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Drilling tax still up for debate in Oklahoma

by Adam Wilmoth and Paul Monies Modified: May 13, 2014 at 11:38 am •  Published: May 13, 2014

Our NewsOK Energy team chatted with readers Tuesday about a drilling tax.

You can join our energy Q&A’s on the second Tuesday of every month at 10 a.m. and submit your questions about energy companies and developments across the state. Below is an unedited transcript of Tuesday's chat.

NewsOK 9:35 a.m. Good morning. We'll get started at 10 a.m., but you can start submitting your questions now.
Paul Monies 9:59 a.m. Good morning.
Paul Monies 10:00 a.m. Let's get started here. I'm your moderator, Paul Monies. I cover renewable energy and utilities. I'm joined by Energy Editor Adam Wilmoth and Energy Writer Jay F. Marks.
Tom 10:01 a.m. The USGS has shown a link between earthquakes and waste water disposal wells. When will you shut down disposal wells in Oklahoma?
Jay F. Marks 10:02 a.m. Personally, I don't have that authority.
Jay F. Marks 10:02 a.m. But the EPA and Oklahoma Corporation Commission, which oversees injection wells on the feds' behalf in Oklahoma, haven't been so inclined either.
Adam WIlmoth 10:04 a.m. A USGS report found a possible link between injection wells and earthquakes. The findings are not conclusive and every scientists we've heard from has said more research is needed.
Jay F. Marks 10:04 a.m. Regulators are working with the industry to determine which disposal wells may lead to increased seismic activity, but so far there has not been any indication that such wells should be abandoned altogether.
Kevin 10:04 a.m. Shutting down disposal wells would STOP drilling and economic activity in Oklahoma. You really think that's a good idea?
Adam WIlmoth 10:05 a.m. The corporation commission has shut down a few wells that have been most closely connected to the quakes.
Adam WIlmoth 10:05 a.m. Those injection wells are still being studied.
Adam WIlmoth 10:06 a.m. It's also important to note that injection wells have been used throughout Oklahoma and the country for decades.
Adam WIlmoth 10:08 a.m. Volumes and pressures are higher in some parts of northern Oklahoma than they were in the '80s, but the state has more than 10,000 injection wells, most of which have been in use for a long time.
Paul Monies 10:09 a.m. Also, we have more seismic monitoring stations now than we did just a few years ago. Although scientists are still looking for additional data.
Jay 10:09 a.m. Companies have a lot of reserves of oil that they have stockpiled in tanks, why besides monetary gains do they continue to hold onto these? If, they saturated the market with this, oil prices would go down and reduce the price other goods. Is there federal/state regulation that forces companies to hold onto a certain amount of oil?
Adam Wilmoth 10:10 a.m. I think that's more of a transportation issue.
Adam Wilmoth 10:10 a.m. Oil is stored in tanks in Cushing and other parts of the country as they wait to move it to market.
Adam Wilmoth 10:11 a.m. New pipelines have increased the ability to move oil from Cushing down to the Gulf Coast, although there could soon be a bottleneck in that area.
Jay F. Marks 10:11 a.m. It's not like those tanks just sit full all the time.
Jay F. Marks 10:12 a.m. Even when they're nearing capacity, oil is constantly on the move to meet the nation's demand.
Guest 10:12 a.m. Is the GE research facility a game change or just nice to have? In other words is it a kd or a Caron butler?
Jay F. Marks 10:12 a.m. It should prove to be a game changer for the industry.
Adam Wilmoth 10:12 a.m. Great question. I think it could be a game changer.
Jay F. Marks 10:13 a.m. New technology is responsible for the ongoing oil and gas boom. Continued research will only improve efficiency in resource recovery.
Adam Wilmoth 10:13 a.m. GE already has inked research deals with Devon, Chevron and Pemex. Others are likely to follow. The site will be home to research from and for many of the biggest companies in the world.
Paul Monies 10:13 a.m. It's a global company with a big effort to make a splash in the oil and gas industry, so it's like landing a free-agent superstar. But all superstars still have to perform.
Jeff 10:14 a.m. Is it true that the oil and gas executives who are calling for a 7% tax rate on horizontal wells are not even drilling horizontal wells in the state?
Adam Wilmoth 10:15 a.m. George Kaiser is leading the effort to return the tax rate to 7 percent. His company is involved in many horizontal wells throughout the state.
Adam Wilmoth 10:17 a.m. Kaiser told me he has more to lose from higher gross production taxes than anyone other than Harold Hamm.
Adam Wilmoth 10:17 a.m. Kaiser is obviously in the minority among oil companies, most of which want lower taxes.
Chris 10:17 a.m. I recently seen on ABC that the BLM did not provide enough oversight on O & G wells on federal and tribal lands. With Oklahoma having many lands under "trust status" how does the state view this? Is it an "infringement" or would they welcome more closer federal oversight on Indian Lands?
Chris 10:18 a.m. I do wish that there would be more discussion on Tribal lands that have federal oversight since many tribes / tribal members hold mineral rights still to their lands. It's like the white elephant in the room.... No one seems to want to discuss it, yet we are one of the largest contributors to this state financially.
Adam Wilmoth 10:19 a.m. This is an interesting issue in Oklahoma. We do not have reservations, but we have tribal-owned land scattered throughout the state.
Adam Wilmoth 10:20 a.m. The Oklahoma Corporation Commission has jurisdiction throughout Oklahoma except for Osage County.
Jay F. Marks 10:21 a.m. Last year, a BLM employee told me the agency regulates any well in Oklahoma, Kansas, or Texas (with the exception of Osage County which is managed outside of BLM) with a federal nexus, including tribal or trust estate.
Adam Wilmoth 10:21 a.m. In Osage County, there is an interesting mix of state and federal regulation. The Osage Nation owns all the mineral rights, but there are still legal questions over control of water and air regulations.
Jay F. Marks 10:22 a.m. Also from BLM: "Many of the wells and leases we regulate are 'split estate' where the surface ownership may be private, yet there is a mineral interest held by the federal government or Indian trust or tribal ownership. Additionally, there are many examples of federal jurisdiction for surface interests in our 3-state area which include such agencies as Department of Defense, Army Corps of Engineers, U.S. Forest Service, Bureau of Reclamation, and Department of Agriculture."
Chris 10:22 a.m. Fractionalization has contributed to the loss of hundreds and thousands of acres in Oklahoma by Tribes. The Land Buy Back Program through the Cobell Settlement would hopefully consolidate much of the fractionated interest and return it to Tribal governments, which in turn would increase their land holdings.
Joe Bee 10:23 a.m. I read where the coal industry is exporting Coal to europe and Canada with a substainal profit. How will this effect oil prices here in the US, will it make Oil and more costly $ wise to produce, refine and distrute to gas stations . #2 tax on hoz drilling, would a substainial increase like what wyo has as a tax defer drilling here?
Jay F. Marks 10:23 a.m. I doubt coal exports will impact oil prices. They are separate industries.
Paul Monies 10:23 a.m. Coal is used mostly here in the U.S. for electric generation. Oil is mostly a transportation fuel.
Jay F. Marks 10:24 a.m. Reduced domestic coal use could spur an increase of natural gas to fuel power plants, but even that might not impact gas prices too much.
Paul Monies 10:24 a.m. The coal companies are looking more to export markets because of higher use of natural gas by utilities and because of current and upcoming regulations on carbon dioxide and other emissions.
Jay F. Marks 10:25 a.m. Plus foreign markets are also more willing to take the high sulfur coal that is not being burned here to create electricity because of environmental regulations.
Paul Monies 10:26 a.m. Coal demand is still high in countries like China and India.
Chris 10:26 a.m. Also just seen recently that the Northern Cheyenne in southeastern Montana opened up a new area south of their reservation for coal development.
Jay F. Marks 10:27 a.m. As for drilling taxes, it remains to be seen what impact a higher tax rate would have on oil and gas activity.
Adam Wilmoth 10:29 a.m. Executives from Devon, Continental and Chesapeake said last week that if the tax rate on horizontal drilling returns to 7 percent, it would make many Oklahoma wells uneconomic and the companies would have to move some of their rigs out of state.
Paul Monies 10:29 a.m. Some of the Oklahoma energy company executives have talked down the geology a little bit in Oklahoma, contending that a higher tax rate could force them to spend capital in other basins outside Oklahoma.
Paul Monies 10:30 a.m. Whatever happens, right now, both sides are in full campaign mode, with dueling commercials on TV and online demonizing the other side.
Adam Wilmoth 10:30 a.m. Kaiser, however, compared the tax rate to a rounding error when you consider the variability in costs to drill a well and how much oil and natural gas wells can produce.
Chris 10:32 a.m. Have there been any estimates of what the capacity for the Barnett and Woodford Shale holds? How many more years can they produce?
Jay F. Marks 10:32 a.m. That will depend on commodity prices...
Jay F. Marks 10:33 a.m. There is probably plenty of natural gas left in the Barnett, but that isn't attracting much activity right now.
Adam Wilmoth 10:33 a.m. Thousands of possible well locations have been identified in both plays. How many wells they drill each year depends on commodity prices and other factors.
Adam Wilmoth 10:34 a.m. A few years ago, Devon had 35 rigs running in the Barnett. Now it has two. If natural gas prices go up, you probably will see a few more rigs return.
Jay F. Marks 10:35 a.m. Another consideration is the amount of resource that can be recovered with existing technology. Even with enhanced recovery methods, producers estimate they are only getting a relatively small percentage of the oil and gas in place.
Jay 10:35 a.m. As these current producing wells stop producing after secondary and tertiary recovery, where will the new formations be? What is going to be the next un-conventional reserve? Has it been found yet?
Jay F. Marks 10:35 a.m. The industry likely will figure out a way to maximize that recovery as long as our society operates on oil and natural gas.
Jay F. Marks 10:36 a.m. It will be interesting to see what methods are used in shale reservoirs...
Paul Monies 10:36 a.m. Programming Note: We've got a few more questions in the queue, but keep them coming.
Jay F. Marks 10:36 a.m. The standard secondary and tertiary recovery methods may not work in those formations, but producers know there is a lot of oil and gas left in place.
Chris 10:36 a.m. Everyone on here seems very savvy about the O & G field. I've been very enlightened and impressed by your knowledge. Thank you all for sharing!
Paul Monies 10:37 a.m. Thanks, Chris.
Jay F. Marks 10:37 a.m. I believe I was told as little as 5 percent of the oil in place is recovered through unconventional shale development, so there is plenty of room for improvement.
Adam Wilmoth 10:39 a.m. Most of the current fields are in areas where oil was discovered long ago. But now the technology and the commodity prices have allowed companies to return.
Paul Monies 10:39 a.m. Economics has a lot to do with it, too. If oil was at $40/barrel, I doubt many folks would be in the Permian, etc.
Jay 10:40 a.m. Can you use secondary or tertiary recovery on shale? Or is that considered re-fracting the formation?
Jay 10:40 a.m. What are other unconventional reserves, I know of shale, oil sands, but what else is considered unconventional? There are only so many traps and shales, and new ones are not created overnight...
Jay F. Marks 10:41 a.m. The industry hasn't gotten to that point yet. The shale boom is still relatively new, so I don't think anyone has had to move the secondary stage yet.
Adam Wilmoth 10:41 a.m. Unconventional refers to the density of the rock and how it is drilled.
Adam Wilmoth 10:45 a.m. With traditional wells, oil escapes from a dense source rock and is trapped in a sandstone or some other soft rock. The well is drilled into the trap. With unconventionals, the well is drilled directly into the dense source rock. Horizontal drilling and hydraulic fracturing, or fracking, is used to allow the oil and natural gas to flow more freely through the source rock and up the well.
Guest 10:45 a.m. Paul: are you blocking all questions unless they work for oil company?
Paul Monies 10:45 a.m. Nope. Do you have another question?
10:51 a.m.
Chris 10:52 a.m. I appreciate you taking my questions. I am a student at OU - College of Law, focusing on Energy and Natural Resources. I've found this discussion very informative and leading to my increased knowledge.
Adam Wilmoth 10:52 a.m. Thank you, Paul. That image shows what I was trying to explain.
Jay F. Marks 10:52 a.m. There is a lot of source rock out there to be drilled, in the U.S. and abroad.
Jay 10:52 a.m. What is going to be the next unconventional?
Jay 10:54 a.m. So anything that is not a vertical is considered unconventional?
Adam Wilmoth 10:55 a.m. I think the difference between conventional and unconventional has more to do with whether you're drilling directly into the dense source rock.
Jay F. Marks 10:55 a.m. Some companies are trying the Tuscaloosa Marine Shale in Louisiana, but the next play depends on how well producers can reach the oil and gas at an economic price. Plus there has to ready infrastructure in place.
Nick 10:55 a.m. How big a deal do you think this GE center will turn out to be for OKC?
Nick 10:55 a.m. Cathy O'Connor was quoted as already speaking about expansion yesterday at the groundbreaking.
Paul Monies 10:55 a.m. O'Connor mentioned helping out with a possible TIF for a parking garage.
Adam Wilmoth 10:56 a.m. At GE's eight other global research centers, the projects have expanded significantly.
Jay F. Marks 10:56 a.m. GE is planning to hire about 125 people, each earning six figures a year. That's pretty big, but the center also will boost the oil and gas industry, which is the state's most valuable. That could be huge.
Mic 10:57 a.m. Is the miss lime in alfalfa county moving towards a stack pay that includes woodford, and lower Mississippian potential?
Jay F. Marks 10:57 a.m. That seems to be the case.
Jay F. Marks 10:58 a.m. SandRidge has started talking about the Mid-Continent rather than the Mississippian because there are several layers of rock that could yield oil and gas.
Paul Monies 10:58 a.m. Last chance for questions. Anyone want to talk wind and solar?!?
Jay F. Marks 10:58 a.m. I hope to write some more soon on SD's multi-lateral wells in that area
Jay F. Marks 10:58 a.m. Or utilities?
Jay F. Marks 10:58 a.m. Paul loves to talk about utility rates...
John 10:58 a.m. No
Guest 10:59 a.m. Was it short-sighted to tax the generation by solar on homes?
Paul Monies 10:59 a.m. It was a smart move by the utilities, but I don't think they anticipated the pushback from some groups.
Guest 11:00 a.m. Why was it smart move by the utilities?
Paul Monies 11:02 a.m. In some ways, they are getting ahead of what could be a big push by homeowners to install solar panels, which are getting cheaper by the year. In other states, some utilities are teaming up with solar companies to provide panels. In other places, such as Arizona, utilities have fought the solar industry on how much of a burden providing the extra infrastructure needed for net metering is.
Jay F. Marks 11:03 a.m. It seems likely that the determining factor on this law will come from the Oklahoma Corporation Commission, which will decide what fee utilities can charge.
Paul Monies 11:03 a.m. Here in Oklahoma, it was actually against the law to charge solar users more. The law dated to 1977. The bill now gives them the opportunity to ask the Oklahoma Corporation Commission to charge extra on the base customer charge for solar and small wind turbine users.
Guest 11:04 a.m. Once the solar panels are installed on a home, does the utility not just measure what they need (like they do now) and bill the reduced amount accordingly? What is this net metering and extra infrastructure burden?
Paul Monies 11:06 a.m. Here in Oklahoma, OG&E customers get credits on their bills for net metering that can carry over for a month. In Arkansas, regulators allow OG&E customers to carry the billing credit from net metering over for up to 12 months. Electric co-ops, which aren't regulated by the Corporation Commission, have their own policies.
Paul Monies 11:07 a.m. During the bill's debate, the utilities could never pinpoint exactly what extra costs the rooftop solar/small wind turbine users could be incurring. The exact costs will have to be substantiated when it goes through the process at the Corporation Commission.
Guest 11:08 a.m. the O&G companies cite the tax burden of returning the rate to 7% making wells in OK uneconomical, but North Dakota and Texas both have much higher tax rates than what OK charges and they still drill there.
Jay F. Marks 11:08 a.m. Part of the difference is probably the amount of oil being produced in ND and Texas, while Oklahoma is mostly gas or other liquids.
Adam Wilmoth 11:09 a.m. That is true. But production levels are different. A good well in Oklahoma produces 400 or so barrels a day. A good well in North Dakota produces 4,000 barrels a day, and a good well in the Permian can produce 1,400 or so.
Adam Wilmoth 11:10 a.m. Devon's Larry Nichols said if Oklahoma rocks produced 4,000 barrels a day the companies could afford to produce here with an 11 percent tax rate. But the rocks are very different.
Megan 11:11 a.m. Why does the wind industry get such huge subsidy while they build wind turbines in parts of Oklahoma with no wind?
Jay F. Marks 11:11 a.m. I wasn't aware there were parts of Oklahoma with no wind...
Paul Monies 11:11 a.m. Not sure where they're building with no wind.
Jay F. Marks 11:12 a.m. No developer will invest the substantial amount of money needed to build a wind farm where there is no resource.
Paul Monies 11:13 a.m. The state's best wind potential is in the western part of the state, but there's still pockets of good wind in the eastern part. With turbine technology improving and turbine heights going higher where the wind is better, they're not taking investment decisions of hundreds of millions of dollars lightly.
Jay F. Marks 11:13 a.m. The wind may not blow as much in eastern Oklahoma, but any wind farm built there is probably closer to the state's populations centers, i.e. the areas that need electricity.
Megan 11:13 a.m. Very little wind. You should see the wind map.
Paul Monies 11:13 a.m. These companies have their own wind maps that are way ahead of what the feds put out.
Megan 11:14 a.m. You should talk to folks in eastern Oklahoma. They would disagree.
Jay F. Marks 11:14 a.m. I've seen the National Renewable Energy Lab's maps, but again no developers (or their bankers) would sink tens of millions of dollars in a wind farm where one would not work.
Paul Monies 11:14 a.m. That's the fight right now. Some of the landowners want it, and some don't. I don't think there's a consensus either way.
Megan 11:15 a.m. They are subsidized to the tune of 193 million a year. Enough to pay off the state budget shortfall.
Paul Monies 11:16 a.m. More on that here:
Jay 11:17 a.m. Is Chesapeake better off or worse off with Aubrey McClendon gone? Why, if he is a shady person are people still giving him hundreds of millions of dollars?
Jay F. Marks 11:17 a.m. The company's largest shareholders wanted a change and that's what they got. CHK's stock price is up, while spending is down.
Jay F. Marks 11:18 a.m. As for McClendon, I think he was more of a gambler than CHK's shareholders wanted.
Adam Wilmoth 11:18 a.m. The company is on much better footing financially. But the company would not be where it is today without the growth it experienced previously.
Adam Wilmoth 11:19 a.m. Chesapeake has enough assets that it has been able to sell its noncore areas and still focus on several of the best producing areas in the country.
Jay F. Marks 11:19 a.m. McClendon is using his acumen to built his business, just like he did for years at CHK. Some of the same people/entities are investing in his new ventures.
Jay 11:19 a.m. As the Mexican Government begins to allow foreign oil companies to dril there, will there be rush to get to the Eagleford shale in North Mexico, or do you think people will be hesitant due to political risk/druglords?
Jay F. Marks 11:20 a.m. That is a fair question.
Jay F. Marks 11:20 a.m. I recently heard from an Oklahoma City University professor who said that part of Mexico is controlled by cartels, not the federal government.
Jay F. Marks 11:20 a.m. That will definitely be a concern for U.S. or other foreign oil companies.
Jay F. Marks 11:21 a.m. Many industry executives talked about foreign markets at this month's OSU energy conference. All of them said government stability is an important consideration when establishing operations in another country.
Adam Wilmoth 11:22 a.m. The Eagle Ford appears to extend well into Mexico. It will be interesting to see whether oil and gas production would help stabilize the region.
Jay F. Marks 11:22 a.m. Mexico seems like a better bet for offshore producers right now, but that could change in the future.
Paul Monies 11:22 a.m. Even so, it's not like the oil industry hasn't operated in global hot spots before. Sounds like a great opportunity for private security firms.
Paul Monies 11:22 a.m. OK, folks, we're going to wrap this up at 11:30 a.m. Last chance for questions.
Jay 11:23 a.m. When will LNG exports begin to happen?
Jay F. Marks 11:23 a.m. That's still several years off, at least.
Adam Wilmoth 11:23 a.m. The first few sites have received preliminary permits, but construction will take several years.
Jay F. Marks 11:24 a.m. A number of sites have received permits from the federal government, but they still have to be developed, to the tune of several billion dollars each.
Jay F. Marks 11:25 a.m. The closest LNG site to being operational, I think, is Cheniere Energy's Sabine Pass project in Louisiana.
Jay F. Marks 11:25 a.m. It was originally meant to be an import terminal, so Cheniere has a head start on everyone else.
Jay F. Marks 11:26 a.m. That facility supposedly is on track to be finished by late next year, at the earliest.
Adam Wilmoth 11:28 a.m. The U.S. Department of Energy has approved seven sites. Another 24 permits are pending. it will be interesting to see how much is approved and built. Most industry people I hear from say exports likely will be in the neighborhood of 6 billion cubic feet per day.
Jay 11:28 a.m. Shells refinery ship, is that a work in progress or completed? Also, is this what the future holds for refineries, where they can drill, refine and deliver oil offshore?
Jay F. Marks 11:28 a.m. I don't know anything about that project.
Jay F. Marks 11:29 a.m. Sounds like an interesting idea though...
Adam Wilmoth 11:30 a.m. Apparently it is a floating LNG processing and export facility. I could see the benefit for that, but I don't know much about the project.
Paul Monies 11:30 a.m. It's a floating LNG facility. Not oil. It's the Shell Prelude ship:
Paul Monies 11:31 a.m. OK, folks. Thanks for joining us today. Our next chat will be at 10 a.m. on June 10.
by Adam Wilmoth
Energy Editor
Adam Wilmoth returned to The Oklahoman as energy editor in 2012 after working for four years in public relations. He previously spent seven years as a business reporter at The Oklahoman, including five years covering the state's energy sector....
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by Paul Monies
Energy Reporter
Paul Monies is an energy reporter for The Oklahoman. He has worked at newspapers in Texas and Missouri and most recently was a data journalist for USA Today in the Washington D.C. area. Monies also spent nine years as a business reporter and...
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