Foundation head: Drilling incentive serves no effective purpose

BY KEN LEVIT Published: July 17, 2013
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As the leader of a philanthropic organization built from the largesse of the oil and gas business in Oklahoma, I see every day the impact the energy industry has on this state. Whether it's the early childhood or economic development work of the George Kaiser Family Foundation or the education reform efforts of the Charles and Lynn Schusterman Family Foundation, the energy business has fueled progress. Those who have benefited from the industry set the bar for generosity. This industry is the backbone of our economy.

However, the importance of Oklahoma's energy sector doesn't dismiss us from the responsibility to weigh the effectiveness of public policy. At issue is a tax incentive the Legislature passed in the final hours of the 2010 session to promote horizontal drilling. Last week, state Finance Secretary Preston Doerflinger showed the gross production tax collections to the general revenue fund dropped $209 million in fiscal year 2013. This loss, which is entirely due to the 2010 law, is projected to be worse next year.

The incentive is complicated. For more than 40 years, the gross production tax for most drilling was around 7 percent. Fluctuation in prices dictated tax rates, including keeping taxes low during the recoupment of drilling expenses.

In 2010, legislators created a windfall for producers by taking the tax to 1 percent on all horizontal drilling in the name of “making Oklahoma energy companies competitive” in comparison to neighboring states. The 1 percent was regardless of the price of oil or gas. If oil was $150 per barrel or $60 per barrel and well production costs had been recouped, the 1 percent level remained. Since 2010, nearly all wells drilled in Oklahoma are horizontal. The one-year forecast for oil is over $100 per barrel.

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