Letters from the West

Lower oil and gas severance taxes, secrecy prompts suspicion in W. Idaho

A sign at the Campo & Poole rail yard in Ontario explains tanker markers.
A sign at the Campo & Poole rail yard in Ontario explains tanker markers. rbarker@idahostatesman.com

A year after Alta Mesa Idaho began full-scale production of gas and oil in Payette County, Emmett farmer Joe Morton has a simple question:

“Where’s the money?”

Morton, who holds mineral rights to his farm where he raises grapes and alfalfa in Gem County, has been skeptical since natural gas development begin in 2010 with a promise of bringing money for schools, local governments and mineral right owners to Idaho.

Idaho Sen. Abby Lee, speaking in mid-2016, calls for rules that encourage competition for Idaho's oil and gas industry.

Alta Mesa is the only company producing oil and gas in Idaho, so he can monitor their monthly reporting on the 2.5 percent gross severance tax on sales they pay for the petroleum by watching the state total.

Alta Mesa officials said in October 2015 soon after production began that they expected to pay $200,000 to $400,000 annually in severance tax payments to Idaho. But the company has paid just $70,559 as of July.

Morton knew the company was selling natural gas to Idaho Power for its Langley Gulch natural gas plant near New Plymouth. Alta Mesa also was shipping natural gas liquids, condensate and crude oil to the Campo & Poole rail yard in Ontario, Ore. He began counting trucks and at 30 trucks in one week, he projected Alta Mesa was producing more than anyone thought.

He was not alone. Jack Rohde, a longtime oil and gas worker from Utah, said he was hired by a company he would not name to show there was more production in Idaho than Alta Mesa was saying publicly. He counted 59 trucks in a week.

At $40 a barrel, he estimated, Alta Mesa was selling enough that it should be paying more than $50,000 a month in severance tax.

Under state law, Alta Mesa does not have to report publicly the production on its eight producing wells until six months after it reports it to the Idaho Department of Lands. And current rules don’t require reporting that data to the state until six months after the wells begin production.

“I think that Alta Mesa has the opportunity to fudge the numbers for the amount paid to the state and to property owners,” Morton said. “They and their lobbyist have written the law in Idaho to benefit their pocket.”

Alta Mesa Idaho spokesman John Foster said the trucks that people are counting are rarely full, and some carry water, which is produced in the wells along with petroleum. Most of all, he said, Alta Mesa is paid dramatically less than $40 a barrel for most of the oil, condensate and natural gas liquids it pumps.

Another factor: low prices and high costs in a remote market far from oil and gas facilities.

The pricing environment is very challenging.

John Foster, Alta Mesa Idaho spokesman

Mineral rights owners and people counting cars aren’t watching the right markets, he said, citing the farm economy as an analogy.

“The prices we receive are not the prices you see in the Wall Street Journal,” Foster said. “It’s the same way that a price for a crop in the field is not the same as you see on the mercantile exchange.”

Another reason why revenues are lower than expected: The state only Friday completed the process for “integrating” pooled mineral rights for two wells it expected to be producing in Fruitland. Alta Mesa also hasn’t produced as much natural gas as it expected because of problems getting new processing plants and pipelines working efficiently.

“That doesn’t always go smoothly,” he said.

CRITICS WANT MORE OVERSIGHT

Former U.S. Sen. Larry Craig urged the Oil and Gas Conservation Commission in July to add rules for ensuring that meters on oil and gas wells are accurate. Craig, representing Lone Tree Petroleum, a Wyoming exploration and development company, said the commission should ensure meters accurately show how much oil, gas and other petroleum products each well produces.

He said he understands why Morton and other mineral rights owners are skeptical about the state ensuring it is getting what it and the mineral rights holders all they should get.

“In the absence of full disclosure, there’s suspicion,” Craig said.

State Sen. Abby Lee, R-Fruitland, said residents with mineral rights come to her to ask if they are being paid fairly. She goes to the Department of Lands, just as she does any other state agency, when she gets a constituent inquiry.

“They don’t have an answer to their question: What is my recourse if I think I’m not getting what I deserve?” Lee said.

But Idaho Department of Lands Director Tom Schultz said that’s not his agency’s role. Even if it was, his department doesn’t have the staff to intercede on their behalf.

“We aren’t watching people harvesting hay and counting the bales,” Schultz said.

Like individual tax records, Alta Mesa’s taxes are private. The severance tax it pays would not be known except for the fact that because it is the only company producing oil and gas, the state total is also Alta Mesa’s total. The company is required to keep records of production and sales and report what they owe.

The Idaho Tax Commission has the power to audit Alta Mesa records. How will the tax commission know it’s getting the right tax?

Just as it does with other taxpayers, the commission would use other sources of information to verify the accuracy and completeness of the tax return, said Randy Tilley, the Tax Commission Audit Division administrator.

“Those sources of information include reports filed with other state or federal agencies and documentation retained by the taxpayer to substantiate amounts entered on the return,” Tilley said in an email.

Craig said the current system doesn’t have enough oversight.

“Why can’t the Department of Lands talk to the Tax Commission and why can’t the Tax Commission talk to the Department of Lands?” Craig asked.

These laws were structured to keep others out and to keep information private.

Former Sen. Larry Craig on Idaho oil and gas regulations

Schultz said that’s a matter of policy the Idaho Legislature has to decide. Utah, for instance, allows state agencies to work together to keep track of production and sales. Ultimately, he said, the Tax Commission must decide to do an audit.

Is the Tax Commission doing that?

“The agency can’t confirm or deny whether we’re auditing or working with a specific taxpayer because the information is confidential under Idaho law,” said Renee Eymann, the commission’s spokeswoman.

ROYALTY OWNERS RIGHTS

Mineral rights owners and others with interests in the wells have the right to audit Alta Mesa’s records, Foster said. They also would have an interest in ensuring the meters are accurate.

The meters are part of an elaborate system that determines how much each well produces, he said.

“That process is highly scientific and precise,” Foster said.

Alta Mesa sells the petroleum produced in Western Idaho to a separate company that markets the gas and manages market risks. After the sales, the midstream company’s computer program accounts for what each well and rights holder is due.

“Alta Mesa is accountable to regulators, taxing authorities, other working interest owners and royalty owners,” Foster said.

AN OUTSIDE OPINION

Schultz is bringing in a team from the interstate Oil and Gas Compact Commission to audit the Idaho oil and gas regulatory program, a process he says will take more than a year.

Craig said the state shouldn’t wait, and should adapt its rules and laws to the transparency standards of other states.

Economist Wayne Winegarden of the San Francisco-based Pacific Research Institute recently wrote a report on regulating oil and gas drilling and production. Economic theory, he said, would argue that a company like Alta Mesa, which is the only oil and gas company in the state, would seek to develop regulations that favor them.

He said Idaho policymakers should seek balance all sides interests.

“They need to ask: Are the regulations reasonable and do they encourage competition,” Winegarden said.

Rocky Barker: 208-377-6484, @RockyBarker

A roll of the dice on Idaho gas

Dennis Campo and his partners Ralph and Ken Poole took a chance in 2014 to become a key part of the oil and gas industry that was in its infancy.

The owners of Campo & Poole Distributing, a bulk fuel distributor in Fruitland since 1949, bought new trucks to haul the natural gas liquids and condensate from the Willow Creek field discovered in 2010 in Payette County to market. Later, they bought a rail yard in Ontario, Ore. from Union Pacific, where their eight or nine employees load the petroleum onto tank cars to ship around the nation.

“Two years ago, we were sticking our neck way out there,” Campo said.

The bet paid off. Alta Mesa Idaho began full production in August of 2015. The discovery of oil has increased the number of shipments, and the haulers have added a third, larger truck.

The job is more than just loading fuel and unloading it. The staff have to ensure the pressures in the tanks remain constant, a closed system with no losses into the atmosphere,

“We’re trying to do everything right,” Campo said. “We are following the rules.

The oil and gas transport business is an important part of the infrastructure both Idaho and eastern Oregon will need if the business is to expand. Companies say it makes new development easier.

“I hope other people come in,” Campo said. “You can’t expect Alta Mesa to pay all the bills.”

But he said the Houston-based company has been a great customer.

“They all have been straight-shooters with us,” Campo said.

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