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Oklahoma Lawmakers Pass Drilling Tax Incentive

Legislation that provides for a permanent, lowered tax rate for new oil and natural gas wells in Oklahoma is on its way to Gov. Mary Fallin, who is expected to sign it, after passing both houses of the state legislature.

HB 2562 establishes a reduced 2% gross production tax rate on production from new wells (horizontal or vertical) spudded on or after July 1, 2015 during the first 36 months of production. Thereafter, the standard 7% rate takes effect. The apportionment of gross production taxes collected at the 2% rate is to be credited 50% to the state's general revenue fund; 25% to the county highway fund; and 25% to each county to be distributed to school districts.

Previously, only horizontal wells qualified for an incentive rate, which was established in the 1990s to stimulate unconventional resource development. That incentive, which was set to expire next year, had reduced the tax rate from 7% to 1% for the first four year's of a horizontal well's production (see Shale Daily,May 16).

"The agreement means all Oklahoma oil and natural gas producers, large and small, would have a permanent tax structure for any new well," said the Oklahoma Independent Producers Association (OIPA), which along with the Oklahoma Oil & Gas Association (OOGA) supported the legislation.

The bill also includes a suite of oil and gas tax provisions that had been set to expire, including provisions for enhanced recovery projects for economically at-risk wells, re-established production at inactive wells, production enhancement projects, discovery wells and three-dimensional seismic shoots.

"Given the session-long debate that surrounded the horizontal well tax provision at the legislature this year, approval of the bill in the Senate and House is a significant victory for the OIPA and the industry," the association said.

The House approved the measure 61-34; the vote in the Senate was 30-14.

"Keeping the gross production tax on drilling at a reasonable and competitive rate will ensure the industry that built this state will continue to prosper," said OOGA President Chad Warmington. "Not only is this a victory for the hundreds of thousands of Oklahoma workers employed by the energy industry, it's a victory for thousands of small businesses and communities across the state that depend upon energy production for their economic vitality."

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