Montana Oil and Gas Tax Rates

Montana’s oil and gas production taxes are based on the type of production – primary, secondary, tertiary, or stripper, the age of the well – drilled before 1999 or after 1999, and whether the production takes place during a drilling incentive tax rate window – the first 12 months for a new vertical well and the first 18 months for a new or recompleted horizontal well. A well that is brought back into production after not having produced for 5 years qualifies for the new well drilling incentive tax rates

To incentivize drilling and attract new exploration and production, vertically drilled wells receive a 12 month reduced tax rate of 0.5%. The same rate applies to horizontally drilled wells for the first 18 months of production. After 12 or 18 months, well production is taxed at 9%. Additionally, there is a variable tax on all production of up to 0.3% for support of the oil and gas regulatory agency and for a natural resources local impact account.

The number of horizontal wells in Montana began dramatically increasing after 1993, the year that legislation passed creating an eighteen month horizontal drilling incentive tax rate and a lowered tax rate for incremental production from vertical wells recompleted as horizontal wells.

Montana’s tax rates incentivize enhanced oil recovery through secondary and tertiary production. Rates range between 5.5% – 8.5% for well drilled after 1999.

Stripper (marginal) oil incentives were adopted to encourage the continuation of production from low volume wells. Montana has been commercially producing oil and natural gas since 1915 and has numerous historic fields still in production or being revitalized.

Stripper wells are taxed between 0.5% and 6% for production averaging less than 10 barrels per day. Various triggers have been put in place by the legislature to lessen the economic impact of low oil prices by providing lower tax rates for incremental and marginal well production when oil prices reaches a specific threshold, based on WTI prices.

Wells drilled prior to 1999 are taxed at higher rates, subject to reductions for marginal and incremental production.

Montana’s taxation of oil and gas production is based on gross value at the wellhead and is administered by the Montana Department of Revenue (MDOR). MDOR collects the oil and gas production taxes, retains a portion of the revenues for statewide purposes and distributes a majority of the revenues to the counties where the production occurred. The local distribution of production tax revenues fund county governments, K-12 schools, including student transportation, teachers’ salaries and retirement, and community colleges.

There is likely no more misunderstood or misrepresented issue in the petroleum industry than the existing tax treatment for oil and gas producers. To better understand the existing tax structure; here is a breakdown of each mechanism working to incentivize drilling for sustainable domestic energy, jobs, and much needed revenue.

Cost Recovery: IDCs
Non-integrated Producers: Percentage Depletion
Geological and Geophysical Costs
Enhanced Oil Recovery-Tertiary Injectants
EOR and Marginal Well Credits
Downstream Sector-LIFO
Double Taxation-Dual Capacity Rules
Domestic Manufacturer’s Deduction-Section 199