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Production tax debate intensifies in Oklahoma's oil patch

A tax break on horizontal drilling designed to help the prolific oil practice throughout the state has sparked controversy this summer as state finance secretary Preston Doerflinger has said the tax break should be changed now that horizontal drilling has become an industry standard.
by Adam Wilmoth Published: August 1, 2013

Oklahoma Finance Secretary Preston Doerflinger sparked controversy throughout the state oil patch earlier this summer when he suggested legislators consider changing a tax break for horizontal drilling.

“My only position in bringing this to everyone's attention — and particularly to the policymakers — is that it is my responsibility and the responsibility of my office to make them aware of revenue risks,” Doerflinger told The Oklahoman on Thursday. “This is one where I felt like it was time for everyone to have an honest dialogue, understanding that something had to give. I'm thankful that we've been engaged in a very productive conversation with industry folks on how to collaborate on addressing this issue.”

At issue is the gross production tax energy companies pay on oil and natural gas produced in Oklahoma through 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 174 rigs drilling for oil and natural gas in Oklahoma, 161 were involved in horizontal drilling, according to the most recent numbers from Baker Hughes.

“What I have tried to suggest is that the industry stakeholders and policymakers and the governor's office work together to come up with what makes the most sense,” Doerflinger said. “I think 7 percent is still competitive when you look at a state like North Dakota that has an 11.5 percent tax. But we're not saying it should necessarily move back to 7 percent.”

The current tax credit is set to expire in 2015, at which time the tax rate would return to 7 percent.

“Probably more important to the industry is certainty,” Doerflinger said. “It is difficult for the industry to decide in what direction they're going without certainty as to what this will look like. I hope we can come up with something that provides certainty. My desire is to find that sooner rather than later.”

Continental Resources CEO Harold Hamm credited the lower tax rate for fueling the rapid drilling growth in Oklahoma over the past few years and said it is essential to the state that the growth continues.

“We don't want to go from a boom to a bust,” he said. “How we handle that and get to a more permanent situation on the severance tax going forward is something that needs to be done carefully. It worked. It worked tremendously well. It has been a great benefit for the state. A lot of production will be coming on tax rolls as a result of having this incentive in place.”

While the tax break may have been beneficial, Oklahoma Policy Institute Director David Blatt said its time has passed.

“We see these credits for horizontal drilling as having become entirely unnecessary and unaffordable,” he said. “Whatever importance they may have had at some point in incentivizing production that was new and experimental and expensive, it's no longer the case when you have 90 percent of production in the state being done horizontally. You're not encouraging something that private companies can't do on their own. You're just providing a large giveaway that is not encouraging drilling.”

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by Adam Wilmoth
Energy Editor
Adam Wilmoth returned to The Oklahoman as energy editor in 2012 after working for four years in public relations. He previously spent seven years as a business reporter at The Oklahoman, including five years covering the state's energy sector....
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