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Small Oklahoma E&P Group Backs State Production Tax Hike to Resolve Budget Crisis

Parting company with mainstream oil and natural gas groups, the Oklahoma Energy Producers Alliance (OEPA), composed of private and small operators, on Wednesday urged state lawmakers to raise the gross production tax back to 7% to help resolve the state's current budget crisis.

OEPA was holding a rally on Wednesday at the state capital, and members were planning to meet with various lawmakers to press their views.

The issue again appears to be dividing industry players between larger, mostly horizontal exploration and production (E&P) operators and mostly smaller conventional E&Ps, with the latter opting for a tax increase. The alliance urging a tax increase also opposes legislation to permit ever-longer laterals associated with horizontal drilling.

Opponents including the Oklahoma Independent Petroleum Association (OIPA) accuse alliance producers of being against modernizing Oklahoma's oilfields, hoping to tie the tax proposal to long-lateral legislation to make the proposal unpalatable to the remainder of the industry.

"Modernizing Oklahoma's oil and gas laws and protecting tax rates that make Oklahoma the nation's most attractive place for oil and gas investment are priorities for the Oklahoma Independent Petroleum Association, and we are opposed to any efforts that run counter to that," a spokesperson said.

In 2014, Gov. Mary Fallin signed an industry-backed bill (HB 2562) modifying the tax rate on gross production, setting a 2% tax rate for the first 36 months of production and setting the same rate for horizontal and vertical wells, effective in mid-2015. The rate increases to 7% after the first 36 months of production. Later in 2014, legislation was passed that provided for a permanent, lowered tax rate for new oil and natural gas wells.

Among the producer alliance members advocating the increase to state lawmakers is Dewey Bartlett, a former Tulsa mayor and owner of Keener Oil and Gas Co. Co-chair of the alliance is Lee Levinson, a Tulsa attorney and oilman, who has said the organization includes traditional and small, privately owned producers.

The alliance sees Oklahoma facing possible state government bankruptcy, approaching a second straight billion-dollar fiscal year shortfall.

Oil and gas development remains a bright spot in the midst of the fiscal malaise. The Oklahoma Oil and Gas Association (OKOGA) and the OIPA don't support the increased production tax because they argue it would hurt ongoing success and attractiveness of the industry.

OKOGA President Chad Warmington called the tax increase proposal a "job-killer" and claimed that the producers backing the plan were not "drilling new wells, making new and significant capital investments in the state, or creating new jobs; in other words, they are not currently participating in the type of activity that will lead our state out of two years of a struggling economy."

An OIPA spokesperson echoed these concerns, adding that late last year, Oklahoma toppled Texas from the No. 1 spot as the most attractive jurisdiction in the world for oil and natural gas investment, a global survey of energy executives by the Fraser Institute found, adding that conversely Alberta, long the heart of Canada's energy industry, has lost its allure.

"The tax provision that temporarily reduces the state’s gross production tax for new wells brings jobs to Oklahoma, encourages investment in our oil/gas fields and is the reason Oklahoma was the most resilient energy state in the nation at weathering the downturn in commodity prices," the OIPA spokesperson said. "Attempts to eliminate the provision for new wells will only result in decreased production and decreased tax revenue for the long term if investment capital moves to other states."

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