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No change expected in oil and gas drilling incentives

BY MICHAEL MCNUTT Published: September 29, 2011

Farmer said the Insurance Department is marketing the home office tax credit program to insurance companies to lure more firms to open regional offices in the state. About 15 insurance companies took part in the home office tax credit program during the last fiscal year.

“This has brought insurance companies to Oklahoma and we hope it brings more,” Farmer said.

More insurance companies having offices in Oklahoma would mean more policies being written in the state and should result in lower rates for consumers, he said.

During the session dealing with oil and gas tax credits and incentives, David Blatt, director of the Oklahoma Policy Institute, argued against the benefits.

A 2008 nonscientific survey by an Oklahoma City University economics professor showed state tax breaks ranked last among 10 variables cited by Oklahoma oil industry executives as affecting their decision to drill.

The state giving tax breaks regardless of the price of oil and gas — as it does with horizontal and deep-well drilling, but not other forms of production — can lead to suspicion that the state is subsidizing the normal cost of doing business for a powerful and well-connected industry instead of giving incentives for production, Blatt said.

Oklahoma has a 7 percent gross production tax on oil and gas, which this fiscal year is expected to bring in about $520 million into the state's general revenue fund, or about 8 percent of the state's $6.5 billion budget.

Tom Price, senior vice president of corporate development and government relations for Chesapeake Energy Corp., told task force members that natural gas producers pay the gross production tax on the amount of they receive at the well head, which is about $2.67 per thousand cubic feet, less than the market price of about $3.80 per thousand cubic feet.

Without the gross production tax exemption on horizontal and deep drilling wells, products would receive about 20 cents less per thousand cubic feet, Price said.

Several states have better incentives than Oklahoma, he said.

Chesapeake, which employs 6,500 in Oklahoma and 12,000 nationwide, is the most active operator in the United States with 176 active rigs in the country, Price said. Texas has 66 and Oklahoma has 34 rigs.

The tax incentive is not the sole factor for Chesapeake to decide where to drill, he said.

“There are a lot of variables that are involved in whether one drills in one state or another,” Price said. “The elimination of these incentives would change the economics relative to the investments that one would make. ... I can only tell you it would have an adverse impact.”