What is GPT and what would you do about it?
OKLAHOMA CITY (KOKH) —
Whether you want your elected representative to vote for it or you are asked to sign a petition or vote yourself on changing the state’s gross production tax rate do you really know what you’re asking for?
Oklahoma’s tax rate on oil and gas wells is, officially, 7-percent but over the years several incentive rates have gone through the legislature. There is a push to restore the official rate across the board.
Right now new wells enjoy a discounted GPT of 2-percent for the first three years of production.
“The first day of the oil well is the best day it will ever have,” said Mike McDonald, the co-owner of Triad Energy. McDonald has spent more than three decades in the energy industry and says increasing the GPT even few percentage points has a cascading effect.
“A two percent on your gross may mean eight or ten percent difference on your net,” McDonald told FOX 25.
It may sound complicated, but simply put when an oil company puts a hole in the ground they are already in debt. Most companies use their own money and take out loans to finance a drilling operation.
“When you think about a rig you need to think about a little business,” McDonald explained. “These horizontal wells require a lot of technology and there's a lot of people employed, there will be anywhere full and part time employees 50-60 people coming and going on one of these wells.”
Because the tax is a “gross” production tax, it is collected as soon as the first oil comes out of the ground versus an “income” tax which is collected off of earnings. Companies can write off debt associated with drilling a new well until those debts are repaid. The gross production tax is also paid by royalty owners who are often the first ones to get money from the sale of oil from a well.
“Some years we're going to make quite a bit of money and other years like the years past we're going to lose money or break even,” McDonald said.
Critics of raising the GPT argue it cuts into the ability to make a profit off the well, which does not just hurt the company; they argue it could potentially hurt the state financially through decreased income taxes and layoffs that might come if under producing wells are shut down.
“You would certainly see a reduction in the number of rigs working in Oklahoma and that means fewer rigs running that is going to mean fewer employees,” McDonald said.
Supports of raising the GPT question the logic of shutting down oil or gas rigs due to a GPT increase. Mickey Thompson, the former leader of the Oklahoma Independent Petroleum Association, says the per-barrel increase with higher GPT could be the same amount of money as the per-barrel price swing for oil on any given day on the open market.
“Nobody is making long range drilling decisions based on that kind of price volatility,” Thomson said. “I think it is disingenuous to say that $2.50 [a barrel] is going to change the economics for oil and gas exploration in Oklahoma. It’s just not true.”
Thompson has a unique perspective when it comes to tax breaks for oil and gas companies. During his tenure at the OIPA, he fought for tax incentives for companies.
“I can say 100% that none of these tax incentives were ever meant to be permanent,” Thompson said.
He said with the industry is able to handle a return to higher GPT rates. With the advent of new technology, Thomspon said the days of drilling a “dry hole” are over and the risk associated with drilling new wells is lower than it has ever been.
“Yes the industry needs to pay more than they are paying,” Thompson said, “Regardless of whether they feel like they are paying enough of if they feel like they are paying too much.”
The other issue to consider in the GPT debate is the recently approved “long laterals” bill in Oklahoma. It gives energy companies the ability to double the length of their horizontal wells. So instead of drilling two wells that only reach one-mile out, a producer can save money by simply extending the well one-mile as opposed to drilling a second vertical well.
“The cost of drilling two wells one mile each versus one well and going out two miles you're probably saving 30-35% of the cost,” McDonald said.
However, the question remains, are Oklahoma companies paying too much?
Other energy producing states have done their own studies to determine where they stand. In an analysis done by the state of Idaho in 2016, Oklahoma ranked the lowest of energy producing states when it came to tax rates.
A Colorado study published in 2018 placed Oklahoma’s effective tax rate, the amount of GPT, income and property taxes combined, as second lowest of the energy producing states.