As Oklahoma’s Oilfield Booms, State Tax Breaks Follow

Toolpusher and rig manager Darrin Silcot walks the perimeter of a Triad Energy horizontal drilling operation near Alva, Okla.

Joe Wertz / StateImpact Oklahoma

Toolpusher and rig manager Darrin Silcot walks the perimeter of a Triad Energy horizontal drilling operation near Alva, Okla.

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.

John Boyd, a petroleum engineer, looks at well readings inside a control room at a Triad Energy horizontal drilling operation.

Joe Wertz / StateImpact Oklahoma

John Boyd, a petroleum engineer, looks at well readings inside a control room at a Triad Energy horizontal drilling operation.

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.

Risky Business

Contractors install a blowout preventer on Triad Energy's horizontal drilling well near Alva, Okla.

Joe Wertz / StateImpact Oklahoma

Contractors install a blowout preventer on Triad Energy's horizontal drilling well near Alva, Okla.

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.”

Evolving Incentives

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.”


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Comments

  • goldwing

    Whatever the investment, it appears the drilling companies are concerned about extracting what resoures we have, and are the experts in the best way of acquiring the oil and gas reserves we have. I do not believe they simply go for what they can maneuver into unwarranted profts, but rely on the most current technology and the most expeditious method of extraction. I’m all for it. Libs tend to cut corners, abandon efforts based on untested risks and rumors, and remain comfortable relying on energy resources provided by other countries, especially our sworn enemies. Political influence of a corrupt administration, and the tree-hugging, solar powered bicycle enthusiasts aside, it is best to provide incentives to businesses dedicated to contributing to our energy independence as well as turn a profit. We have huge reserves of gas and oil, and it is wise to utilize what we have, and incentivise those who know how to get it.

  • wwatts826

    Some in the oil industry would have you believe that drilling a well is based on the existence of the tax credit available for horizontal well drilling. The facts are that a company basis for drilling a well is not based based on the existence of a tax credit it is based on the existence of oil and gas, the projected oil and gas reserves, the market price of that gas and the cost of recovery. That the state of Oklahoma would pay a business owner, in the form of a tax credit, to do his best to make a profit is sheer nonsense. A business owner who does not do his best to make a profit with or without this tax credit is a fool and should and will ultimately fail at whatever he does. Energy companies are going to drill whenever and where ever a profit can be made. For someone to state a well would not be drilled without the tax credit is simply a poor businessman or a liar. The horizontal tax credit is a farce that allows a company to recover more than its actual drilling costs and should be repealed immediately.

  • Michael from Alva

    This tax credit is crazy. Do you think that the oil and gas companies will stop horizontal drilling without this tax credit? No!! Why? Because it is the best way for them to get massive amounts of oil and gas out of the ground cheaper. Use to they would have what is called increased density motions they would file at the courts to allow them to put more wells down in a section to get more oil and gas out of the ground. This means drilling more wells. So instead of drilling 5 wells in a stretch they are only drilling 1. So if you go with the figures the Triad Energy co-owner gives $550,000 x 5 =$2,750,000 verses $2.7M-$3M per well, kinda comes out even. In most cases around the Waynoka area just south of Alva there were more then 5 wells drilled in a section. Who do you think pays for these wells to be drilled? Is all of it coming out of the oil companies pockets? No I think not. They get investors to pay for the drilling and make money off of it by overcharging.

    The Oil and Gas companies try to tell you they are helping the communities out. Bringing in jobs to the area and money for business, helping out the local economies. What they don’t tell you is that those guys that now have trailers to sleep in instead of their pickups aren’t usually your local guys. This state has a policy of fining companies and individuals that hire illegal immigrants except the big oil and gas companies that are exempt to these rules. Even if they weren’t exempt no one is checking. And those workers who were local where do you think they came from? Do you think they were just setting around jobless before the oil and gas companies came to town? No, they were the hard workers from the local business that support stable jobs. Now these business either have to pay inflated wages or loose stable help. They are the business that will have jobs next year, 5 years and 10 years down the road. Not a company that picks up and moves once the drilling is done or oil play falls off. Now these hard workers either have to pickup and move to keep the wages they are now accustomed to or go back to that lower paying job. Those that do move end up sleeping in their pickups before getting trailers at the next location that the company moves to.

    These tax breaks hurt the local schools in these new oil boom areas. How you might say? Once families move into an area and population increases the amount of children going to the local schools increases. Now the local schools struggle to provide education to a larger student body population on the same money. A lot of money that goes out the window on these tax breaks would go to local schools for teacher salaries, school repairs, educational expenses, playground equipment, ect. ect. One way for the Alva School system to fight this is trying to raise money from the parents and grandparents of students. These same people that pay taxes on what they earn and buy to do the same thing. Are the oil and gas companies supporting the local schools voluntarily? Of course not. That is money out of their pockets. They caused the burden the state continues it with the tax breaks and the KIDS are the ones who ends up paying the price. Thanks oil and gas industry….Thanks a lot……

    I have much more that I could say but I think this is long enough for now. No one will ever read this that will do anything.

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