Lawmakers should back boost to longer laterals

OKLAHOMA state government has faced serious budget challenges three years in a row, but it’s nothing that a little economic growth can’t cure. One way to help achieve that goal is to change state law so energy producers can use extended horizontal drilling in all rock formations.

Since 2012, state law has allowed drillers to use long laterals in shale formations, but not in other formations. That’s a policy decision that doesn’t make logical sense. If long laterals are fine in one formation, why should drillers face greater restrictions in another?

The 2012 law resulted in a dramatic increase in shale drilling in Oklahoma, which helped mitigate the impact of the subsequent state recession. But restrictions on the use of long laterals in other formations have deterred much drilling, driving that activity to other states. In Texas, the use of long laterals in all formations is legal. There’s a notable dropoff in drilling at the Texas/Oklahoma line even though reserves in Oklahoma are comparable.

A single well can involve millions of dollars in investment and associated economic activity, generating higher income and sales taxes for the state. Given that numerous wells are on hold due to Oklahoma’s existing regulations, the state is missing out on untold millions in economic activity and associated tax revenue.

As Chad Warmington, president of the Oklahoma Oil and Gas Association, put it, “For a state that’s $800 million short on their budget, leaving a significant amount of development off the table doesn’t seem to make a whole lot of policy sense.”

The dual system has also created headaches for the Oklahoma Corporation Commission, which regulates much drilling activity. In some cases, the commission has been asked to rule on whether a well is drilling into shale or not, which squanders time and state resources.

Some producers, primarily smaller operators, oppose changing the law. But those producers already deal with similar situations regarding shale formations and existing safeguards will apply.

Other opponents cling to a misguided belief that oil and gas producers are undertaxed. Yet the effective tax rate on Oklahoma wells is only slightly lower than the effective tax rate on Texas wells. Allow more wells to be drilled, and current tax rates will generate more revenue.

Others argue Oklahoma officials should simply wait out the market until oil prices surge again and state revenue climbs in tandem. That scenario appears unlikely in the near future.

“With oil not going back to $100 any time soon, expansion of production is what’s going to fill those gaps,” Warmington said. “It’s not going to be some massive run-up because OPEC suddenly runs out of oil.”

Senate Bill 284 and House Bill 1613 would both authorize the use of long laterals in all rock formations, clearing the way for many more wells to be drilled that are otherwise profitable at today’s prices.

Put simply, part of Oklahoma’s budget crisis is selfinflicted. The key to solving the budget shortfall in the long term is for government to get out of the way and allow the private sector to thrive. Approving long-lateral legislation this year would be a step in that direction.