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Oklahoma Legislature Removes $5.00 Cap on Gross Production Tax Exemptions

May 30, 2005
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The Oklahoma legislature has handily approved a bill to remove the price cap of $5.00 for gas and $30 for oil on deep wells eligible for exemption from the state's gross production tax.

House Bill 1588, sponsored by Rep. Dennis Adkins (R-Tulsa) and Senate President Pro Tem Mike Morgan (D-Stillwater), passed the state senate 34-14 on Wednesday. It had previously passed the Oklahoma House 79-19. Gov. Brad Henry is expected to sign the legislation.

The action means that wells producing from below 15,000 feet will be eligible for the production tax exemption, regardless of what the market price is. Opponents had claimed the measure was not needed to spur production when oil is selling at around $50 per barrel and natural gas is selling above $6. They estimated the loss to the state in gross production taxes at between $17 and $25 million.

Supporters said it would breathe life back into the industry and stimulate economic growth, noting the depletion of conventional wells.

Tom Price, vice president of Chesapeake Energy Corp., who lobbied for the bill, said the state gets a larger payback from the more expensive deep wells in terms of increased number of wells drilled, job creation and royalty taxes. The deep wells on average produce about 4 Bcf over their lifetime.

Price pointed out the high cost of deep drilling. "This is why so much money is going into acquisitions instead of drilling. It's just difficult to grow by the drill bit." Each deep well costs between $6 and $12 million to complete. Only 4% of drilling in Oklahoma over the last 10 years has targeted depths below 15,000 feet.

Price said creating the new incentive would draw companies to expand operations in the state. Only a few of the 10 most active drilling operators have operations in Oklahoma, he pointed out. Chesapeake, which claims the title of most active operator with 75 onshore wells underway in the lower 48, has about 38 rigs active in Oklahoma and 26 active in Texas. Of the 75 active operations, about one third are deep wells.

The company, based in Oklahoma City, is the most active operator of deep wells in Oklahoma, Price said.

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