Yesterday Oklahoma’s Republican Gov. Mary Fallin signed into a law a new round of tax increases on oil and gas companies drilling for oil and natural gas in her state. Beginning in 2015 Oklahoma will tax energy companies at a 2% rate on a given well's oil or gas production for the first three years of its operation with the tax then rising to 7%. The new law resulting from Oklahoma House Bill 2562, increases the per well production tax rate from1% for the first four years doubling it to 2% for the first three years. After the initial period, all Oklahoma wells in production are then taxed at rate of 7%. The new law also eliminated several tax rate exemptions the industry had previously enjoyed. “The new 2 percent 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. “We want to be a leader in this field, not just today but for decades to come.”
The new tax affects some of the biggest Oklahoma based oil and gas companies such as Chesapeake Energy, Devon Energy, and Anadarko Energy among others. Chesapeake Energy pays a drilling tax levy of just 1.5% in total in Pennsylvania whose Marcellus shale formation is one of the largest producers of natural gas in the United States. Pennsylvania’s Gov. Tom Corbett has refused to support proposals for similar drilling production tax rates as found in virtually all oil and gas producing states in the United States.
Legislative support in Oklahoma along with support from Gov. Fallin came about as a result of the need in Oklahoma to raise revenue to support education funding and fund repairs to the state’s roads, bridges and related infrastructure. According to the Energy Information Agency, while Oklahoma has seen gas and oil production increase from 400 million barrels of oil equivalent to 490 million barrels over the last several years, state revenue from drilling production has declined from a high of $1.2 billion in revenue in 2008 to less than $513 million in 2012/2013.
George Kaiser, who controls closely, held Kaiser-Francis Oil Company, stated "Oklahoma is in desperate financial circumstances," “A higher tax on oil-and-gas production could help the state pay for education and much needed infrastructure improvements, he said in a prepared statement. Raising the production tax "doesn't move the needle in the decision to drill."
Unlike Oklahoma’s Republican Gov. Fallin, Pennsylvania Republican Gov. Tom Corbett has moved in the opposite direction. He has refused to consider levying drilling production taxes in order to meet state budget shortfalls by slashing more than $1 billion in state education funding, cutting back on social welfare services and enacting a series of state gasoline tax increases over the next 5 years to rebuild Pennsylvania’s crumbling roads and bridges. Many of the state’s roads and bridges are heavily used by the oil and gas industry in their drilling operations. Critics have charged the Governor with shortchanging Pennsylvanian’s in the classroom, in times of social welfare needs and the at the pump while allowing out of state oil and gas drillers one of the lowest tax rates in the country. Gov. Corbett has continued to state an extraction tax on production will drive drillers out of Pennsylvania.
Under the Corbett Administration, Pennsylvania has one of the lowest drilling fee structures in the United States mainly in form of well permitting fees, estimated at less than 1.5% in total. By contrast, North Dakota which has seen its own continuing oil and gas boom from hydraulic fracking and levies a tax of 11.5% of the value of production pumped from its fields. Texas production tax rates are 4.75% on oil and up to 7.5% on natural gas. Oklahoma will now enforce a 2% tax rate for the first three years of a given well then at a 7% ongoing tax rate after that. Pennsylvania does not have a production based tax formula.
Appearing the other day in Allentown during a reelection campaign stop, Gov. Corbett was asked if he would levy a production tax on oil and gas drillers with the state facing a $569 million budget deficit. The Governor reiterated his opposition to any production taxes on drillers stating he wants to keep the state competitive with other natural gas producing states such as Texas. Regarding his adamant opposition to production taxes, the Governor stated, “I can't imagine there is anything that could be presented to me that would cause me to change that, when we know that we are on the right track,".
The issue of oil and gas production taxes has quickly become a major hotbed issue in this year’s Pennsylvania’s governor’s race. Gov. Corbett maintains his refusal regarding consideration of drilling production taxes while his Democratic opponent, Tom Wolf, has proposed a 5% production tax on natural gas which would place Pennsylvania roughly on par with Texas in tax structures.
Full disclosure: The writer does not hold any U.S. securities in oil and gas production companies and does not have any financial arrangements with any of the entities or individuals in this article. He is not a member of any environmental, anti-fracking group or political PAC.
To learn more about Oklahoma's House Bill 2562, go to: http://www.oklegislature.gov/BillInfo.aspx?Bill=HB2562&Session=1400
To learn more about Gov. Corbett's position on energy, go to: http://www.tomcorbettforgovernor.com/energy
To learn more about Candidate Tom Wolf's position on energy, go to: http://www.wolfforpa.com/sections/page/marcellus-shale