Oklahoma's finance secretary is calling for changes to how horizontal oil and natural gas wells are taxed, saying a reduction in the gross production tax has led to significant revenue loss for the state.
Finance and Revenue Secretary Preston Doerflinger said Wednesday he is urging oil and gas industry leaders and lawmakers to come together and discuss the issue.
“I think everybody recognizes that something has to give,” he said. “It's just a matter of what we collectively come up with to address the issue. ... I would suspect that there's going to be a real interest in trying to have serious conversations over the interim and lead into session with hopefully some viable options to help address the problem.”
Doerflinger said an increase in the rebate for horizontal drilling over what was projected three years ago is part of the reason for the decrease in revenue. As in many states, horizontal drilling has become the predominant drilling method in Oklahoma.
“Any fiscally responsible policymaker needs to seriously consider at what level government should incentivize something that is now standard practice,” Doerflinger said. “It's not responsible for government to give money away as an incentive if no incentive is needed.”
The latest Baker-Hughes rotary rig count showed 174 rigs engaged in exploration or development in Oklahoma, with 161 involved in horizontal drilling. In 2011, about 40 percent of all Oklahoma wells drilled were horizontal, up from 15 percent in 2006.
“The boom in the energy industry is improving Oklahoma's economy in so many ways, but the general revenue fund isn't seeing the benefits it would have before 2010,” Doerflinger said. “The 2010 law has led to some real revenue loss. In our estimation, policymakers should consider revisiting this law in consultation with the energy industry to determine whether it is fair and equitable to the industry, the state and all its taxpayers.”
‘One part of the whole economic equation'
Mike Terry, president of the Oklahoma Independent Petroleum Association, said the increased drilling resulted in more high-paying jobs, which were a factor in higher income and sales tax collections for the state. About 27 percent of all taxes come from oil and gas activity, he said.
“He's only looking at one part of the whole economic equation,” Terry said. “It temporarily reduces the gross production tax, but overall in all the other taxes that are paid by the industry — they are increased dramatically.
“Really, the big thing is all the other taxes that are paid from economic activity and all the jobs that come about from the increased drilling,” he said.
Income and sales tax collections this past fiscal year helped boost receipts for Oklahoma's main operating fund ahead of a year ago, despite steep declines in oil and natural gas gross production tax receipts for the state, according to financial reports released Wednesday by the state Office of Management and Enterprise Services.
Drop in oil, natural gas collections
During the 2013 fiscal year, which ended June 30, the state's general revenue fund saw a $248.4 million gain in income and sales tax collections over the previous year, the reports show. Those collections helped offset a $208.9 million, or 48.5 percent, drop in oil and natural gas collections.
Total general revenue fund receipts for the 2013 fiscal year were $5.6 billion, an increase of $10.3 million, or 0.2 percent, over the previous fiscal year. However, that is $26.5 million, or 0.5 percent, below the estimate upon which the 2013 fiscal year budget was based.
The reduced gross production revenue is due in large part to how horizontal wells are taxed under a 2010 law and payment of deferred rebates to the oil and gas industry.
The deal came when the state, faced with a second year of revenue shortfalls and draining virtually all of its savings account, owed oil and gas producers an estimated $150 million in rebates. With the state unable to pay the incentives, oil companies agreed to delay payment.
But horizontal drilling increased, and it was determined last year that the state owed $294 million in rebates on oil from horizontal and deep wells; the state agreed to pay back nearly $98 million a year for three years beginning with the 2013 fiscal year, which ended June 30. That is in addition to the current incentives they are receiving.
In 2010, legislation was signed into law reducing the gross production tax rate on horizontal wells from 7 percent to 1 percent for 48 months after the start of production. The 2010 law removed a stipulation in the previous rebate law that ended the tax break once the cost of the well was recovered.