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Oklahoma Governor Signs Bill Modifying Gross Production Tax Incentive

Oklahoma Gov. Mary Fallin signed an industry-backed bill Wednesday to modify the state tax rate on gross oil and natural gas production, setting a 2% tax rate for the first 36 months of production and setting the same rate for both horizontal and vertical wells.

The new tax rate set by the bill, HB 2562, will take effect for all new oil and gas wells drilled after July 1, 2015, the same date that the current tax program is set to expire. The rate will increase to 7% after the first 36 months of production (see Shale Daily, May 23).

"The new 2% tax rate is fair to the state and sends a clear message to energy producers worldwide: Oklahoma is the place for energy production and investment," Fallin said in a statement. "We want to be a leader in this field not just today but for decades to come.”

Oklahoma currently levies a 1% tax on gross production from horizontal wells for the first 48 months of production. The tax rate would have increased to 7% without the passage of HB 2562, something the Republican governor said would have negatively impacted jobs and investment in the state.

Mike Terry, president of the Oklahoma Independent Petroleum Association (OIPA), said the inclusion of an incentive was necessary to keep the pace of drilling going.

"The easy-to-find, inexpensive-to-produce oil and natural gas is long gone," Terry said. "What remains are energy resources locked beneath Oklahoma's red soil that require advanced technology to find and are costly to produce.

"By providing tax programs that encourage the continued production of older oil and natural gas fields, the discovery of new fields and the use of expensive and time-consuming production enhancement techniques, the lifeblood of our state economy will continue to flow."

Billionaire George Kaiser had lobbied for a tax hike of up to 7% on horizontal drilling, but conceded that a reasonable compromise might be 3.5% (see Shale Daily,May 16). Several major producers in Oklahoma, including Continental Resources Inc., Chesapeake Energy Corp. and Devon Energy Corp., supported a 2% tax.

HB 2562 was introduced in the state House of Representatives on Feb. 3, and was sponsored by House Speaker Jeffrey Hickman (R-Fairview) and Sen. Rob Johnson (R-Kingfisher). On May 22, the bill passed the House by 61-34 vote and then passed in the Senate, 30-14.

Critics of HB 2562 said the tax rate wasn't high enough, and accused Fallin and legislators of caving in to pressure from the industry.

"This bill continues a huge, unnecessary subsidy for drilling that would have happened without the subsidy," the Oklahoma Policy Institute said after HB 2562's passage. "It sides with a few well-connected oil executives and their lobbyists, whose views do not represent the majority of Oklahomans or even many members of the industry. Instead of investing in Oklahoma while the energy boom lasts, this bad deal gives away our prosperity."

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