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Oklahoma Considers Tax Hike on Unconventional Drilling

In the state with the nation's second-highest drilling rig count, Oklahoma elected and industry officials are considering an across-the-board hike of the tax on oil/natural drilling, but it would still be considerably lower than a counter proposal by a billionaire philanthropist in Oklahoma City.

On Thursday, representatives of the Oklahoma Independent Petroleum Association (OIPA), state lawmakers and representatives of Gov. Mary Fallin's office were discussing a tax hike of from 1% to 2%, something the OIPA has said the unconventional drilling industry can swallow, but not a separate, earlier proposal for a 3.5% to 7% increase.

In Oklahoma, oil/gas revenues are taxed at 7%, but horizontal drilling only draws a 1% tax during the first four years of production, something state lawmakers did a few years ago to encourage more unconventional plays even though there is no Bakken or Eagle Ford-like play in the state. The incentive has worked to the extent that Oklahoma has more rigs operating than any other state other than Texas, an OIPA spokesperson told NGI on Thursday.

George Kaiser, a billionaire by virtue of inheriting his family business, Kaiser-Francis Oil Co., and establishing the Kaiser Foundation, and a nonprofit group have pushed for a tax hike for horizontal drilling up to 7%, although he later said a reasonable compromise might be 3.5%.

This has prompted some major Oklahoma-based operators, such as Continental Resources Inc., Chesapeake Energy Corp. and Devon Energy Corp. to develop a 2% tax proposal for all drilling, which has received support from Fallin's office. As a result, proposals are kicking around the state legislature, but there are only 10 more working days before the session adjourns the end of this month, the OIPA spokesperson said.

"We see [the lower tax provision for horizontal drilling] a necessity for making Oklahoma an attractive place for oil/gas companies to do business," said OIPA's Cody Bannister. "Other states have provisions similar to ours, and our geology is not as strong as it is in the Eagle Ford or the Bakken, but we want drilling rigs to continue working here, and they are.

"Even without having the prolific resource returns of the Bakken, we have the second highest number of drilling rigs working,.behind only Texas. We're pleased with that and think it is proof tax incentives work. We want to keep people here working."

Kaiser and his supporters argue that tax levels don't determine whether drilling takes place, and to a certain extend OIPA does not disagree with that contention when it is applied to the heart of plentiful plays. But they do help incentivise drilling on the edges of major plays, Bannister said.

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