Higher oil prices have temporarily eliminated a 17-year-old state tax incentive to encourage production, which may funnel another $1.2 million monthly into a state oil trust fund, the Tax Department says.

The development may prompt North Dakota's oil industry to seek tax changes in the 2005 Legislature, though Ron Ness, director of the North Dakota Petroleum Council, said the loss of incentives should not affect current production, with prices hovering near $50 a barrel.

The tax break could be reborn if oil prices swoon, though a price dip would have to go beneath the mid-$30s for at least five months.

North Dakota has two primary taxes on oil production - a 5 percent production tax and a 6.5 percent extraction tax, which was part of an initiated measure that voters approved in November 1980. Both tax rates are calculated against the oil's value where it is produced.

The Legislature began granting exemptions from the extraction tax in 1987, when the industry was slumping and incentives were seen as a way to encourage drilling. At first, the tax break included a "trigger" to remove the incentives if oil prices rose above $33 a barrel.

The trigger stayed at $33 until 2001, when the Legislature raised it to $35.50, provided annual inflation adjustments and made changes to ensure the tax incentives stayed in place unless there was a sustained oil-price rise.

This year, the adjusted trigger price is $35.11. It is expected to rise to $36.48 next year. Under the new legislation's terms, the tax breaks ended if the North Dakota oil price averaged more than $35.11 for five consecutive months, Tax Commissioner Rick Clayburgh said.

North Dakota's average oil price moved past the $35.11 benchmark in May, said Kathryn Strombeck, a Tax Department analyst. The price averaged $37.58 a barrel in May, $35.63 in June, $38.20 in July, $42.48 in August and $43.21 in September, Strombeck said.

When September ended with the average higher than the price benchmark, the extraction tax exemptions stopped. Last Friday, the full 6.5 percent tax was restored for more than half of the state's oil production, moving the total oil tax rate from 5 percent to 11.5 percent.

Dropping the incentives will apply higher rates to about 58 percent of North Dakota's oil production, or 48,140 of 83,000 barrels of daily production, according to Tax Department estimates.

If prices remain at current levels, a state trust fund for surplus oil tax collections will get about $1.2 million each month, Strombeck said. The fund now has a balance of less than $1 million, after the 2003 Legislature spent most of it to help balance state government's current two-year budget. Lawmakers agreed to take $11.9 million from the fund.

North Dakota's oil tax collections are already running well ahead of projections for the state's two-year budget. Through August, the treasury had collected $51.3 million in oil production and extraction tax revenues, or 19 percent more than was forecast. The current two-year budget period for North Dakota government began July 1, 2003, and ends June 30, 2005.

Clayburgh said the extraction tax breaks could be restored, but only if oil prices decline steeply from current levels and stay there for a while. To bring back the incentives, the average North Dakota oil price would have to stay below the mid-$30s price trigger for five months, he said.

The end of the tax incentives does not affect all production. Lower rates will stay in effect for low-volume "stripper" wells, and for a portion of the oil produced from oilfield units. In a unitized field, a group of oil-rights holders agree to manage the property as if it were a single producing unit, rather than separate units.

Robert Harms, director of the Northern Alliance of Independent Producers, which represents small oil companies in North Dakota, South Dakota and Montana, said small companies were not bothered by the demise of the tax breaks.

"Our members recognize the fairness of the tax incentives," Harms said. "There haven't been any complaints about it, just a general recognition that it was a fair arrangement."