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Thu August 22, 2013
As Oklahoma’s Oilfield Booms, State Tax Breaks Follow
The energy industry fuels Oklahoma’s economy, and the state is flush with active rigs and plentiful oil and natural gas production.
Oklahoma’s oilfields are booming, as are state tax credits for drilling, which is leading some to question whether it’s sound fiscal policy to incentivize a thriving industry.
BREAK IT TO MAKE IT
Triad Energy’s Jane #1 is a well lease in the middle of a unassuming stretch of prairie a few miles outside of Alva, in northwestern Oklahoma’s Woods County.
But below the unassuming field lies the Mississippi Lime, one of the state’s hottest oil plays.
More than a dozen engineers, toolpushers, roughnecks and contractors were onsite when StateImpact visited on Aug. 20, and crews on the Nomac No. 12 rig had drilled a hole more than a mile deep.
“We just got the well turned horizontal,” says John Pat Boyd, a petroleum engineer contracted by Oklahoma City’s Triad Energy.
And because this well is a horizontal well — not the vertical wells drillers have used for more than a century — Triad Energy is eligible for a tax break: 1 percent instead of the 7 percent gross production tax the state levies on crude oil and natural gas production.
Triad Energy’s co-owner, Mike McDonald, says there’s a simple reason for this.
“It’s five to six times as expensive,” McDonald says. “We could drill a vertical well, and put it into production for in the neighborhood of probably $500,000. Maybe $550,000 — it just depends. Horizontal wells, if everything goes right — $2.7 million to $3 million dollars.”
But these expensive horizontal wells — combined with hydraulic fracturing, or fracking — are what most energy companies are using to pull out the hard-to-get oil and gas in formations like the Mississippian.
And without the horizontal drilling tax breaks, McDonald and other representatives of Oklahoma’s oil and gas industry say many wells — like Triad’s operation near Alva — would never be drilled.
But others aren’t so sure.
“As more and more drilling has shifted to horizontal production, the cost of these credits is simply skyrocketing,” says David Blatt of the left-leaning Oklahoma Policy Institute, a think-tank that has been critical of some of the state’s oil industry tax breaks. “A tax subsidy that might have been tenable when it was costing the state $20 million a year becomes a lot less tenable when it it’s costing the state $150 million a year.”
The 1980s oil bust rattled lawmakers at the state capitol, which depended heavily on oil and gas taxes. In 1994, tax refunds and incentives for experimental types of drilling received unanimous support from Republicans and Democrats.
Today, horizontal drilling is a proven industry tool in Oklahoma and other states.
The technologic risk of horizontal drilling is gone, but the tax break installed to encourage it has stayed, Blatt says.
“Ninety percent of the new drilling that takes place is being done horizontally. This is now standard industry practice, so why are we subsidizing something everyone is doing?”
Preston Doerflinger, Oklahoma’s Secretary of Finance and Revenue, asked a similar question in a July update of the state’s economy, and called on lawmakers to re-examine the incentives, which expire in 2015.
“Any fiscally responsible policymaker needs to seriously consider at what level government should incentivize something that is now standard practice,” Doerflinger wrote. “It’s not responsible for government to give money away as an incentive if no incentive is needed.”
Lawmakers have tweaked and expanded the tax breaks over the years. After the Great Recession, a state budget crisis pushed lawmakers to approve a 2010 measure delaying payments of drilling incentives for horizontal and deep wells. The repayments started in fiscal year 2013, and continue through 2015.
State Treasurer Ken Miller authored the payment delay measure when he served as a state House member, and explained the impact in his most recent economic report:
At the time, tax officials expected the three-year payback would total $150 million, but in early 2012, it was determined the payment would be closer to $300 million – with an almost $100 million per year impact on the budget.
In fiscal year 2013, state tax breaks for oil and gas drilling totaled $321 million, data from the Oklahoma Tax Commission show. More than half of that total, $173 million, is tied to those deferred refund payments.
Triad’s McDonald hopes the tax incentives are renewed in 2015 because they’re working. He says it makes sense for the state to support an industry that’s one of its primary economic drivers.
“It’s an erratic industry, and the incentives add some stability,” he says. “They smooth out some of the peaks and valleys.”
Back on the rig site, Boyd the petroleum engineer uses a line of parked pickup trucks as a roughneck jobs spreadsheet, and rattles off the cities and towns they originated from.
“Alva, Cherokee, Woodward, Helena — towns that really didn’t have anything,” he says. “The money’s good now. We get trailer houses to sleep in now. Hell, we used to have to sleep in the pickup.”