gas industry covers two-thirds of our state, and we have oil and gas industry and mineral owners and surface owners all over the place, and each area of the state has its own specific details and specific characteristics for getting oil and gas out of the ground.”
The legislation in HB 406, Galt says, is patterned after North Dakota law and he says changes in forced pooling that make sense in northwestern North Dakota do not necessarily make sense statewide in Montana. “We think it will have a detrimental effect in Montana because our wells are not as prolific as wells in North Dakota, and it really puts us at a disadvantage with exploration and development in other parts of the state.”
Before a non-consent owner gets to share in the product in the well, Galt says, that owner should pay a penalty for its non-consent. “That’s capitalism,” he says, “and the whole thing is set up to say that if you want to take on the risk, well, everybody puts skin in the game, and I think that’s the purpose for the law.”
The House Federal Relations, Energy and Telecommunications committee was scheduled to hear HB 406 on Feb. 15.
Taxation
SB 295 was introduced by Sen. Christine Kaufmann of Helena on Feb. 12. This bill would terminate the 12 month and 18 month reduced tax rates for new oil and natural gas production and would use those proceeds to address oil and gas impact projects and promote renewable energy sources. The short title of the bill is “Eliminate oil & gas ‘tax holiday’ and provide money for impacts and renewables.”
The drilling incentive that SB 295 eliminates was put in place in 1993, Galt says, and that incentive made it possible to convince companies to come to the Elm Coulee field, “where the Bakken all started.” There is a belief, he continues, that because of the increased activity in North Dakota, the same thing is happening in Montana, but he says that is not the case. “Montana wells struggle with operator’s economic thresholds for investment, and this small incentive tips the scales to entice capital investment.” Galt says there is exploration going on in many places in Montana, and the loss of this incentive will be a “show stopper” for many of these exploratory efforts. “The drilling incentive is an example of a business friendly decision made by the Montana Legislature and it works. There is an old saying, if it ain’t broke, don’t fix it.” SB 295 is scheduled for a hearing on Mar. 5 in the Senate Taxation committee.
Galt is also watching and the MPA is supporting HB 408, another bill introduced by Miller, this one calling for a phased reduction in the tax rate for certain air and water pollution control equipment down to 1 percent over a four-year period. Historically, Galt says, pollution control equipment, as a class, has always been taxed at a lower rate for business property tax purposes. However, as business property taxes have declined over the years, Galt says, now the rates are about the same. In addition, he says, pollution control equipment is generally mandated by federal or state law for the purpose of cleaning air and water and does nothing to increase production or refining capacity. The MPA doesn’t think that such equipment should be taxed at the same rate as other equipment. The House Taxation committee has not yet set a hearing date for the bill.
A similar bill is SB 240, introduced by Sen. Bruce Tutvedt of Kalispell. That bill would actually exempt all taxation on pollution control equipment installed since Jan. 1, 2012, and has not yet hit the tax rolls. The MPA supports this bill as well, and Galt thinks the industrial community is concerned about impacts of pending environmental regulations that will require more pollution control equipment. Reducing the pollution control equipment tax would lessen those impacts, albeit, he says, ever so slightly. SB 240 was heard in the Senate Taxation committee on Feb 6, but the committee has not yet voted on the bill.
Leasing water rights
Another bill that the MPA sees as important is HB 37 introduced by Rep. Bill McChesney of Miles City on behalf of the Montana Department of Natural Resources and Conservation, and provides for temporary leasing of water rights. Owners of water rights can lease their rights under current law, but that process is lengthy and can be expensive. Under the proposed legislation, that process would be expedited. However, to qualify for the temporary leasing, the water right has to have been used in the last 10 years, the right may be leased only during the period of diversion for the appropriation right, the right may not be leased for more than two years during any consecutive 10-year period, and the volume of water lease may not exceed 180 acre-feet per year.
The oil and gas industry, Galt says, buys water from people who have the water for sale, and this bill is meant to expedite the process for an agricultural user who might want to sell that water. “It allows flexibility for an agricultural user who may have a year they don’t want to irrigate for example and have the option to sell that water for a year but go back and use the water the next year,” Galt says. “This is an important bill to enhance the availability of water in a state where water has always been a contentious issue.”
The House Natural Resources committee passed HB 37 on Jan. 18. The full House passed the bill on second and third readings and the bill was sent to the Senate on Feb. 4.
Relief to oil-impacted counties
Getting infrastructure relief to oil-impacted counties is another issue the MPA feels is important. HB 218, introduced by Rep. Duane Ankeny of Colstrip is important, Galt says, because it creates an impact fund to provide financial assistance to counties that are impacted by oil and gas development. This bill would take a share of federal mineral royalties that go into the general fund and create a distribution mechanism to address impact projects such as infrastructure. “I really like that idea,” Galt says, “because federal lands in Montana represent 30 percent of our land base.” The bill was heard in the House Taxation committee on Jan. 24, but the committee is waiting is waiting on a requested revised fiscal note before taking further action.
Many of the oil and gas-related impacts felt by communities in northeastern Montana result from oil and gas development in neighboring North Dakota from people simply needing a place to live, Galt says. “I would argue that raising taxes on the oil and gas industry in Montana doesn’t get at the heart of the issue, and that a little assistance to help provide the basic infrastructure so these communities can address that growth benefits everybody. It’ll eventually allow for larger development in the communities and the economic development that everybody’s been after, and folks will come in and connect to those systems and provide the bigger tax base.”
School Funding
Approximately 48 percent of the production tax on oil and gas in Montana goes to the county in which the well is located, and that money is split approximately in half with one half going to the county’s general fund and the other half to the school district in which the well is located.
There is, however, a problem in how the school district money is distributed in that the school district money goes only to the district in which the well is located. As a result, some school districts are impacted by oil and gas development but don’t have any wells in their specific district. An example, Galt says, is Sidney where there is an elementary district inside the city but there are no wells in the city so that elementary school district doesn’t receive any oil and gas revenues. However, Galt says some of these issues are being addressed in a variety of school funding bills the legislative session is considering.
Carbon dioxide and common carrier status
SB 141, introduced by Sen. Alan Olson of Roundup, calls for a revision of the definition of a common carrier carbon dioxide pipeline in Montana. This is a housekeeping bill that aligns language in the common carrier code with that in the “clean and green” energy bill passed in 2007.
Galt says this bill is important in the context of carbon sequestration and enhanced oil recovery, EOR. In recent years, he says, there has been increasingly more focus on climate change and carbon sequestration, and carbon dioxide is being injected for EOR which can significantly enhance oil production. Galt believes this will be a process used more and more in older conventional fields in coming years. He says there is a carbon dioxide EOR project that will be starting soon in Powder River County just north of the Wyoming border in southeast Montana, which he says could be “a significant bright star in Montana’s oil and gas production.”
SB 141 passed third reading in the Senate on Jan. 26 by a vote of 45-0 and sent it to the House. The bill was heard in the House Federal Relations, Energy, and Telecommunications on Feb. 8.
What else could be in the legislative pipeline?
In Montana, non-revenue bills can be introduced all the way up to the transmittal deadline of Feb. 28, the point at which all bills have to be transmitted between the two houses of the legislature. Consequently, there could be more oil and gas-related bills introduced in this legislative session, and Galt says he will continue to watch them closely. “We’re ever vigilant during the legislature,” he says.
