A 10 percent severance tax on oil and gas production on trust lands in eastern Utah's Ute Indian Reservation would severely curtail Uintah Basin oil production and devastate a region already in the economic doldrums.
Those were the sentiments expressed at a public hearing at the tribe's Uintah-Ouray Reservation headquarters Thursday. The tribe is proposing a severance tax on oil, gas and other mineral production on reservation trust lands.The tax would be levied beginning Nov. 1 on the 1,000 barrels of oil pumped daily from trust lands on the reservation, quadrupled to 4 million acres under a 1986 court decision that turned the reservation into the nation's second largest.
The state already collects $4 million annually from trust lands on a 4 percent oil severance tax. Producers complain the Ute and state tax would amount to double taxation, an issue already being weighed in the U.S. Supreme Court.
The tribe funds its 51-department government chiefly on mineral-related revenue and can no longer support itself since oil prices plummeted from above $20 per barrel to its current price of $13, said Lester Chapoose, chairman of the Ute's ruling Business Committee.
"The bottom line is that the Ute Tribe is not in a position it can survive," he said.
With $5 million netted from the proposed severance tax, together with $6 million in yearly royalty revenue it already enjoys, the tribe could recover the lost revenue needed to operate tribal government, Chapoose said.
But non-Indian government officials and oil producers in the Uintah Basin say the industry's profit margins are too thin to support the tax and its repercussions could be felt throughout eastern Utah's economy.
"Many wells are marginal in production. If an additional cost is imposed on those kinds of wells, they would be uneconomical to operate," Duchesne County Commission Chairman Larry Ross said.
"We would see a reduction in production, a reduction in employees and a reduction in income throughout the county," he said.
Penzoil Exploration & Production Co., one of the largest producers in the Uintah Basin, imported a Houston executive to tribal headquarters to fight the proposed ordinance.
The new tax "as a measure to cure your (the tribe's) ailing economic situation could ultimately result in a cure worse than the ailment," said Bennie Sinclair, Penzoil's vice-president of production.
Low oil prices, high production costs for retrieving the Uintah Basin's thick, "waxy" oil and a double tax on oil production would spell "disaster" for his company, Sinclair said.
The tax could force Penzoil, which pumps 200 barrels of oil per day from Ute trust lands and pays $1 million in annual royalties to do so, to cut back on well maintenance and cause "premature abandonment" of the pumps, he said.
That could reduce tax and royalty revenue awarded to the tribe by millions, Sinclair said. "We all lose," he added.
Responding to doomsaying by oil producers, Chapoose said "I do not think anything drastic is going to happen. I'm an optimist when it comes to things like that," he added.
Chapoose said the 10 percent figure represented "the needs of the tribe" based on revenue decreases and would not be bargained away.
However, tribal attorney Robert Thompson said "no one has suggested the 10 percent is written in stone." Other tribal officials suggested the tribe would back off from the figure.
Whether the tax is indeed imposed depends largely on the outcome of the Cottonwood Petroleum Co. vs. the State of New Mexico case before the U.S. Supreme Court. The case questions states' rights to tax oil production on Indian trust land, Assistant Utah Attorney General Michael Quealy said.
There are scores of other cases involving the double taxation issue and millions of dollars for Utah and other states.
In 1987, the Ute tribe filed suit against the state of Utah challenging the state's authority to tax oil from reservation land. The tribe has agreed to postpone action on the suit, Quealy said.
Texaco, which was drilling oil on the Navajo Reservation in southeastern Utah, is challenging the state and San Juan County's authority to tax them for oil taken from Indian lands. State attorneys hope to stave off that case until a decision in the Cottonwood case, Quealy said.
Fifty to 60 similar cases are pending in various stages of litigation throughout the country, Quealy added.