Exempting oil and gas production from severance taxes is used by
many producing states to encourage drilling and enhanced recovery
operations. Like many other tax incentives, these exemptions provide
a competitive edge for those states who have them in vying for oil
and gas investment dollars. Companies deciding how best to use
exploration and drilling budgets look for every possible enhancement
for return on their investment dollar.
Many in the industry believe these tax incentives make a
difference where companies will drill. They also believe since most
producing states now have these incentives they have led to
domestic drilling activity in the United States.
Oklahoma currently allows exemptions from its gross production
for several types of oil and gas drilling and production operations.
Production from horizontally drilled wells is exempt until the cost
of the project is recovered, but not to exceed 24 months. This
exemption applies to oil and gas produced from a horizontally
well producing prior to July 1, 1994, which production commenced
after July 1, 1990, or producing prior to July 1, 1997, which
commenced after July 1, 1995.
There is a similar exemption of 28 months for production from
inactive wells that are reactivated. Incremental production of oil
and gas resulting from a production enhancement project also
an exemption. One of the more coveted tax incentives is a 28-month
gross production tax exemption for wells drilled to a depth of
feet or deeper. Also there is a 28-month exemption for production
from discovery wells.
The problem is, these exemptions are due to expire June 30 of this
year, and the industry is working to get them extended. The vehicle
for accomplishing this is HB 2140 by Rep. Larry Rice, D-Pryor. The
Senate author is Sen. Kevin Easley, D-Broken Arrow.
As introduced the bill was a simple one page "shell" bill. When
the committee substitute was reported from the House Committee on
Revenue and Taxation, a funny thing had happened. The only extension
granted was for the horizontal drilling exemption for five years. No
other extensions are provided for in the present language. According
to Rice failure to include the others was a staff oversight in
drafting the new language. He said the plan is to send the bill to a
conference committee where a final draft can be written later in the
A tale of two bills
If you have been around the capitol long enough, and are prone to
be suspicious you could begin to wonder if the tax incentives bill
maybe is being used as leverage to muffle opposition to SB 600 that
creates a new energy commission. Both bills have the same House and
Senate authors. The incentive bill has been put on a slow track, and
there has been little or no outspoken criticism of the new agency
proposal from some producers who are vitally interested in the tax