Oklahoma Oil and Gas Association touts long-lateral bills (The Oklahoman)

By Paul Monies

Longer horizontal drilling in nonshale formations is back before the Oklahoma Legislature as the Oklahoma Oil and Gas Association touted it Tuesday as a partial solution to the state’s budget woes.

The association and its members, mostly large oil and gas companies, have tried several times in the past few years to get the Legislature to sign on to longer drilling laterals in nonshale formations. But some smaller, vertical drillers have actively opposed the proposals, calling them unfair.

Two bills in the Legislature, Senate Bill 284 and House Bill 1613, would strike the word “shale” from the state’s existing Shale Reservoir Development Act. The bills are authored by Senate President Pro Tempore Mike Schulz, R-Altus, and Rep. Weldon Watson, R-Tulsa, chairman of the House Energy and Natural Resources Committee.

SB 284 is scheduled to be heard by the Senate energy committee on Thursday. Bills have until March 2 to make it out of committee.

Calling the bills a “no-brainer,” the Oklahoma Oil and Gas Association said the state’s prohibition on longer drilling laterals in nonshale formations is something companies don’t face in other energy states. Oklahoma limits horizontal development to a maximum of 640 acres in all formations except shale formations.

Chad Warmington, the association’s president, said drilling in the state’s fast-growing SCOOP and STACK formations could be enhanced by allowing companies to drill more than the one-mile limit for laterals in nonshale formations.


“With all the talk about increasing taxes, we’re trying to point out we have a piece of legislation that doesn’t increase taxes,” Warmington said. “The potential our companies are seeing in that rock is pretty astounding. You won’t even need a tax debate, and this change will cost the state nothing.”

Some Democratic lawmakers have called on the state to increase the current rates for gross production taxes on oil and natural gas. New wells are taxed at 2 percent, with the rate rising to 7 percent after three years.

The new tax rates went into effect in July 2015, but earlier wells are taxed at a mix of 1 percent, 4 percent and 7 percent. That translated into an effective gross production tax rate of 3.2 percent for fiscal year 2016, according to Oklahoma Policy Institute calculations using Oklahoma Tax Commission data. That’s down from an effective rate of 6 percent in 2012.

Warmington said his association remains opposed to any increases in gross production tax rates. The state’s most active drillers are constantly evaluating how to deploy their capital among states in which they operate, he said. The Permian Basin in Texas is the country’s top drilling spot, with more than 300 rigs.

“If you raise gross production taxes, you may very well get a bump in total revenue, but that would be assuming the same drilling,” Warmington said. “There’s not a lot of wiggle room when you compare us to Texas. We are told by our top CEOs that capital is really fluid. They’re quick to say that’s not a threat, but it’s a function of their capital allocation committees.”

Some smaller producers with vertical wells have raised concerns that allowing longer laterals in nonshale formations without concessions to vertical producers would dilute their ownership interests. Many smaller companies also can’t quickly raise the capital to participate in horizontal drilling in areas where they operate vertical wells.

Warmington said SB 284 and HB 1613 would keep the protections for smaller operators recognized by the Oklahoma Corporation Commission under existing law.

“The Corporation Commission and district courts are already set up to handle those complaints,” Warmington said.

The Oklahoma Independent Petroleum Association, which has a mix of large and smaller producers among its membership, continues to consider its approach to long laterals in nonshale formations. Spokesman Cody Bannister said the association’s working group plans to meet Wednesday to discuss the issue.

According to the Oklahoma Corporation Commission, horizontal wells accounted for more than 80 percent of the well completions from January 2015 to August 2016.


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