Facts on Horizontal & Vertical Wells in Oklahoma | Oklahoma Oil & Gas Association

Facts on Horizontal & Vertical Wells in Oklahoma

Myth v. Fact on Horizontal and Vertical Wells in Oklahoma

OKOGA member companies are drilling horizontal wells and are the primary driver for the 2,800 jobs the energy sector created in Oklahoma in January and February of 2017. In areas where horizontal drilling is taking place in Oklahoma, the unemployment rate has declined by 2 percent. In March 2017, gross production taxes on oil and natural gas increased by 102 percent from last March.

At OKOGA, we advocate for and support policies at the state capitol that will allow this type of growth to continue so that we can close the budget gap and continue to be the top revenue stream for education, roads, and critical services in Oklahoma.

Below is a fact check on falsehoods regarding horizontal wells in Oklahoma:

Myth #1: Oklahoma has the lowest gross production tax rate in the nation because horizontal wells are taxed at 2%.

Fact Check: All wells – whether horizontal or vertical – are taxed at 2 percent for 36 months and then 7 percent thereafter for the life of the well, which is often 30+ years of production. If there are no vertical wells being taxed at 2 percent, it is because vertical wells are not being drilled in the state of Oklahoma.

This two-tier gross production tax became law in 2014. The law resulted in a 100 percent tax increase on horizontal wells and established sunset dates on all oil and gas rebates on the books. A majority of those rebates expired in 2015, ones primarily impacting horizontal wells. A transparent, two-tiered gross production tax is meant to encourage drilling in Oklahoma, as drilling is what drives new job creation and new economic growth and in turn creates long-term revenue streams for the state’s budget.

According to an economic report published in September 2016 by the State Chamber of Oklahoma Research Foundation, the “recent changes to [Oklahoma’s] severance tax structure will likely raise the average severance tax rate paid beginning in FY’2016.”

Myth #2: Increasing production tax to a flat 7 percent “demonstrates a commitment” to help solve the state’s budget crisis.

Fact Check: The gross production tax makes up one-fifth of $2.55 billion in state taxes the oil and natural gas industry paid in FY’15, the largest single source of tax funding for public services in Oklahoma. When other Oklahoma industries pay $1 in taxes per employee, the oil and natural gas industry pays $4 in taxes per employee.

Drilling new wells and producing oil and natural gas demonstrates a commitment to help solve the state’s budget crisis. New capital investments = new rigs which = new jobs. All of this activity creates various new and long-term revenue streams for the state to collect taxes.

For example, the most active operators in Oklahoma have pledged $5.5 billion in capital investments for 2017. As a result, the state has already seen the industry create 2,800 jobs in January and February. This activity will soon become revenue streams for the state.

Investing in new economic activity is being committed to Oklahoma’s future prosperity as well as its current and future tax revenue for critical government services. The most active operators in the state, who are largely drilling horizontal wells, also pay more in taxes than just a gross production tax. For example, unlike Texas, oil and natural gas companies in Oklahoma pay corporate and personal income taxes, which generated more revenue for the state than the gross production tax in FY’15.

Myth #3: OKOGA’s priority bill, Senate bill 284, is a “direct assault on the property rights of every traditional oil and gas producer in Oklahoma.”

Fact Check: Vertical well and horizontal well operators DO NOT OWN the hydrocarbons. A mineral owner possesses the right to drill for, produce, or otherwise gain possession of such substances. Royalty and mineral owners make lease agreements with owner/operators to capture those minerals through the drilling of wells.

Mineral owners can earn significantly increased royalty revenues with horizontal drilling verses vertical wells. The Coalition of Oklahoma Surface and Mineral Owners has endorsed SB 284, the Oklahoma Energy Jobs Act of 2017, for this reason. The more profit mineral owners generate from wells, the more taxes they pay. The Oklahoma School Land Commission is the largest mineral owner in the state and their earnings go to public schools and higher education institutions.

Furthermore, horizontal drilling is better for landowners as it creates significantly less surface impact. The presence of one horizontal well replaces the need for at least six vertical wells to produce the same amount. This is a major win for landowners who want to protect and preserve the function and beauty of their land while still financially benefiting from the development of oil and natural gas. Hear landowners discuss this impact with testimonial video #1 and testimonial video #2.

The reality is that old vertical wells are no longer an effective method for developing oil and natural gas, and these conventional wells will never lead Oklahoma out of the current revenue shortfall. In fact, conventional vertical well production has declined by 110 million barrels of oil equivalent (mmboe) per year. Horizontal well production in Oklahoma surpassed vertical production as of 2015 with a fraction of the surface impact.

Myth #4: Horizontal drillers are “tapping into oil found by” vertical wells and “destroying those wells that are paying a 7 percent tax, replacing it with horizontal wells paying a 2 percent tax.”

Fact Check: Since this falsehood compares an old well to a new well in a hypothetical situation, consider the following scenario: If the price for a barrel of oil is $43, an old vertical well producing 10 bbl a day generates $30.10 a day in state revenue at the 7 percent gross production tax rate. A new horizontal well produces an average of 1,000 bbl a day, and generates $860 a day in state revenue at the current gross production tax rate. This horizontal well will be taxed at 7 percent after 36 months of production, the exact same treatment as a new vertical well.

If vertical well producers “found” oil that others are allegedly stealing, why are they not drilling new wells and developing it? Do they not have an obligation to their mineral owners to do so?

Myth #5: No other state permits these ‘big boys’ to just waltz in and drill these long, horizontal wells.

Fact Check: Oklahoma is the only state restricting long lateral drilling of horizontal wells by geologic formation. No other state has this unnecessary restriction limiting long laterals to shale-only formations. Most states let technology and regulatory agencies determine the appropriate length of lateral drilling.