With about $171 million less for the Legislature to spend this year than last, an already heated debate over oil and natural gas drilling incentives is expected to soon become much more intense.
At issue is the gross production tax energy companies pay on oil and natural gas produced in Oklahoma through horizontal drilling.
“We're having good discussions with the industry about collaborating on a new structure that retains Oklahoma's status as a national leader in energy policy and production,” Finance Secretary Preston L. Doerflinger said in a statement Thursday. “There is a legislative presence also at the table acknowledging the need for consideration of a better solution long term. Oklahoma has a great energy industry with a lot of bright minds who we're collaborating with on something that can work for everyone in the long term.”
Doerflinger sparked controversy throughout the state oil patch this summer when he suggested legislators consider changing a tax break for horizontal drilling.
The state historically has assessed a 7 percent tax on most production. But in 2010, the Legislature created a temporary incentive designed to stimulate horizontal drilling by cutting the tax to 1 percent for the first 48 months of production from horizontal wells.
Out of 172 rigs drilling for oil and natural gas in Oklahoma, 155 were involved in horizontal drilling, according to the most recent numbers from Baker Hughes.
Industry leaders have said the tax credit should be extended because it has been successful.
House Speaker T.W. Shannon echoed that sentiment last month at the Oklahoma Oil and Gas Association annual meeting.
“It is my opinion that most of the solutions I've heard are solutions in search of a problem. I see a program doing exactly what it was supposed to do. We wanted to incentivize drilling,” he said. “Now is the time to put the pedal to the metal.”
Shannon said he would like to see the Legislature extend the tax rate at current levels.
“A lot of people have said they are friends of the industry,” he said. “As we look for incentives for the oil and gas industry, I think it's time for those of us who say we are friends of the oil and gas industry to show it. We need to say Oklahoma is open for business.”
Others, however, say the tax credit has served its purpose and is no longer necessary.
“The tax credit was put in place when this type of drilling was a new technology and was risky,” said Gene Perry, policy director for the Oklahoma Policy Institute.
“Today, it's pretty much fueling the huge boom in production and is a well-established technology that has showed to be very profitable. There's not a reason to incentivize it. They're going to make money by drilling these wells.”
The increasing popularity of horizontal wells also is making the incentive program increasingly expensive to the state, Perry said.
“Considering that we're already facing a budget shortfall this year, it deserves to be high up on the priorities as one of the most obvious ways the state could help improve the revenue situation and fund the school budgets and DHS reform and all the obligations that are piling up,” he said.
The current tax credit is set to expire in 2015, at which time the tax rate would return to 7 percent if no action is taken.
Representatives from all sides of the issue, however, say they are intent on resolving the issue as quickly as possible.