Editor’s note: This is the first of a 2-part series about the state’s gross production tax rate.


The ongoing budget crisis at the statehouse now has even industry leaders at odds over possible solutions to prevent devastating cuts and to find funding for state teachers’ pay and other critical needs.
Oil and gas production has long been the bread and butter of Oklahoma’s economy. Ardmore and Carter County are no strangers to the boom and bust economy that comes with the highly volatile resource.
In recent decades, new technology — horizontal drilling — has made Oklahoma and much of the United States  prime locations for oil and gas extraction. But that wasn’t always the case. In the late 80s, horizontal drilling was considered experimental and the production of wells was still cost prohibitive to most producers. In the early 90s, the state made changes to its gross production tax along with other incentives to help drive the industry.
“The rate of 2 percent has proven to work, to stimulate the economy,” Cody Banister, vice president of communication for the Oklahoma Independent Petroleum Association, said. “The competition around board tables for where we invest our drilling dollars - that competition is incredibly challenging. Nobody is talking about moving their headquarters to Texas, or New Mexico, but those companies that have operations and drill in multiple states have to be able to look to their investors and show them some certainty.”
Banister said one of his members, based in Tulsa, isn’t currently drilling in Oklahoma due to the political and regulatory climate.
“What he will tell you is ‘I feel like I’m a ping pong ball on this gross production tax because it’s always changing and it’s always a topic,’” Banister said. “Rigs are what drive our economy, not GPT, if you look at our history. We need some certainty. When companies look, when investors look, they have lots of choices they can invest in. They look for political climate, regulatory climate and tax climate”
Legislators on both sides of the aisle have suggested using various methods to tweak the current GPT during recent legislative sessions.
 “As an investor, am I going to come in here (Oklahoma) when a year later it’s going to be something else, then another year later it’s going to be something else?” Banister said.”“Now that we are coming out of this slump, why would we want to change that certainty? The investment companies outside of the state don’t like this kind of uncertainty. Some of these companies will say that if we change this rate, we won’t invest here.”
Banister’s organization believes that other industries in the state should be subject to similar GPT, specifically, wind energy producers.
“We need a plan for this state to broaden (the tax base on) who’s in and who’s out,” Banister said. “If we don’t broaden the base then how are we ever going to be able to long-term broaden the base and attract people to come here with their factories and companies?”
Banister and his organization’s members believe the state relies too heavily on the oil and gas industry and believe the tax burden should be spread out evenly over other industries and through income and ad valorem taxes, which could potentially create more stability and encourage additional growth in the state.
“Over the last several sessions we (the oil and gas industry) have given up every incentive we’ve had, a total of $250 million dollars in incentives that we gave up to help the state,” Banister said. “We theoretically pay a quarter of all the taxes that are paid in the state. We’re not in this situation because oil and gas companies don’t pay enough in taxes, we are in this situation because term limits leading to inexperienced legislators, and some of these folks aren’t very good at math. Kansas went through the same thing recently. They cut their income taxes and we saw what happened. It’s a real dicey thing. You can have cheap license plates and high property taxes, or you can have low income taxes and high property taxes, but the state has got to figure this out.”
A collection of state based energy companies, ones focusing more on vertical drilling, believe the GPT has served its purpose and is no longer needed. They also scoff at the notion that ending the incentive would have any direct impact on the number of jobs the industry creates in the state.
“It won’t have any impact on the job market,” said Mike Cantrell, co-chairman of the Ardmore-based Oklahoma Energy Producers Association. “That 7 percent is still lower than any of the other states producing energy. It won’t have any impact on the rigs going up or the jobs being created. The only impact would be in the revenues collected by the state that we could use to pay our teachers.”
Cantrell said the state could potentially see revenue increases of $200-300 million annually if the GPT were to return to the flat 7 percent rate.
“I participated in the state’s first horizontal well in 1989,” Cantrell said. “The incentives are great, but they should have sunset it to end when it did as it was intended. Here we are incentivizing the taking of a finite resource at a low rate. We may see $100 barrels of oil again but we won’t have the oil when we do. We are depleting our resources faster and at a lower rate. This is bad public policy. We need the incentives, but we also need the sunsets. This needs to be revisited. Even at 7 percent, it’s a bargain. It’s still attractive for capital.”
Cantrell said the state’s revenue from oil and gas exploration went from $1.2 billion in 2009 to $400 million in 2016. Part of the decline in revenue stems from the global recession and the significant drop in oil prices during that span.
Cantrell has holdings in several oil and gas companies in the state including Cantrell Energy Company, Cantrell Investments and Postwood Energy.
“I’ve never done an analysis on tax rates to determine what well to drill,” Cantrell said. “I can understand these companies that do 2,000-5,000 barrels a day wanting to keep that rate. That’s a lot of money. But I live in Oklahoma. We want to fund our state and pay our teachers. We don’t get to go back to Houston to cash our checks.”