Oil and natural gas production in Oklahoma is on the rise. New horizontal drilling and hydraulic fracturing technologies have allowed companies to cost-effectively extract “unconventional” oil and gas trapped inside tight shale rocks.
These new technologies are expensive and intensive. Extracting unconventional oil and gas requires more wells, trucks, water and workers compared with conventional vertical wells.
While these greater investments and activity result in more job opportunities, they also impose greater demands on roads, public safety, housing and other local government services. Oklahoma's gross production tax raises revenue to facilitate development and mitigate these impacts, but as a result of generous tax subsidies, it's proving to be too little to pay for these services. The state continues to face budget shortfalls.
Oklahoma has a relatively simple gross production tax on oil and natural gas of 7 percent, with an incentive rate of only 1 percent on new horizontal wells for a “holiday” period of four years. As states across the country look to benefit from economic development opportunities that unconventional oil and gas drilling provides, can Oklahoma remove its drilling incentive to ensure adequate revenue is available to facilitate development, reduce budget shortfalls and remain competitive?
A study conducted by my firm, Headwater Economics, finds that Oklahoma's tax rate on oil production — accounting for the holiday — is the lowest of seven major oil-producing states, including Colorado, Montana, New Mexico, North Dakota, Texas and Wyoming. Only one other state (Montana) extends a holiday incentive.
Among seven leading natural gas-producing states, Oklahoma's tax rate ranks sixth. Three other natural gas-producing states (Arkansas, Louisiana and Texas) extend holiday incentives, while three do not (New Mexico, Pennsylvania and Wyoming). Even without the four-year tax incentive, Oklahoma's tax rate of 7 percent would still compare favorably to most major producing states, including Texas, for both oil and natural gas.