Issue: Lost North Dakota Tax Dollars
M.E. Denomy, CPA, MBA
Accredited Petroleum Accountant
Oil and Gas Companies Use Master Limited Partnerships and Affiliate Agreements to Divert Taxable Income away from North Dakota
- 1. Oil and Gas Companies have split their operations into categories, such as Production, Marketing, Gathering, Processing. Each “division” is often filed as a separate business, frequently using the form of a Master Limited Partnership.
- 2. The Master Limited Partnership is not taxed as a business in North Dakota.
- 3. The net income of the division is “passed through” to the owners of the Master Limited Partnership. Each owner will report their own share of the net income.
- 4. Oil and Gas Companies can use each of the separate divisions to reduce their taxable income to North Dakota by raising postproduction costs (PPC’s) paid to divisions that have high expenses, like plants.
- 5. The PPC’s are deducted from the royalty owners.
- 6. Royalty owners will pay less tax because the PPC’s are deducted from gross royalties thereby reducing net royalties received.
- 7. The production company will also pay less tax on the oil and gas income by applying PPC’s paid to affiliates.
Potential Dollars Overlooked:
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Scenario 1: Basic assumptions-annual loss (current price and production)
Per barrel price = $45
Production per day = 1,200,000 barrels
North Dakota average lease= 1/8 royalty
Average PPC= 10% (one major prod. is over 35%)
1,200,000 x 45 X 0.125 x 0.10 x 365 days = $246,375,000 ND income tax exempt
Scenario 2: Basic assumptions-annual loss (January 2020 price & production)
Production per day= 1,400,000 barrels
Per barrel price= $60
North Dakota average lease= 1/8 royalty
Average PPC= 10% (one major prod. is over 35%)
1,400,000 x 60 x 0.125 x 0.10 x 365 days = $383,250,000 ND income tax exempt
The total postproduction costs to royalty owners (taken by the oil producers) for one year would be $383,250,000. It appears that only a ridiculously small amount of ND State income tax is paid on this wealth generated from ND oil production.
Attached is a graphic that provides a simplified picture of what the consequences are on 1,000,000 barrels of oil at $45 per barrel when a $5 PPC per barrel is charged. That equates to $312,000 per day or $113,880,000 per year in untaxed wealth at the current production of 1,200,000 barrels per day and $5 PPC rates.
I believe the $5 PPC per barrel is very conservative.
The second ND State Income Tax avoidance is due to the PPC’s charged on produced natural gas. That difference may be deduced by subtracting the dollars in red in the previous paragraph from the previous dollars shown in red earlier in this correspondence.
Respectfully,
Bob Skarphol
Williston Basin Royalty Owners Association (WBROA)
