Energy Tax Incentives

Article excerpt

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 increased domestic drilling activity in the United States.

Oklahoma currently allows exemptions from its gross production tax 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 drilled 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 receives an exemption. One of the more coveted tax incentives is a 28-month gross production tax exemption for wells drilled to a depth of 15,000 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 session. 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 exemptions. …