American Oil and Gas Reporter - October 2017 - 94

ConventionSection: Oklahoma Independent Petroleum Association

OIPA Offers Perspective
On Industry Tax Load
By Danny Boyd
Special Correspondent
OKLAHOMA CITY-Oklahoma's gross
production tax on oil and gas will remain
in the cross hairs of some state lawmakers
and political players, reports Berry Mullennix, chairman of the Oklahoma Independent Petroleum Association.
As OIPA leaders prepare for the association's fall conference, Nov. 5-7 at Big
Cedar Lodge near Branson, Mo., members
were anticipating a legislative special
session called by Governor Mary Fallin.
Scheduled to convene Sept. 25, lawmakers
were expected to determine how to make
up a reported budget shortfall after the
Oklahoma Supreme Court ruled unconstitutional an additional $1.50 a pack cigarette levy to raise $215 million for
several state agencies. Combined with a
loss of federal matching funds, that leaves
Oklahoma with a $500 million budget
hole.
Scheduled renovations to the Capitol
will force the special session to conclude
by Oct. 13, observes Mullennix, president
and chief executive officer of Tulsa-based
Panther Energy II LLC. Therefore, he
predicts, lawmakers are unlikely to increase
the GPT rate. But the tax, a topic that
arose in the regular session that ended in
May, will continue to be a topic of conversation in upcoming regular sessions,
he warns.
"A lot of people argue that producers
get special favors from the state, but the
bottom line is our GPT is 7 percent,
which is higher than just about any nearby
state," Mullennix notes. "However, we
pay 2 percent on new wells-whether vertical or horizontal-drilled to any depth
for the first 36 months to incentivize
drilling, and it has worked."
The 2 percent tax rate for new wells
has been in effect for two years, he points
out, and has generated $8 million for the
state in the first year and about $40
million in the second.
Dynamic Drilling Decisions
Even during the early days of the
price downturn, the industry continued
94 THE AMERICAN OIL & GAS REPORTER

to provide 25 percent of state revenue
and employ 20 percent of Oklahoma's
entire workforce, Mullennix observes,
adding that the incentives have played a
major role in the industry's overall contribution.
Although some argue that a flat 7 percent GPT on new wells may have brought
in $100 million in the last fiscal year, he
counters that tax proponents are wrong
to assume operators will drill the same
number of wells without incentives. Charging a higher rate for initial production, as
compared with the effective lower rate,
can swing a major difference for wells'
rates of return, he insists.
"Our company's minimum requirement
is a return of 20-25 percent before we
even consider investing," Mullennix says.
"If you look for projects and run the numbers on initial production taxed at 2 percent
versus 7 percent, sometimes it works. If
you run it on a flat 7 percent GPT rate,
sometimes it doesn't work. It can affect
people's decisions. Some argue that companies will drill these wells anyway. I
beg to differ. The larger companies have
to answer to shareholders exactly like I
do. When you are taking 5 percent more
off each barrel at the wellhead, it is going
to affect people's budget decisions."
In mid-September, Capitol watchers
were expecting the special session to last
one or two days, indicates OIPA President
Tim Wigley. Initial indications suggested
that leftover funds and improved revenue
forecasts were shrinking the deficit, although the budget gap still could force
cuts to some Oklahoma agencies, he says.
Oklahoma House Speaker Charles McCall, R-Atoka, and Senate President Pro
Tempore Mike Schulz, R-Altus, have expressed opposition to raising the GPT
during the special session, Wigley says.
Oil and gas producers already gave up
several incentives during the first regular
session of the 56th Legislature, which
adjourned May 26, he points out, and the
industry remains the state's largest taxpaying segment.
During the regular session, lawmakers
passed and Fallin signed HB 2429, adjusting incentive rates for wells drilled

between 2011 and 2015 from 1 percent
to 4 percent for the first 48 months of
production, before the rate increases to 7
percent, Wigley reviews. The state was
to gain $95 million from the move, according to the Oklahoma Tax Commission.
Legislators also passed and Fallin signed
SB 2377, which moved sunset dates for
several tax incentives to July 1, 2017, in
a move expected to increase state revenue
by $46 million (AOGR, July 2017, pg.
110).
"We are still in an environment of
soft oil and gas prices, so now is not the
time to raise taxes on a recovering industry," Wigley advises. "I feel good about
our chances of holding it off for now, but
we are preparing as if we will have
another battle."
Next Year
The GPT likely will be front-andcenter when the 56th Legislature meets,
and will get plenty of attention during
the 2018 governor's race, Wigley forecasts.
House minority leader, Representative
Scott Inman, D-Del City, is running for
governor and favors a higher tax rate for
operators, Wigley says.
OIPA also must continue to educate
new lawmakers on the industry's importance and its existing tax load, he suggests,
because term limits ensure a steady flow
of new faces in the legislature.
"We had 32 freshman legislators last
session, many of whom know little about
the oil and gas industry," Wigley describes.
"Our biggest challenge is that companies
such as Devon or Chesapeake do not talk
about relocating their corporate headquarters. But companies that drill in multiple states have choices, and companies'
internal competition for drilling dollars
is very intense. If anything goes out of
whack, including the tax rate, it makes it
easier for companies to spend their drilling
budgets elsewhere. That is what we try
to convey to new legislators. Why would
you want to do anything to discourage
drilling?"
The regular session saw some characterize the GPT debate as a battle that
pitted the industry versus teachers because

American Oil and Gas Reporter - October 2017

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