Session ends with oil taxes tinkered

Oklahoma lawmakers talked a lot about changing gross production tax rates in this year’s session, but in the end tinkered around the edges of some old rates and incentives still on the books.

If Gov. Mary Fallin signs the bills, that tinkering is expected to bring in another $141 million in revenues for the upcoming fiscal year, according to the Oklahoma Tax Commission.

Much of the budget negotiations in the closing weeks of the Legislature centered on changing the temporary, 2-percent gross production tax rate that is in effect for three years before it rises to 7 percent.

Various groups and lawmakers floated new rates from 3, 5 and 7 percent, as well as shortening the time period for lower rates. There was also considerable debate over whether those changes should apply to new or existing wells.

But by the end of session Friday, the 2- and 7-percent rates that started in July 2015 remained unchanged.

Lawmakers did pass House Bill 2429 and House Bill 2377, which make changes to previous rates and incentives that were in effect before July 2015.

Because of the mix of old and new rates, the effective rate for Oklahoma’s gross production tax was 3.2 percent in fiscal year 2016. That’s down from an effective rate of 6.25 percent in 2012.

HB 2429 increases the rate to 4 percent from 1 percent on horizontal wells drilled before July 2015. That old 1-percent rate is in effect for four years from the point of the first sale.

The bill covers about 5,700 horizontal wells, although the typical horizontal well declines its production by more than 50 percent in the first couple of years. That means most qualifying wells under the higher 4-percent rate will be at the end of their initial burst of production.

The change is expected to bring in $95.3 million in additional gross production tax revenue in the 2018 fiscal year, according to the Tax Commission.

During debate on the bill earlier this week, some House members said it could draw a legal challenge because it was retroactive and could be considered a tax increase. Others said since it dealt with an earlier incentive that had a sunset date in the past, the change passed legal muster.

It’s unclear if any groups plan to challenge the law if it’s signed by Fallin.

The change will also cover at least 70 horizontal wells that were drilled in the first half of 2015 but were uncompleted,

the industry term for wells that haven’t been brought online through a completion process like hydraulic fracturing. The first sale for that small slice of wells was in 2016, meaning they will return to the 7-percent rate in 2020.

Under HB 2429, that handful of drilled-butuncompleted wells, called DUC wells, will now be taxed at 4 percent until 2020.

Meanwhile, HB 2377 moves up the sunset date for eight gross production tax incentives to July 1. Most were scheduled to end in 2020. The bill is expected to result in an extra $46.3 million for fiscal year 2018, although the rebates will be paid back to companies over a threeyear period beginning in July 2018.

Some energy industry representatives weren’t happy with the changes but said they recognized the budget challenges faced by the Legislature.

Chad Warmington, president of the Oklahoma Oil and Gas Association, said removing rebates provides some clarity to the previous taxing regime before it changed to the two-tier rate in 2015.

“Part of the policy goal should be to make it simple for the producers and for public perception,” Warmington said. “We crave certainty and clarity over the rate.

“Our emphasis is on new wells. That’s what drives the Oklahoma economy. That’s why we didn’t fight the rebate bill much. We put a higher priority on making sure new wells had a consistent and competitive rate.”

The intense debates over gross production tax rates likely means the issue will resurface.

In an after-session news conference, House Minority Leader Scott Inman, D-Del City, said most of the people he and his caucus heard from wanted the tax to go to 7 percent. That included some in the energy industry, he said.

“I’ve never had more communications around a particular issue in my 11 years here than I have on the gross production tax,” Inman said. “The only people who were lobbying to keep the gross production tax artificially low — like it currently is — were members of the industry and House and Senate Republicans.”

Warmington said the industry expects to keep advocating for consistent tax policy.

“I fully expect we’ll be back having this same discussion,” Warmington said. “Going on recent history, in the last two years alone, the oil and gas industry has foregone or given up $250 million of incentives and rebates. Next session we’ll be right back in the same position having to defend what we think is an unwise tax increase on new wells.”

Last year, lawmakers put a $12.5-million cap on a rebate for economically at-risk wells that was expected to cost the state more than $120 million. The Tax Commission said $7 million of that $12.5-million incentive has been paid out, although companies have until December to submit claims in that program.