The state has lowered its royalty on new oil, gas and hydrocarbon leases, hoping the move will spur energy development on state-owned land.
The new rate, which went into effect April 1, will lower royalties on the market value of the resource from 162/3 percent to 121/2 percent the same as the prevailing federal rate outside of known producing areas."Our 162/3 rate put us at a disadvantage to other landowners who offered lower rates," Patrick Spurgin, director of the Division of State Lands and Forestry, said. "The new, lower state lands rate will help make us competitive with other landowners, principally the federal government, and will likely increase the revenues from state lands through increased rentals."
Utah's Oil and Gas Regulatory Task Force, created by Gov. Norm Bangerter to discover ways to improve oil and gas development, recommended royalty reductions as a means to boost energy exploration in Utah.
"We view it as a very positive action on the part of the state land board, and we are hopeful it will create the kind of incentive needed to develop oil and gas leases in Utah," said Gary Fisher, president of the Utah Petroleum Association.
Oil and gas drilling in Utah came to a halt in 1986 as the drop in world oil prices knocked the price of Utah crude from $24 a barrel to $10.25. Oil prices have since increased to about $17 a barrel, but exploration has yet to pick up.
When oil prices are depressed, prudent investors will most likely drill where royalty payments are less, the task force said.
Spurgin added that less expensive federal leases were more abundant than state leases, creating another competitive disadvantage that lower royalty rates may overcome.
Energy exploration in Utah helps the state financially through increased royalty payments and other tax revenue tied to production, officials said. The 1986 drop in oil prices and local exploration accounted for $59 million of the state's budget shortfall that year.
Increased drilling on state lands would also help Utah's financially strapped school system, which receives royalty revenues generated by oil production on state land.
Fisher also praised a move on the national front last week that could boost future energy exploration in Utah. On Thursday, House and Senate trade conferees endorsed trade legislation that would repeal the oil windfall-profits tax.
The tax, which kicks in when oil prices hit about $19 to $20 a barrel, has been criticized as a disincentive to production, costing oil companies an estimated $100 million annually to comply with reporting requirements. Energy Department officials believe repealing the tax would increase domestic production by 75,000 barrels per day.
oil increases, it will free up money for exploration that would have gone to the windfall-profits tax," he said..
More incentives are needed, however, for Utah to become attractive to drillers, he added.
Among the incentives supported by some energy companies are tax exemptions during the first years of exploration. The task force, on which Fisher sits, couldn't unanimously support tax exemptions, however, saying the benefits of increased drilling would not outpace lost tax revenue.
But the task force acknowledged that some benefits could not be calculated by its incentive model, such as improved employment, increased demand for community services and support businesses, improved income, sales and use tax revenue, and the perception of Utah's business climate.