Newspaper article THE JOURNAL RECORD

Drilling Down for an Answer: Will Lower Tax Rates on Horizontal Wells Hurt or Help State Budget?

Newspaper article THE JOURNAL RECORD

Drilling Down for an Answer: Will Lower Tax Rates on Horizontal Wells Hurt or Help State Budget?

Article excerpt

OKLAHOMA CITY - If House Bill 2177 is made into law this session, it will allow horizontal drillers to operate closer to existing vertically produced reservoirs.

Aside from the debate on whether the bill is unfair to mineral rights holders, there's another question: Will the state's budget win or lose?

Vertical wells in Oklahoma that are pumping out product now are taxed at 7 percent. If new horizontal wells come on-line as expected, producers will pay 2 percent on gross production for the first 36 months of operation.

Russell Evans, executive director of the Steven C. Agee Economic Research and Policy Institute at the Meinders School of Business, said it then becomes a question of whether the state wants the money now or later.

"Increases in production today that come at the expense of production in the future may be preferable for the state if they have a high discount rate," Evans said.

He said divining the best answer for state revenue would require data on existing well production, expected well life spans and the political answer for whether the state wants those dollars today.

Oklahoma Oil and Gas Association President Chad Warmington said it's hard to estimate the return on state budget dollars. Still, he said, there ought to be a boost.

"A lot of these old stripper wells are producing less than 10 barrels a day," he said. "You bring on a modern, horizontal well in one of these non-shale formations and you're looking at 700, 800, 1,000 barrels a day. The math is easy."

Horizontals are able to pull out a significantly greater amount of their product before the first three years, which is when the higher tax rate kicks in. That means that for most of the oil and gas claimed by these new wells, the state would receive 2 percent.

Mike Cantrell is an independent producer from Ada. …

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