Wind, oil and more
The Oklahoman’s energy team fielded questions during Tuesday’s online chat.
The Oklahoman’s energy team of Adam Wilmoth and Paul Monies fielded questions during Tuesday’s online chat. This is an abridged transcript of that conversation. For the full transcript or to participate in next month’s chat, go to NewsOK.com.
Q: What are your thoughts on House Bill 2298? Does Oklahoma really need to be subsidizing wind development at this point?
Paul Monies: There seems to be a growing consensus at the Capitol that it’s time to phase out the last big incentive for wind production. HB 2298 closes the zero-emissions tax credit to new claims after July 1. Existing companies that qualified would still be able to stay on the program through the end of their qualifying period (a maximum of 10 years). HB 2298 passed the Senate Monday and now heads to the governor, who advocated an early end to the incentive in her executive budget in February. If she signs it, the measure won’t help this year’s budget shortfall, but it is expected to put the state on firmer financial footing on a longerterm basis.
Q: Any chance the Oklahoma oil & gas business will get to a level in 2017, big enough and soon enough, to make a significant impact on state revenue?
Adam Wilmoth: Drilling activity is up significantly in the state. The rig count has almost doubled from one year ago, and companies are using rigs more efficiently, drilling many wells into several rock layers from a single pad. That is creating jobs in rural Oklahoma and increasing oil and natural gas production. If prices stay where they are or inch a bit higher, drilling likely will continue to increase. I don’t know if that will be enough to fix the state revenue picture, but it should help.
Production didn’t fall much over the past two years, but commodity prices tumbled. Prices have recovered, but are still well below 2014 levels and are unlikely to approach that point any time soon.
Q: Do you see Oklahoma increasing the 2 percent production tax on new wells? Do you think they would move it to 5 percent,
to the full 7 percent? I know tax rates play a role when the economics of a well are otherwise equal but besides that, I don’t see it being a big factor, especially if a company wants to maintain its lease.
Monies: Hate to be evasive, but I just don’t know. The oil and gas industry has said they will fight any attempt to raise the gross production tax rate. But more and more groups (including some Republicans) are calling for a tax increase. State Auditor and Inspector Gary Jones, who is mulling a run for governor, put out a plan Monday calling for a flat, 5 percent rate for the gross production tax. House Democrats have also called for a 5 percent rate. And a small group of longtime vertical producers, the Oklahoma Energy Producers Alliance, whose wells are already taxed at 7 percent, have advocated for a full, 7 percent rate for all producers.
The political reality is that we have a lot of lawmakers who are philosophically opposed to any tax increases. And many Republicans are afraid of being “primaried” by fellow Republicans branding them as tax increasers. Not to mention the legislative hurdle that any tax increase would require three-fourths vote in the House and Senate.
Wilmoth: At the same time, the Legislature is faced with an $878 million budget hole, and there is strong pressure to not cut education, which is one of the largest budget items.
Q: I am familiar with the OKOGA bill and OEPA bill, but could you elaborate on the third group and their plan?
Wilmoth: Companies now have the ability to drill two-mile laterals in shale, but not in most other rock layers. Big producers want to drill long laterals in all producing layers. In many cases, the companies have acreage on an area over several producing areas. They want the ability to drill long laterals in every producing layer. Without that ability, companies often opt to drill only in the shale layers, leaving the others untapped. The big companies say the ability to drill long laterals would boost production and production taxes for the state.
The concern is from smaller producers who have vertical wells in the area. Those vertical wells are not producing from shale, so they don’t care what happens to those rock layers. But they say large horizontal wells in their producing layers can hurt their existing wells. The small producers also are concerned that they can be forced out of their leases if large companies want to drill several multimillion dollar wells in the area. If the small producers can’t afford to buy into all those wells, they could be forced to sell their positions.
The Oklahoma Oil and Gas Association, the Oklahoma Independent Petroleum Association and the Oklahoma Energy Producers Alliance each have different plans to address the issue. The biggest differences center on protections for the smaller, vertical producers.