OKPOLICY.ORG
FOR IMMEDIATE RELEASE — Tuesday, August 27, 2013
Contact:
David Blatt; Oklahoma Policy Institute; 918.859.8747
Mark Haggerty; Headwaters Economics; 406.570.5626
New study shows Oklahoma’s tax rates for unconventional oil and gas production are among nation’s lowest
TULSA, Okla – A new study of state oil and gas taxes shows that Oklahoma tax rates on unconventional drilling are among the lowest rate compared to other energy producing states. Even if Oklahoma removed its current tax’ holiday’ for horizontal drilling, it would remain on the low end of effective tax rates compared to peers, the study finds.
The study, conducted by the non-profit research group Headwaters Economics in conjunction with Oklahoma Policy Institute, calculates the “effective tax rate” that is paid over the course of the first 10 years of horizontally-drilled, or unconventional, oil and natural gas wells in Oklahoma and peer states.
Oklahoma provides a tax break on horizontally-drilled wells that reduces the tax rate from 7 percent to just 1 percent for the first 48 months of production. As a result, Oklahoma’s effective tax rate on unconventional oil production is just 3.3 percent, the lowest of seven peer oil-producing states. The effective tax rate on natural gas is 2.6 percent, ranking fifth lowest among seven peer natural-gas producing states.
“This study confirms that Oklahoma is taxing production from horizontal wells at substantially lower levels than most other states,” said David Blatt, director of Oklahoma Policy Institute, a Tulsa-based think-tank. “Even if one assumes that state taxes influence the decision of where to drill, Oklahoma is providing subsidies that are far more generous than what is needed to compete.”
If Oklahoma were to eliminate the 48-month tax break for horizontal drilling, its effective rate on oil production (7 percent) would still be lower than five of six peer states, including Wyoming, North Dakota, New Mexico, Montana and Texas, the study shows. For natural gas, the effective rate without the tax break (7.1 percent) would be the same as Texas and lower than New Mexico (11.7 percent) and Wyoming (9.1 percent).
“Oklahoma’s 48-month tax holiday on unconventional drilling has an especially large fiscal impact because unconventional wells have steep decline curves compared to conventional production,” said Mark Haggerty of Headwater Economics, and the report’s author.
This means that production is typically greatest in the initial months and then declines steeply and quickly, eventually stabilizing at relatively low levels. For a typical oil well, nearly two-thirds (64 percent) of cumulative production over the first 10 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. With almost all new production in Oklahoma coming from horizontal wells, the cost of Oklahoma’s 48-month tax break for horizontal drilling is escalating rapidly, and reached $150 million in FY 2013.
“The evidence is now clear that tax breaks for horizontal production are substantially reducing state revenue collections, which in turn is making it increasingly difficult to meet the state’s budget needs and provide adequate funding for education, public safety, infrastructure, and social assistance, “ Blatt said. “It is encouraging that state leaders are now acknowledging the vital need for reforms in this area that will allow the state to meet its budgetary needs while still allowing energy companies to operate profitably.”
The full report is available at: http://tinyurl.com/oilandgastaxes
About Headwaters Economics
Headwaters Economics, an independent, nonprofit research group, works to improve community development and land management decisions in the West.
About Oklahoma Policy Institute
Oklahoma Policy Institute promotes adequate, fair, and fiscally responsible funding of public services and expanded opportunity for all Oklahomans by providing timely and credible information, analysis, and ideas
