OKPOLICY.ORG
By Susan Hylton, Tulsa World
A study released by the Oklahoma Policy Institute shows that Oklahoma has the lowest gross production tax rate on unconventional or “horizontal” oil and gas wells when compared to six other major energy-producing states.
A 2010 tax law dictates that horizontal drilling in Oklahoma be taxed at 1 percent during the first four years of operation. After that, it jumps to 7.1 percent, which places its “effective tax” over the course of 10 years at 3.3 percent.
The state doesn’t see any return until the 7.1 percent tax takes kicks in during the fifth year. The 1 percent tax in the first four years goes to counties and schools.
“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 a statement by the study’s author, Mark Haggerty of Headwater Economics, a nonprofit research group based in Bozeman, Mont.
Most new oil and gas production comes from horizontal drilling combined with hydraulic fracturing, which can pull tremendous amounts of oil and gas from rock units deep underground. The process has revolutionized the industry.
Oklahoma was compared to six other drilling states, all of which paid higher taxes. Wyoming had the highest tax rate at 11.7 percent, followed by North Dakota at 11.5 percent.
Other states with higher tax rates were Montana, New Mexico, Colorado and Texas, which had the second-lowest tax rate at 6.7 percent – still 3 percent higher than Oklahoma.
OPI also notes that even if Oklahoma didn’t have the tax break in its first four years of operation, it would still be ranked in the lower end of tax rates.
OPI Director David Blatt said the study looked at the largest and most long-standing oil producing states for the study. He said Alaska wasn’t used because of its unique tax structure and because it isn’t as focused on horizontal drilling.
Alaska, however, is the second largest oil producer after Texas, excluding federal off-shore areas, according to the federal Energy Information Administration.
Horizontal wells are taxed as long as they are producing, but the production trails off considerably after five or six years, Blatt said.
“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.
Mike Terry, president of the Oklahoma Independent Petroleum Association, said oil and natural gas producers look at the state’s entire business climate in deciding where to drill their wells and that Oklahoma must have a tax structure in place that encourages oil and natural gas development.
“To take one part, in this case the tax rate for (horizontal) wells, of a complicated formula out for comparison doesn’t provide an accurate picture of each state’s business environment,” he said in a statement. “Working Oklahomans work in the oilfield. The oil and natural gas industry is a proven job creator and horizontal tax provisions put dollars in the pockets of working Oklahomans.”
The study reports that nearly two-thirds of a horizontal well’s production comes in the first four years.
Using data from a typical horizontal oil well, the study estimates that each well is getting a tax break of around $770,000.
Preston Doerflinger, state secretary of finance and revenue, said in July that the 2010 tax law has led to some real revenues losses to the state and that policymakers should consider revisiting it.
The Oklahoma Tax Commission reported that the gross production tax has cost the state $148 million.
But Terry said taxes paid by the oil and natural gas industry make up 27 percent of all taxes paid to the state, which includes the gross production tax, personal income taxes and sales taxes.
“That number increases when you include motor vehicle taxes, income tax on royalty payments, ad valorem taxes and the litany of other miscellaneous taxes and fees paid by oil and natural gas producers and the service companies that support them,” he said.
http://www.tulsaworld.com/article.aspx/Oklahoma_well_production_tax_lowest_in_seven_state/20130831_49_E1_CUTLIN73223
