Deep-Well Tax Break Debated in Capitol

By MICK HINTON

OKLAHOMA CITY — When it comes to giving a $25 million annual tax break to energy producers for deep-well drilling, state Rep. Larry Glenn says he is the “proverbial skunk at the picnic.”

Glenn, D-Vinita, said it is hard to believe that the producers need any tax breaks when oil recently reached a price of $125 a barrel.

But industry spokesman Mike Terry said, “First of all, we are not talking about oil.”

The wells covered by the tax break are being drilled to find natural gas, said Terry, executive director of the Oklahoma Independent Petroleum Association.

“This is very, very expensive drilling,” he said.

Natural gas prices have risen, but the increase has not been nearly as dramatic as for oil, he said.

Versions of Senate Bill 1658, a proposal to extend for three years a tax refund for wells drilled deeper than 15,000 feet, have been passed by both houses. The House vote for the measure was 85- 10.

After another vote in the Senate, the bill is probably headed to a joint conference committee, which will write its final version, then go back to the House and Senate for votes before the session ends this month.

Rep. Ken Miller, an Edmond Republican who is chairman of the House budget committee, told members to look at the math. Although energy companies are eligible for as much as $25 million in refunds, they are paying $1 billion a year in gross production taxes, he said.

Terry said that’s not corporate welfare, adding, “This is an incentive to get producers to drill deeper wells.”

JMA Energy Co. President Jeff McDougall said Friday that the tax incentive has helped his company with deep-well drilling. He said he uses his refunds on additional drilling projects, which encourages him to drill deeper.

Although McDougall said he can get back the 7 percent severance tax for deep wells, he still pays $3 million to $4 million a year in gross production and income taxes.

Glenn, who seldom speaks on the House floor, said: “These companies would be drilling here whether we give them this incentive or not. Where do we draw the line?”

House Democratic Minority Leader Danny Morgan strongly encouraged members to vote for the extension. Morgan, who runs a well- servicing company with about 80 employees in Prague, said the incentive has spawned more deep drilling in Oklahoma.

In 2002, before the current incentive became law, 39 wells were drilled at these depths, Morgan said. In 2006, the total was 139.

A rig provides work for about 100 people from inception to completion, he said, noting that some of those workers are paid $20 an hour.

Deep-well natural gas production has been increasing in the Anadarko basin in western Oklahoma and in the Arkoma basin in southeastern Oklahoma, particularly in Latimer, LeFlore and Pittsburg counties.

Rep. Brian Renegar, D-McAlester, said royalty owners in his district are receiving large checks, which he said shows that natural gas companies don’t need incentives. He said some of his constituents leased their mineral rights for $5,500 an acre.

“They are making more money on the royalties than they paid for the land,” he said.

But Tom Price, Chesapeake Energy Corp.’s senior vice president of corporate development, pointed to the high cost of drilling a well, especially a deep one.

Drilling costs are spiraling because of the increasing global demand, especially in Asia, for equipment, Price said. The $25 million refund amounts to just a little more than the cost of drilling three deep wells, he said.

Chesapeake is now drilling 43 wells in Oklahoma, and 13 are deep wells, he said.

Mick Hinton 405-528-2465

mick.hinton@tulsaworld.com

Top deep-well drillers in Oklahoma, 2000-07

1. Chesapeake Energy Corp.: 290

2. Apache Corp.: 72

3. St. Mary Land and Exploration Co.: 71

4. Marathon Oil Co.: 66

5. Dominion Resources: 58

6. Sanguine Gas Exploration LLC: 51

7. JMA Energy Co. LLC: 43

8. Ward Petroleum Corp.: 35

9. BP America Production Co.: 25

10. Key Production Co.: 21

Source: Oklahoma Corporation Commission/Oklahoma State University (Data complete through third quarter 2007)

Originally published by MICK HINTON World Capitol Bureau.

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