{"id":15897,"date":"2013-08-22T06:30:18","date_gmt":"2013-08-22T11:30:18","guid":{"rendered":"http:\/\/stateimpact.npr.org\/oklahoma\/?p=15897"},"modified":"2014-01-06T12:53:13","modified_gmt":"2014-01-06T18:53:13","slug":"as-oklahomas-oilfield-booms-state-tax-breaks-follow","status":"publish","type":"post","link":"https:\/\/stateimpact.npr.org\/oklahoma\/2013\/08\/22\/as-oklahomas-oilfield-booms-state-tax-breaks-follow\/","title":{"rendered":"As Oklahoma’s Oilfield Booms, State Tax Breaks Follow"},"content":{"rendered":"
\"Toolpusher<\/a><\/p>\n

Joe Wertz \/ StateImpact Oklahoma<\/p>\n

Toolpusher and rig manager Darrin Silcot walks the perimeter of a Triad Energy horizontal drilling operation near Alva, Okla.<\/p>\n<\/div>

The energy industry fuels Oklahoma’s economy, and the state is flush with active rigs and plentiful oil and natural gas production.<\/p>

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.<\/p>

<\/p>\n

\"John<\/a><\/p>\n

Joe Wertz \/ StateImpact Oklahoma<\/p>\n

John Boyd, a petroleum engineer, looks at well readings inside a control room at a Triad Energy horizontal drilling operation.<\/p>\n<\/div>\n

Break It to Make It<\/h3>

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.<\/p>

But below the unassuming field lies the Mississippi Lime, one of the state’s hottest oil plays.<\/p>

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.<\/p>

\u201cWe just got the well turned horizontal,” says John Pat Boyd, a petroleum engineer contracted by Oklahoma City’s Triad Energy.<\/p>

And because this well is a horizontal well \u2014 not the vertical wells drillers have used for more than a century \u2014 Triad Energy is eligible for a tax break: 1 percent instead of the 7 percent gross production tax<\/a>\u00a0the state levies on crude oil and natural gas production.<\/p>

Triad Energy\u2019s co-owner, Mike McDonald, says there\u2019s a simple reason for this.<\/p>

“It’s five to six times as expensive,” McDonald says. \u201cWe could drill a vertical well, and put it into production for in the neighborhood of probably $500,000. Maybe $550,000 \u2014 it just depends. Horizontal wells, if everything goes right \u2014 $2.7 million to $3 million dollars.”<\/p>

But these expensive horizontal wells \u2014 combined with hydraulic fracturing, or fracking \u2014 are what most energy companies are using to pull out the hard-to-get oil and gas in formations like the Mississippian.<\/p>

And without the horizontal drilling tax breaks, McDonald and other representatives of Oklahoma’s oil and gas industry<\/a> say many wells \u2014 like Triad’s operation near Alva \u2014 would never be drilled.<\/p>\n

Risky Business<\/h3>\n
\"Contractors<\/a><\/p>\n

Joe Wertz \/ StateImpact Oklahoma<\/p>\n

Contractors install a blowout preventer on Triad Energy's horizontal drilling well near Alva, Okla.<\/p>\n<\/div>

But others aren’t so sure.<\/p>

\u201cAs 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<\/a> of some of the state’s oil industry tax breaks.\u00a0\u201cA 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\u2019s costing the state $150 million a year.\u201d<\/p>

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.<\/p>

Today, horizontal drilling is a proven industry tool in Oklahoma and other states.<\/p>

The technologic risk of horizontal drilling is gone, but the tax break installed to encourage it has stayed, Blatt says.<\/p>

\u201cNinety 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?\u201d<\/p>

Preston Doerflinger, Oklahoma’s Secretary of Finance and Revenue, asked a similar question in a July update of the state’s economy<\/a>, and called on lawmakers to re-examine the incentives, which expire in 2015.<\/p>\n

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\u201cAny fiscally responsible policymaker needs to seriously consider at what level government should incentivize something that is now standard practice,” Doerflinger wrote. “It\u2019s not responsible for government to give money away as an incentive if no incentive is needed.”<\/p>\n<\/blockquote>\n

Evolving Incentives<\/h3>

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.<\/p>

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<\/a>:<\/p>\n

At the time, tax officials expected the three-year payback would total $150 million, but in early 2012, it was\u00a0determined the payment would be closer to $300 million \u2013 with an almost $100 million per year impact on the budget.<\/p><\/blockquote>

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.<\/p>\n

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