Editor’s note:This is the second of a 2-part series about the state’s gross production tax rate. The first part of this series is available at ardmoreite.com.
Current budget conversations surrounding the potential for new revenues — or the return of previously forgone revenues — has put the state’s gross production tax for horizontal oil and gas producing wells back in the spotlight.
The current rate sits at 2 percent through a well’s first 36 months, also considered the most productive period of production with as much as 80 percent of the well being depleted in that time frame, according to Mike Cantrell, co-chairman of the Ardmore-based Oklahoma Energy Producers Association. After 36 months the rate moves to 7 percent, well below the national average, though the effective rate of taxation can vary based on other incentives and each state’s tax structure.
“We’ve had increases (to the effective tax rate) over the last 3 years. The state can’t continue to target the same revenue streams. It will not solve the problems and it can not solve the problems,” Donelle Harder, vice president of communication for the Oklahoma Oil and Gas Association, said.
Harder said that more than 22,000 oil and gas jobs were lost during the recent economic downturn and, of that, nearly 5,000 have returned while the number of operating rigs in the state remains at 50 percent of peak numbers from 2014.
“The industry is still recovering,” Harder said. “It’s hard to say now just how detrimental a flat 7 percent would be because we haven’t seen that number in decades. Oil is here, so there will be producers. But it’s hard to predict the impact.”
Harder said the comparable rates of other states — most of which have GPT well above 7 percent — doesn’t take into account downstream revenues created by oil and gas companies. Those revenues are created through the headquarter locations and the residents who often work out of state, then return to Oklahoma to spend the bulk of their earnings.
“Trying to increase your revenue streams through a volatile industry is very dangerous, especially when it has to do with important functions like funding teacher pay,” Harder said.
With seemingly all options on the table, state legislators are currently looking for solutions that will garner enough support from both sides of the aisle to avoid potentially catastrophic cuts.
“I think we need to get it (GPT) back to a level where other states are at,” Rep. Pat Ownbey, R-Ardmore said. “We’re nowhere near where some of the other energy producing states are. They’re (energy companies) here for the minerals, not the weather.”
Ownbey said the initial change in gross production tax was the result of the Legislature trying to incentivize experimental horizontal drilling in the 90s, a method that, at the time, was considered cost prohibitive. Ownbey said the Legislature originally set the tax to encourage exportation and drilling, but included a sunset clause that required the rates be renewed semi-frequently.
“I pushed for a return to the original tax in a letter to the editor in The Ardmoreite in 2014 to use the revenue to fund teacher pay,” Ownbey said, adding that efforts by lobbyists were successful in removing the sunset clause.
“We’ve had companies tell the Legislature that regardless of the rate, they will be here to produce,” Ownbey said. “They create a lot of jobs and they are good for the state’s economy, but they are here for the minerals. We are practically giving away a resource in our state.”
Current support for a change in the GPT is limited at the statehouse, but the overall dynamics of the issues has changed significantly over the last few years.
“There are forces in the leadership and there are some legislators that will fight it at every turn,” Ownbey said. “A lot of these legislators have political aspirations, and going against oil in this state makes that a tough row to hoe.”
Ownbey said he wasn’t confident that any movement on the GPT would happen any time soon and that the Legislature could tap into one-time funds and other stop-gap measures to avert any immediate disaster. Though, without a long-term solution, the state will likely find another pending budget crisis waiting when the Legislature returns to the Capitol in February to begin the 2018 session.
“The Legislature doesn’t do a very good job of looking down the road,” Ownbey said. “Right now, we are reacting and not looking into the future.”