With crude oil prices soaring and state budgets still tight, some policymakers and industry observers are questioning whether the oil and gas industry should continue to receive some of the tax incentives it has enjoyed.
The Oklahoma Policy Institute, a nonprofit group that analyzes state government spending, on Wednesday called for the Legislature to consider reducing, capping or eliminating a tax incentive for producers who use horizontal drilling techniques.
“There was a time when horizontal drilling was a new technique that required new equipment,” said Oklahoma Policy Institute Director David Blatt. “But now most of the drilling in Oklahoma is horizontal drilling. The companies have invested in this technology. The procedures are established. It is much less risky than it was before, and at least on the oil side, producers are making record profits.”
Oil and natural gas producers, however, say the tax incentives are still necessary.
“These tax provisions are designed to create jobs,” said Cody Bannister, spokesman for the Oklahoma Independent Petroleum Association.” They're doing that, and that benefits all of Oklahoma.”
Blatt suggests the Legislature either set the incentive to kick in only when commodity prices drop below a certain level or that the state should cap the tax incentive each year.
“Given the scarce resources and the real competing demand for tax dollars, I think we need to think about how expensive these tax breaks could get,” Blatt said. “I think you could have productive conversations about what the cap should be and how you would allocate the credits. But they should not be unlimited like they are now.”
Blatt pointed out that tax rebates to the state energy companies for 2010 and 2011 totaled $297 million, nearly twice the estimated amount of $150 million.
Producers typically pay a 7 percent gross production tax on the oil and natural gas they recover within the state. They then apply for rebates based on the various tax incentives. After rebates are applied, producers using horizontal drilling can see their gross production tax rate reduced to 1 percent for the first 48 months of production. Horizontal wells tend to peak within weeks of production and taper off significantly within several months.
While producers have benefitted from the tax reduction, they have been using the savings to create jobs, Bannister said. Oil and gas industry employment surged 17 percent in 2011.
“When you talk about creating jobs and creating tax dollars, the oil and gas industry is doing its part,” Bannister said. “Eliminating and cutting tax incentives that encourage job growth in Oklahoma is not in the best interest of the state.”
The tax credit changes have been discussed in the Legislature as part of Senate Bill 1234.
When you talk about creating jobs and creating tax dollars, the oil and gas industry is doing its part. Eliminating and cutting tax incentives that encourage job growth in Oklahoma is not in the best interest of the state.”