From The Oklahoman
Readers asked the Oklahoman about the potential that gross production taxes might be increased if Drew Edmondson is elected governor. The Oklahoman’s energy reporters, Adam Wilmoth and Jack Money, fielded questions during their monthly online energy chat on Tuesday. This is an edited transcript of that conversation. To see the full transcript, go to NewsOK.com.
Q: I’ve heard that the tax revenue from the special session’s gross production tax increase has not come in yet. Can you explain how that works?
Wilmoth: The gross production tax rate on the first three years of a well’s production increased to 5 percent beginning July 1. Tax Commission spokeswoman Paula Ross said the tax is collected two months after production (i.e., the tax on January production doesn’t get paid until March 25), so the state should see the impact of the increase on Sept. 25, when the tax on July’s production is due
Q: What do you think the chances are of a flat 7 percent gross production tax if (Drew) Edmondson is elected?
Wilmoth: Drew Edmondson’s proposal would increase the tax on a well from 5 to 7 percent for its first three years of production, the period when horizontal shale wells typically produce the bulk of their product (after three years, the tax increases to 7 percent under current law).
Edmondson has said he wants to use that money mostly to fund education, so his plan likely would have teacher support, along with support from some vertical well operators who have called for a similar tax scheme in the past. But organizations representing larger oil and natural gas producers would strongly oppose such a plan.
I don’t have a good read for what the Legislature’s mood might be in the spring, but the most recent tax increase came only after several years of difficult negotiations.
Q: I keep hearing we are going to have an oil supply crunch in the near future where demand outstrips supply because funds aren’t being invested in major, long-life projects while the ones currently out there continue to decline. What are your thoughts?
Wilmoth: Because of oversupply and relatively low prices, companies all but stopped some long-term exploration projects that underpinned the oil industry for decades, including multibillion-dollar projects offshore of Brazil and in the deep water of the Gulf of Mexico.
Some of that is restarting, but since those projects often take up to a decade to explore, test, drill and produce, the loss of four or five years could cause dips in global production.
At the same time, some industry observers say shale oil production significantly changed the model. Companies now can produce so much oil from fields like the Permian, the STACK/SCOOP and the Bakken, they question whether the large-scale projects are needed, at least to the extent they have been in the past.
Money: The Permian, of course, has been a major producer in the Lower 48 for decades, and horizontal well technologies changed its status from being a declining field to one that’s growing again. In Oklahoma, exploration and production companies are just beginning to tap the SCOOP, the STACK and the Arkoma STACK, and I would categorize all of those as long-term development projects. I don’t worry we will see a supply crunch when it comes to oil for quite some time to come.
Q: Why isn’t there more of an emphasis on building U.S. refineries that can process sweet crude more efficiently? This would support producers by decreasing our need for foreign oil.
Money: Refiners could retrofit their current operations to process sweet crude more efficiently and were being pushed in that direction several years ago when the spread between the costs of Brent and West Texas Intermediate was quite distinct.
Once the U.S. changed its policies to allow crude exports, the spread narrowed. Producers’ primary concern is to have a market where they can sell their product. Allowing exports has helped greatly, in that regard.
Q: What do you feel is the most pressing energy related issue in the state of Oklahoma today?
Money: Boosting access to pipelines for producers in Oklahoma’s SCOOP and STACK fields, allowing them to more profitably move natural gas produced by their wells to market. Cheniere Energy has just obtained approval from the Federal Energy Regulatory Commission to build a line that will carry gas from those fields into the interstate pipeline network, and that will help.
