Comparing State Taxes on Unconventional Oil and Gas Production

August 26th, 2013
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A new study from Headwater Economics, in conjunction with Oklahoma Policy Institute, finds that Oklahoma’s taxes on unconventional production of oil and gas, or horizontal drilling, are among the nation’s lowest and would remain relatively low even if the state eliminated the tax breaks currently benefiting horizontal drilling.

The study compares the effective tax rate of unconventional oil and gas wells in seven states over a ten-year period. It finds:

  • Oklahoma’s effective tax rate on unconventional oil production is 3.3 percent, the lowest of seven peer oil-producing states;
  • Oklahoma’s effective tax rate on unconventional natural gas is 2.6 percent, ranking fifth lowest of seven peer natural gas-producing states;
  • If Oklahoma eliminated its tax break benefiting unconventional production, its effective production tax rate on oil would rank sixth among seven peer producing states and third (along with Texas) among seven natural-gas producing states.

Oklahoma currently taxes production from horizontal wells at only 1 percent for the first 48 months of production, compared to 7 percent for conventional (vertical) wells. This tax break has an especially large impact because unconventional wells have very steep decline curves compared to conventional production. For a typical oil well, nearly two-thirds (64 percent) of cumulative production over the first ten years will come in the first 48 months after a well is completed, the study shows. The decline curve for natural gas is even steeper.

Using data from a typical unconventional oil well, the study shows that cumulative gross production tax revenue over ten years will be $630,000, which is less than half of what the state would collect ($1.4 million) without the tax break.

The tax holiday for unconventional drilling cost Oklahoma $150 million in lost tax revenue in FY 2013 at a time when the state continues to struggle to fund core services in education, infrastructure, social services, public safety and other areas.

Click here to download the full study

Click here to download the 2-page Major Findings

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