American Oil and Gas Reporter - October 2018 - 96

ConventionSection: Oklahoma Independent Petroleum Association

Longer Laterals, Oil Prices
Energize Oklahoma
By Dan Holder
TULSA-There are plenty of positive
signs for Oklahoma's oil and gas industry,
muses Berry J. Mullennix, chairman of
the Oklahoma Independent Petroleum Association, including legislation supportive
of drilling operations and new technology
boosting production in the state's SCOOP
and STACK plays. However, he notes
several clouds dot the Sooner State's skies,
most notably another possible increase in
the new well tax rate.
"Overall, the mood at the fall conference
will be positive," offers Mullennix, president and chief executive officer of Panther
Energy Company II LLC in Tulsa. "Oklahoma has had some challenges in the
legislature in the past year, but prices and
the economy will make people positive."
OIPA will return to the Big Cedar
Lodge in Branson, Mo., for its Nov. 13
fall event.
The Oklahoma Legislature expanded
drilling opportunities in 2014 when it
approved a 2 percent gross production
tax for 36 months on new wells and allowed longer lateral technology in all
formations three years later, Mullennix
says. The GPT increases to 7 percent
after 36 months (AOGR, July 2014, pg.
157). However, legislators increased the
initial rate to 5 percent on March 29
(AOGR, July 2018, pg. 32).
Compounding the problem of the GPT
increase is a fear that a Democratic governor

or a ballot initiative in 2020 may boost
the tax to 7 percent and harm the industry's
long-term direction, Mullennix worries.
On drill sites, the Oklahoma Corporation
Commission initially implemented the provisions of SB 867, legislation that allows
drilling laterals longer than a mile in nonshale
formations, by emergency rule in August
2016. The bill was signed into law on May
31, 2017, (AOGR, May 2018, pg. 77).
"There has been a lot of talk about how
fracturing from long laterals has hurt vertical
producers but there are a lot fewer of those
cases than some people would like you to
believe," Mullennix says. "I see both OIPA
and the Oklahoma Oil & Gas Association
are determined to correct misinformation
by providing the right information to the
public and the legislature as we fix it."
He points out Oklahoma's geology
differs greatly from the Permian Basin
and the Marcellus Shale, and opening
the state's nonshale formations to new
technology and improving well economics
with that 2 percent tax had proven a boon
to industry, with Oklahoma now beginning
to see the fiscal impacts in new revenues.
"That is because the longer laterals and
the 2 percent tax rate incentivized exploration companies to drill those wells," he
applauds. "The long lateral bill was something that brought Oklahoma, which was
behind the rest of the country, to a more
competitive environment, although the
higher tax rates put into effect this year
may take us out of that."

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Hollye Hunt, OIPA's vice president
of legislative affairs, says one of the association's top priorities is protecting SB
867. "We have to continue to make sure
that that legislation is not crawled back,
and that people do not try to alter or
amend that piece of legislation. OIPA
will have to stay vigilant and protective
of that law," she cautions.
State Concerns
While there is support for the argument
that energy companies will not leave Oklahoma only because of a GPT increase, especially when oil prices are strong, Mullennix points out operators are constrained
by fiscal realities of rates of return, with
well economics affected significantly by
taxes' contribution to well costs.
In addition to tax challenges, Mullennix
notes Oklahoma is beginning to see a
sharp increase in the number of drilling
but uncompleted wells in the SCOOP
and STACK plays.
"Companies mainly do that when they
have to drill to maintain leases, and they
don't complete wells because there are
take-away issues or price issues, or both.
I don't know how bad of a problem DUCs
in Oklahoma will be in the future, but
we are starting to see some constraints in
the midstream sector," he describes.
Overall, the state has enough pipeline
capacity, but Mullennix notes Permian
Basin operators are seeing significant
bottlenecks, with oil production overwhelming available pipeline or trucking
capacity. He cites reports showing the
basin added 50 DUCs in May/June/July,
adding to the 1,000 nationwide.
The number of available fracture crews
is part of Oklahoma's production challenge, he adds. "Fracture costs fluctuate
wildly," he says. "The last year I worked
in the Permian Basin, in 2017, fracture
costs for a well went from $1 million to
$5 million, in one year," Mullennix notes.
Service companies face the continuous
challenge of finding workers who can
pass the drug tests required during the
hiring process, and convincing young
people industry jobs are worth pursuing,
he says. "There is a real shortage across
the country of people who can qualify to

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