Tax credits for oil, gas drilling cost Okla. $321M

Okla. tax credits for oil, gas drilling cost state $321M; spurs call for legislative review

OKLAHOMA CITY (AP) -- Major tax breaks for the oil and gas industry handed out in 2010 cost Oklahoma $321 million last fiscal year and should be re-examined by legislators next session, Gov. Mary Fallin's finance director said Wednesday.

Secretary of Finance and Revenue Preston Doerflinger released figures that show tax rebates and refunds for drilling totaled $173 million in the fiscal year that ended June 30, while state tax credits delayed for two years during the economic downturn cost the state an additional $148 million during the same fiscal year.

"The boom in the energy industry is improving Oklahoma's economy in so many ways, but the general revenue fund isn't seeing the benefits it would have before 2010," Doerflinger said in a statement.

Initially predicted to cost the state about $150 million over three years, the generous credits to the oil and gas industry — including those for drilling deep and horizontal wells — have cost Oklahoma that much alone in the first year of payback. The incentives were initially put in place in the 1990s, when horizontal drilling was experimental and very costly. But now, the practice is so commonplace that nearly all new oil and gas wells qualify for the tax incentives.

The credits were delayed for two years to help lawmakers close a major budget gap during the downturn, but now have resumed. As part of the deal with industry, Oklahoma agreed to pay back the accrued credits over three fiscal years, beginning with the year that ended June 30 and continuing until fiscal year 2015.

Still, not all the economic figures released on Wednesday were dire. Other figures show gains in income and sales tax collections helped offset the drop in oil and natural gas collections.

While the gross production tax on oil and gas production typically is 7 percent, producers are exempt from all but 1 percent of that if they drill qualifying deep or horizontal wells.

Of the 174 active drilling rigs in Oklahoma, 161 are involved in horizontal drilling, according to Houston-based oilfield services company Baker Hughes Inc.

"Any fiscally responsible policymaker needs to seriously consider at what level government should incentivize something that is now standard practice," Doerflinger said. "It's not responsible for government to give money away as an incentive if no incentive is needed."

Fallin and Senate President Pro Tem Brian Bingman both have expressed an interest in meeting with energy industry leaders during the interim and coming up with a way to restructure the tax incentives.

"(The governor) has been asking me to get the right people in the room and around the table — meaning industry leaders and leaders in the House and Senate — to come up with a solution to this problem," Doerflinger said. "I think everybody recognizes that something has to give."

Some oil and gas industry leaders have been hesitant to embrace changes to the tax incentives, arguing that the increased oil and gas drilling in Oklahoma is playing a huge part in the state's economic resurgence and helps provide jobs and other forms of tax revenue for the state.

Mike Terry, president of the Oklahoma Independent Petroleum Association, which represents more than 2,500 individuals and companies from the state's oil and natural gas industry, said the tax incentives aren't a break, but a capital investment in the state's economy.

"In the face of decreased commodity prices, tax provisions for oil and natural gas production have proven their worth by increasing the number of oil and natural gas wells drilled in the Sooner State," Terry said in a statement. "Increased drilling results in increased production, benefiting state tax coffers, hundreds of thousands of Oklahoma royalty owners and the workers needed to complete and maintain those wells."


Sean Murphy can be reached at