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
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Berry Mullennix, CEO at Tulsa-based Panther Energy, credited the tax program for helping his company grow to more than 90 employees, up from 18 a few years ago.

“I would argue the tax incentive is a direct reason we have so much horizontal drilling in the state today,” Mullennix said. “The companies used the credit to help discover this massive wealth in oil and natural gas.”

While horizontal drilling has become an industry standard practice, the process is still extremely expensive and risky, especially for smaller operators, said Mike McDonald, president and co-owner of Oklahoma City-based Triad Energy.

“When you run into problems, you can spend half a million dollars to fix it. You have $600,000 worth of downhole equipment in the well,” he said. “If you get that stuck, you can't retrieve it, and you have to pay for that equipment.”

A higher tax rate could make some wells uneconomical and could lead to less drilling, McDonald said.

“The less capital we have, the fewer wells we can drill. We've pretty much been drilling most of our available cash flow,” he said.

Blatt, however, said it is not the state's role to make unprofitable operations profitable.

“If they can't be profitable without a tax giveaway, there are other problems,” he said. “We generally don't use tax policy to continue to subsidize permanently what the private sector should be able to do on its own.”

Not all in the energy industry support the lower tax rates.

Stacy Schusterman, CEO at Tulsa-based Samson Energy, said the tax rate should return closer to 7 percent, boosting revenue to other state programs.

“We have a 25 percent college graduation rate while the national average is 33 percent,” she said. “We need to invest in our human capital and invest in our economy overall, which will help the oil and gas companies by having a more highly trained workforce.”

Mullennix, however, said that returning to a higher tax rate could lead to less drilling, fewer jobs and a reduction in other tax collections.

“We would drill fewer wells,” he said. “I don't know how many, but we would drill fewer.”

While she could not speak to individual companies, Schusterman said overall drilling likely would not be reduced if the full tax were reinstated.

“I believe that at a higher gross production tax than 1 percent, they will still continue to drill and hire people,” she said. “When paying more in taxes, they will have less cash flow, but I still believe their cash flow will be sufficient because the reserves are at such a quality that the wells will be profitable.”

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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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