A new state gross production tax proposal pitched by Oklahoma City’s big three oil companies has the tentative support of the governor and Senate leadership, but is being criticized by a prominent Tulsa oilman and banker as being overly generous to the oil and gas industry at the expense of state services.
Whether it ultimately will be approved by the Legislature remains in doubt.
Leaders of Devon Energy, Chesapeake Energy Corp. and Continental Resources Inc. told The Oklahoman they have submitted a unified proposal to state negotiators.
That proposal calls for permanently setting Oklahoma’s gross production tax rate at 2 percent for the first 48 months on all new wells, regardless of whether they are horizontal or vertical, followed by a 7 percent tax rate for the remainder of each well’s production.
“The governor is inclined to support the concept and thanks the industry and Legislature for collaborating in the review process we recommended last summer,” said Preston L. Doerflinger, the governor’s secretary of finance.
Senate President Pro Tem Brian Bingman, R-Sapulpa, said he also likes the proposal.
“I think it’s a very fair and reasonable proposal,” Bingman said, adding that he has presented the proposal to Senate Republican caucus members and believes it was “received very favorably.”
House Speaker Jeff Hickman was more noncommittal.
“The plan the oil and gas industry has come forward with is one among several that have been discussed this session,” said Hickman, R-Fairview, who has been directly involved in negotiations in behalf of the House. “The energy industry is a crucial part of Oklahoma’s economy and job market, and ultimately, the Legislature has to make a decision about the incentives that are set to expire next year.”
Even if the industry’s basic proposal is accepted, there are still details to be worked out, officials said. Among those details are whether the 2 percent tax rate would jump back to 7 percent earlier than 48 months if a well has earned enough money to pay for itself, and how revenues from the 2 percent tax would be distributed between counties, schools and the state.
Currently, Oklahoma’s basic gross production tax rate on oil and natural gas stands at 7 percent, but for several years a tax incentive has been in effect that lowers the tax rate to 1 percent for the first 48 months of production from a new horizontal well, rising to 7 percent for the remainder of the well’s producing life. Under the law, the 1 percent tax goes entirely to counties and school programs and the state receives no money from new horizontal oil and gas wells for 48 months. Vertical wells pay the 7 percent tax rate from the beginning.
The law’s effects
Larry Nichols, executive chairman of Devon, predicted the proposed change would be either revenue neutral to the state and oil and gas industry or would more likely result in a modest tax increase on the industry. Companies that concentrate on vertical drilling would see a tax decrease, while companies like the big three that almost solely in horizontal drilling would see a tax increase, he said.
About 87 percent of wells now being drilled in Oklahoma are horizontal wells, said Harold Hamm, chairman and CEO of Continental Resources.
Some lawmakers have eyed elimination or partial elimination of the tax incentive as a possible source of millions of dollars for things like raises for state employees and teachers. At least a few of them have advocated waiting until next year to act in order to put pressure on oil companies to agree to a higher tax rate.
However, Hamm, Nichols and Chesapeake CEO Doug Lawler claim that would be a huge mistake because oil companies make their drilling plans in the fall and the tactic would result in the state seeing a huge dip in new wells next year, regardless of whether lawmakers ultimately agreed to the proposal.
Earl Sears, vice-chairman of the House Appropriations and Budget Committee, said he believes lawmakers are committed to arriving at a deal that will be good for the state and the oil industry.
“We’re still reviewing and looking at all kinds of scenarios,” said Sears, R-Bartlesville. “I feel committee members are still keeping a very open mind.”
Sears said he personally felt at one time that setting the tax rate at 2 percent for two years and then raising it to 7 percent might be a good option.
“I’m not saying that’s the plan. That’s just one that I have looked at and considered,” he said.
“We want to make sure that whatever we come up with is good for the oil industry because the oil industry and the energy industry have been extremely good to Oklahoma,” he said. “But by the same token, we have a commodity that’s in Oklahoma that we need to make sure ... that we’re addressing that commodity for the best of all the people who choose to live in Oklahoma.”
Sears said he agrees with the oil industry that a solution needs to be reached this year so everyone can plan for the future.
State Rep. Don Armes, chairman of the House Appropriations Subcommittee on Natural Resources and Regulatory Services, said lawmakers are looking for the right balance between taking care of the oil industry and meeting some of the very great needs of state government.
“The oil industry in Oklahoma is a big deal,” said Armes, R-Faxon. “I think we need to make sure they are strong and vibrant and I think we need to be careful, even at a time when we need some income and some revenues for the state coffers. ... Personally, I think it’s not prudent to overtax those guys.”
Armes predicted a negotiated agreement will be reached that oil industry officials will find reasonable.
“I don’t think there is the political will in the House to go force them to do much more than they think they can comfortably do,” he said.
State Sen. Ron Justice, chairman of the Senate Appropriations Subcommittee on Natural Resources and Regulatory Services, said he believes the horizontal drilling incentive has accomplished what lawmakers wanted.
“We see all the activity that has happened in our state,” said Justice, R-Chickasha. “It’s important that we continue to work with the oil companies ... to evaluate the situation and what’s best for everybody concerned.”
Justice said it is important to realize a lot of mineral owners and other businesses have profited from the economic activity created by oil and gas companies.