Energy groups debate state’s gross production tax rates

Attracting capital to Oklahoma and keeping rigs in the ground shouldn’t be jeopardized by an increase in the state’s gross production tax rate, two local oil and gas executives said Monday.

That was the message from the Oklahoma Independent Petroleum Association as the debate over the state’s energy taxes is likely to be resurrected in an upcoming special session of the Legislature. Lawmakers will be back at the Capitol on Monday to fix a budget hole of $215 million.

OIPA’s media briefing came days after a splinter group of longtime vertical producers, the Oklahoma Energy Producers Alliance, sponsored a poll showing 67 percent of Oklahomans favored an increase in the gross production tax to 7 percent. The current rate is 2 percent for three years before it rises to 7 percent.

OIPA members Earl Reynolds, CEO of Chaparral Energy LLC, and Mike McDonald, coowner of Triad Energy Inc., dissected how their companies reach investment decisions, with commodity prices, drilling costs and taxes all part of the discussion.

Reynolds said a reorganized Chaparral came out of bankruptcy earlier this year tightly focused on Oklahoma. During the recent energy downturn, the Oklahoma Citybased company went from 800 employees to about 320 today. It now has two drilling rigs in the state, down from its peak of 12, Reynolds said.

“We had to attract new investors into our company, and they were supportive for three primary reasons: our assets in the STACK, good (energy) infrastructure and the state’s fiscal regime,” said Reynolds, who is also chairman of OIPA’s legislative committee. “Our intention is to be a longterm player in Oklahoma, but our concern would be if you start messing with the gross production tax. I think it could materially impact our ability to access capital and clearly be competitive in this sector.”

Reynolds said oil and gas investors know they can’t control the price of oil and gas but are looking for companies that have some certainty over costs like state taxes. Investors coming to the state are evaluating opportunities in other states, too.

“Look, we have good rock in Oklahoma, there’s no question about that,” Reynolds said. “Is it the best rock in the nation? I can assure you it’s not.”

As an excise tax, McDonald said gross production taxes are based on the commodity sales price and aren’t reduced by incentives or deductions like income taxes.

“It doesn’t matter whether you make money or lose money, you’re still going to pay that gross production tax,” said McDonald, whose company has been in business for 46 years and has 10 full-time employees.

McDonald said Triad and its investors are drilling a horizontal well into the Woodford formation in Garvin County that is expected to cost $10.1 million. Based on the current tax rate, production costs and the expected price of oil, that well has a payback period of about three years, he said.

“We have an economic program, and we have a threshold of what we anticipate making as a return on our investment,” McDonald said. “If we can’t make that cutoff, we don’t drill.”

McDonald said each drilling rig is like a minifactory, with a concentrated burst of economic activity for the local economy.

“When you put a rig up, it’s like a little manufacturing facility,” he said. “You’re going to bring 25 to 30 people direct and possibly another 15 to 20 people indirect servicing the rig. That’s like a little manufacturing facility for a month or two months. We’ve got 130 (rigs) right now. We used to have over 200. That plus the drop in oil prices is what’s happened to the state. The economy dropped because the economics was beyond anybody’s control.”

Meanwhile, the Oklahoma Energy Producers Alliance repeated its call for restoring the gross production tax rate to 7 percent. Its survey, conducted by WPA Intelligence, found support for raising the rate across the political spectrum. About 76 percent of Democrats polled were in favor of an increase, with support at 74 percent of independents and 57 percent of Republicans.

Given the choice of earmarking the proceeds of an increased gross production tax, more than two-thirds said it should go toward higher teacher salaries. About 55 percent said roads and bridges, followed by Medicaid (34 percent), combating opioid addiction (25 percent) and general revenue (23 percent) should be funded by an increase in gross production taxes, the survey found.

The survey of 503 likely Oklahoma voters was conducted from Aug. 28 to Aug. 30. It had a margin of error of 4.4 percentage points.