- Associated Press - Monday, May 19, 2014

OKLAHOMA CITY (AP) - An incentive for a 1 percent tax rate for horizontally drilled oil and gas wells would be increased to 2 percent and extended to all wells drilled in Oklahoma under a bill drafted in the Oklahoma Legislature on Monday.

The bill, which is expected to be considered by House and Senate budget panels on Tuesday, calls for the new 2 percent rate to be in effect for the first three years of a well’s production. After that, the rate would increase to the standard production tax rate of 7 percent.

The tax rate on production from traditional vertical wells, which is currently 7 percent, would also drop to 2 percent for three years.

“I think it’s a fair compromise that accomplishes the goal of certainty and simplicity,” said Chad Warmington, president of the Oklahoma Oil and Gas Association. “Although we’d like to see a longer term … I think it’s fair to both the industry and the state.”

Warmington said industry officials had been pushing to have the 2 percent rate in effect for the first 48 months of a well’s production, but that House Republicans pushed for a shorter duration. The length of the reduced rate is significant because wells, especially those drilled horizontally, produce considerably more oil and gas in the first few years of production.

A tax incentive first approved by lawmakers in the 1990s dropped the tax rate for horizontally drilled wells from 7 percent to 1 percent, but that was when horizontal wells were experimental and costly. Now that most wells are drilled horizontally, the reduced rate is costing the state hundreds of millions of dollars annually in potential revenue.

Critics say the generous subsidy is no longer needed, since oil and gas drilling is already a profitable activity. But industry leaders say without the incentive, companies may decide to move their drilling operations to other states.

“This doesn’t represent a good deal for the people of Oklahoma,” said David Blatt, director of the Oklahoma Policy Institute, a Tulsa-based think-tank that advocates for more funding for core state services. “We’ll continue to see an erosion of our gross production tax, and this will continue to come at the expense of resources we need for schools, public safety, health care, and other services that are vital to our state.”



House Bill 2562: https://bit.ly/TnGSgT


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