Lobbyists ask Utah lawmakers to eliminate 7.5% sales tax to help oil and gas industry

Eastern Utah’s Uinta Basin is missing out on the massive oil boom unfolding in New Mexico and Texas.

The basin’s production — which is ratcheting up, thanks to a new program of horizontal drilling — could really soar were it not for the excessive costs of doing business in Utah and the difficulty of moving this crude.

So argued a chorus of energy lobbyists appearing before a legislative panel Wednesday, imploring lawmakers to prioritize a proposal to erase the 7.5% sales tax the industry pays on equipment and materials it uses to coax hydrocarbons out of the ground.

“For the first time since the 1950s, the U.S. stands to be a net energy exporter. Utah has a key role to play in that,” Rikki Hrenko-Browning, president of the Utah Petroleum Association, told the the Public Utilities, Energy and Technology Interim Committee on Wednesday. “If we are going to be able to increase production, we have to find a way to economically get [Uinta crude] out of the state to other markets.”

The lobbyists were asking the panel to reconsider SB201, a failed measure last session that sought to eliminate Utah’s sales tax on oil and gas producers, a consideration already enjoyed by mining and manufacturing.

Howard Stephenson, a former state senator who heads the business-backed Utah Taxpayers Association, characterized the sales tax as “a barnacle on the ship of our economy,” acting as a drag on growth.

Sponsored by Sen. Ronald Winterton, a Republican from the oil patch town of Roosevelt, the bill would have phased in the tax break, resulting in a $48 million reduction of sales tax revenue by the fourth year, according to the measure’s fiscal note. While many may see the forgone revenue as a sop to a politically connected but embattled fossil fuel industry, it should be viewed as an “investment” in future revenues that would be unleashed by heightened production, according to its supporters.

“Signals are extremely important when companies are deciding where to deploy their development dollars,” said Hrenko-Browning, noting legislation recently enacted in Colorado “did the exact opposite” of SB201. Colorado’s “Protect Public Welfare Oil and Gas Operations” tightened regulations that protect public health and safety and the environment and gave local governments regulatory authority over surface impacts.

The Colorado law “drove capital out of the state. Capital is risk averse and signals are important, so I hope we, in the state of Utah, can send a positive signal that oil and gas is welcome and that we recognize the economic benefits it brings to the state, particularly as capital is fleeing Colorado."

Meanwhile, Utah’s oil and gas production is subject to a severance tax of 5% to 7%, further reducing the state’s competitiveness, according to Stephenson.

Utah coal producers, by contrast, pay no sales or severance tax. These breaks come in recognition of the difficulty of getter coal out of Utah’s mines. Stephenson argued the same logic should apply to the state’s oil and gas production, ranked 10th and 13th in the nation, respectively, which faces its own challenges to extraction.

For Uinta oil, the main challenge is its waxy qualities, which require heating to keep it fluid.

“It literally forms a candle at room temperature,” Hrenko-Browning said. The basin’s topography complicates exploration and lack of transportation infrastructure make it hard to get Uinta oil anywhere except to Salt Lake City-area refineries by truck. As a result, it costs more to produce a barrel of Uinta oil, which then fetches a lower price because these refiners know there is nowhere else for that oil to go.

Nearly all of the basin’s production goes to the Salt Lake City area, where five refineries can process up to 100,000 barrels of waxy crude a day. But the basin’s production is expected to outstrip the refining capacity as drillers gain more experience with horizontal drilling, which has boosted the amount of recoverable oil.

Of Utah’s 11,700 producing oil and gas wells, just 285 were horizontally drilled with more on the way. One major producer, Crescent Point Energy, estimates 55 billion barrels now lie available under the basin.

“Even more important is the amount of oil available per section and how it competes with other really prolific basins in the country,” Hrenko-Browning said. “We know we are on the front end of what’s going to be a major boom. Ballpark estimates are looking at two to three times current levels of production we are currently seeing and that can be sustained over decades.”

According to the Baker Hughes rig count, seven drill rigs are currently sinking wells in Utah, five of them drilling horizontally. By contrast, Colorado and New Mexico have 33 and 102, respectively.