Finance Secretary Doerflinger floats possible changes in energy incentives, industry reacts
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Published: 11-Jul-2013

OKLAHOMA CITY – Oklahoma Finance Secretary Preston Doerflinger, director of the Office of Management and Enterprise Services (OMES) this week raised a possible change in the Sooner State’s oil and gas drilling incentives. Thursday (July 11) spokesmen for the energy industry disputed Doerflinger’s assertions. 
 
In a statement on the robust state tax revenue picture, Doerflinger cautioned, “higher than anticipated gross production revenue losses may prevent a Rainy Day Fund deposit this summer. We will know for sure in the coming weeks, but a deposit doesn’t look likely based on recently revised Tax Commission estimates. 

The Rainy Day Fund is still flush with $532 million, although it’s always nice to make a deposit when possible.”

Doerflinger said a variety of incentives for energy development, including those in a 2010 law, had a more dramatic impact than anticipated on tax receipts. 

Doerflinger focused critically on the impact of horizontal drilling incentives, intended to boost to what was, several years ago, relatively new technology. OMES analysis said the incentives “totaled $321 million in FY 13. Rebates and refunds totaled $173 million, with $102.6 million linked to horizontal wells, of which $72.5 million was for gas and $30.1 million was for oil.”

The reduced levy for horizontal wells totaled $148 million for the year, “with $79 million for oil and $69 million for gas.”

“Our members are concerned and frustrated,” said Chad Warmington of the Mid-Continent Oil and Gas Association. “There was no forewarning of this. We’re happy to have a conversation, but not via press release.” 

Pointing to the billions in taxes paid by the industry, Warmington told CapitolBeatOK, “I don’t think the secretary’s statement took into account the broad impact of the industry on the Oklahoma economy.”

(In 2012, an Oklahoma City University study for the Oklahoma Energy Resources Board, an association that finances energy education and environmental amelioration programs, estimated some $5 billion in cumulative tax payments by the industry in Oklahoma.)  

In response to questions from CapitolBeatOK, Mike Terry of the Oklahoma Independent Petroleum Association commented, “Tax provisions for the oil and natural gas industry are not tax breaks. They are a capital investment in Oklahoma’s economy.” 

Terry argued the incentives have proven effective over the last three years: “In the face of decreased commodity prices, tax provisions for oil and natural gas production have proven their worth by increasing the number of oil and natural gas wells drilled in the Sooner State. Increased drilling results in increased production, benefitting state tax coffers, hundreds of thousands of Oklahoma royalty owners and the workers needed to complete and maintain those wells.”

Echoing Warmington, Terry said oil and gas businesses are responsible for 27 percent of all taxes paid in the Sooner State, “when the gross production tax is combined with state income and sales taxes paid by the industry.” Further, he said, “That amount does not include corporate taxes, motor vehicle taxes, ad valorem taxes and other miscellaneous taxes and fees.”

Terry concluded, “After decades of decline, crude oil production in Oklahoma is actually increasing. The increase has been spurred by the use of horizontal drilling, and tax provisions that encourage the continued use of advanced drilling techniques will only benefit the state in terms of jobs and tax dollars created.”

Discussing the issue with reporters in the Capitol press corps on Wednesday, Doerflinger said, “I am well aware of what this industry means to our state.” 

Doerflinger, finance advisor to Gov. Mary Fallin, said, “Conversations are ongoing with industry leaders. My boss has asked me to get the right people in the room to consider this. I think everybody involved recognizes that something has to give. Hopefully we can come up with some viable options.”

He said state officials are look at how energy commodities are treated in other states: “We want to have an honest conversation, and look carefully at this policy.”  Responding to a question from CapitolBeatOK, Doerflinger said he could not yet offer a direct comparison of the taxing provisions in Oklahoma versus those in North Dakota, which is now in the midst of an unprecedented oil boom. 

David Blatt of the Oklahoma Policy Institute supported Doerflinger’s analysis. He told CapitolBeatOK, “Oklahoma's tax incentive for horizontal drilling has become a wasteful and expensive giveaway that is long past its usefulness. Companies don't need extra tax breaks to drill these highly profitable wells, and polling shows that large majorities of Oklahomans prefer to end these tax breaks to provide more funding for core services.

In his statewide release on Wednesday (July 10), Doerflinger said, “The boom in the energy industry is improving Oklahoma’s economy in so many ways, but the general revenue fund isn’t seeing the benefits it would have before 2010.

“The 2010 law has led to some real revenue loss. In our estimation, policymakers should consider revisiting this law in consultation with the energy industry to determine whether it is fair and equitable to the industry, the state and all its taxpayers.”

Another energy leader -- Blu Hulsey, vice president of government and regulatory affairs for Continental Resources, a major Oklahoma drilling firm active in the North Dakota fields --  told CapitolBeatOK, “Oklahoma is surrounded by oil and gas-friendly states. Eliminating the horizontal drilling provision will make drilling in Texas, New Mexico, Kansas and others all the more attractive – taking our jobs and our state revenue.

“We still have oil and gas fields in Oklahoma that are yet unproven. Horizontal drilling incentives allow us to take the financial risk of exploring these fields and discovering new resources that will provide for Oklahoma long into the future.”

You may contact Patrick B. McGuigan at Patrick@capitolbeatok.com and follow us on Twitter: @capitolbeatok.

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