By session’s end, Oklahoma lawmakers need to OK 2 percent tax for all drilling rigs
Oklahoman Published: May 7, 2014

BENEATH the surface of this oil-rich state is ancient rock. This is true of all states, but the geology varies greatly from place to place in terms of the richness of oil and gas deposits.

Rock formations don’t respect county, state or even international borders, but the richest shale deposits seem to favor certain addresses. A good well in Oklahoma can produce up to 400 barrels a day. In North Dakota, wells can produce 10 times that amount. In parts of Texas, a good well can produce 1,500 barrels a day.

The epicenters of shale formations responsible for producing great wealth and great tax revenue include the Bakken formation in North Dakota and the Eagle Ford formation in south Texas. Regarding its economic richness, Oklahoma has good rock but not great rock. This is key to understanding the current differential in the gross production tax rate for conventional oil and gas wells versus higher-tech, pricier horizontal wells.

The current structure taxes production from conventional vertical wells at 7 percent and horizontal wells at 1 percent — but only for the first 48 months, after which the higher rate applies. This differential rate is much discussed by tax consumers who need additional funding and by industry trade groups and executives who favor keeping the rate low.

The debate has been overly focused on how much eliminating the differential rate would profit the state and centered too little on how much economic harm could come from overtaxing oil production. While state funding for education and health care takes center stage in the debate, what should equally guide the discussion is rock. Simply put, it’s disingenuous to say that North Dakota is booming despite that state’s 11 percent gross production tax rate. Can’t Oklahoma’s rate be much higher and still motivate energy firms to drill here?

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