Tax Break for Unprofitable Oil Wells Swells Amid Slumping Crude Prices

  • Joe Wertz
An American Energy Woodford well near Perkins, Okla.

Joe Wertz / StateImpact Oklahoma

An American Energy Woodford well near Perkins, Okla.

As crude prices limp along, a tax rebate for “economically at-risk” wells is poised to grow into one of the state’s biggest tax breaks for business and industry.

Two years ago, when Oklahoma crude was selling for about $100 a barrel, the rebates totaled just $11 million, Oklahoma Watch’s Warren Vieth reports:

During the current fiscal year, the at-risk rebate reduced the amount of money available to finance state government by an estimated $41 million. The cost is expected to nearly quadruple to $158 million next year, contributing to the state’s $1.3 billion budget shortfall. The expected rebates already have been incorporated into official revenue estimates presented to lawmakers.

“This is by far the biggest impact that the price of oil has had,” said Tax Commission Executive Director Tony Mastin. “Because of the price decline we’re getting less gross revenue, and also because of the price decline this rebate has come into effect. So it’s kind of a double hit.”

The economically at-risk tax rebate was created in 2005. Here’s how it works:

The economically at-risk rebate refunds 6/7ths of oil and gas production taxes collected on any 7-percent well that generates less revenue in a year than the combined cost of royalty payouts, operating costs, overhead expenses and production taxes. In effect, it reduces the tax rate from 7 percent to 1 percent, retroactively.

About 40 percent of Oklahoma oil production comes from older vertical wells whose operators the tax break was designed to help, Vieth reports.

“The majority of Oklahoma’s oil and natural gas producers are small mom-and-pop companies,” [Cody] Bannister [with the Oklahoma Independent Petroleum Association] said. “They don’t drill a lot of wells. They manage some historic properties. Those are the people that this helps most of all.”

Senate Finance Committee Chairman Mike Mazzei, R-Tulsa, a frequent critic of state tax breaks, credits and incentives, introduced a bill to suspend the at-risk rebate, but the measure has failed to advance, Vieth reports. Still, the state’s $1.3 billion budget hole means no potential remedy is off limits:

“When you’re in a $1.3 billion budget shortfall, anything and everything’s going to be on the table,” said Chad Warmington, president of the Oklahoma Oil and Gas Association. “So yeah, we’re keeping an eye on it.”