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May 23, 2014

New wells to keep pumping with low taxes

OKLAHOMA CITY — The Legislature set a new production tax rate for horizontal oil and natural gas wells on Thursday, in a move opponents called a victory for big energy companies.

Proponents of the new tax said failing to act — or raising the tax too much — would drive the booming industry and corporations based here to other oil-rich states, like North Dakota or Texas.

“If we mess this up, it will have incredible ramifications, I believe, in the future,” said Rep. Josh Cockroft, R-Wanette. He added that the tax will "define the future of our state.”

The plan now heads to Gov. Mary Fallin for her signature.

In 1994, lawmakers adopted a tax break that charged oil businesses a 1 percent production tax on horizontal wells during the first four years of use.

Horizontal drilling was a risky technology at the time. Today it accounts for about 70 percent of the state’s wells.

And the four-year window is important, since half of the productivity of a typical well happens within that period.

The tax break was set to expire in mid-2015, returning the production tax to its normal 7 percent rate. Instead, lawmakers agreed to a 2 percent rate for the first three years of a well's production, followed by the standard 7 percent.

Opponents said the state should have waited another year before setting a new rate. They argued a 1 percent increase wasn't enough, and that the Legislature should have asked experts to recommend competitive tax rates for an industry that provides about a third of the state’s annual revenue.

"This bill continues a huge, unnecessary subsidy for drilling that would have happened without the subsidy," said David Blatt, executive director of the Oklahoma Policy Institute, a liberal-leaning think tank in Tulsa, in a prepared statement.

"It sides with a few well-connected oil executives and their lobbyists whose views do not represent the majority of Oklahomans or even many members of the industry. Instead of investing in Oklahoma while the energy boom lasts, this bad deal gives away our prosperity," he said.

Media reports indicated three of the state’s biggest oil and natural gas companies — Chesapeake Energy Corp., Continental Resources Inc., and Devon Energy Corp. — threatened to cut drilling activity in Oklahoma by as much as half if the Legislature reverted to the 7 percent rate.

Rep. Emily Virgin, D-Norman, said oil executives told her the state could set the rate even higher than 2 percent, and they’d still be OK with it.

Mark McCullough, R-Sapulpa, said if he was an oil company CEO, he “would fight to the bitter end to keep this tax as low as I could.” But, he added, lawmakers needed to be careful not to “give away the farm.”

He said the state could have a competitive tax and still pay for services.

But the bill’s sponsor, House Speaker Jeff Hickman, R-Fairview, said the energy industry is the only thing preventing farmers and ranchers in western Oklahoma from starving, amid a severe drought.

Without it, he said, "We'd be talking about selling the farms.”

Under the new rates, production is expected to continue to increase, said Hickman, which will create jobs and revenue for small businesses in communities surrounding the oil fields.

Hickman said 297 people are typically involved in drilling a new well.

“We do not want to mess this up,” he said.

In addition, the law specifies that vertical wells will be taxed at the same rate as their horizontal counterparts. Vertical wells are typically run by small companies and now taxed at 7 percent.

In addition, the rates approved Thursday will apply to all royalty mineral rights owners.

Mike Terry, president of the Oklahoma Independent Petroleum Association, serving more than 2,700 oil and natural gas producers, said Thursday’s vote was a “a huge win.”

He said current incentives have made a huge impact on bringing drilling rigs to Oklahoma — a trend that he said will continue.

Terry also praised lowering the tax rates for vertical wells, and said that will likely spur smaller companies to drill more wells.

A study released last year found that oil and gas companies spend about $12 billion a year in Oklahoma in drilling alone, he said. “There’s no other industry that really comes close to bringing that much capital into the state,” he said.

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