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Energy industry hopeful for a quiet legislative session

 The Journal Record | January 7, 2019

OKLAHOMA CITY – After years of legislative changes to their tax incentives and rates, the state’s energy industry groups said they’re hoping for a quiet year at the Capitol.

Over the past few years, the Oklahoma Legislature has ended all tax credits offered specifically to wind generation companies. The industry no longer qualifies for the zero-emissions tax credit, and there has been a push to find ways to end credits that have already been rewarded. As legislators sought new revenue for teacher pay increases and other service investments, Democrats successfully urged a tax increase on oil and gas production.

State lawmakers have a little more than a week to wrap up their bill filing. The deadline is Jan. 17. So far, no one has pitched legislation that would affect those industries. Their trade groups said they hope that keeps up.

In addition to losing their industry-specific credits moving forward, wind producers have seen their already-rewarded credits on the chopping block. One of the most controversial bills introduced in 2018 would end refundability of those credits, which would prohibit companies from using credits that surpassed the amount they owed the state. That bill stalled and died. A top House Republican, state Rep. Mike Sanders, R-Kingfisher, never filed formal legislation, but he said publicly he supported creating a gross production tax on wind companies. Step Up Oklahoma, the group of high-profile private-sector executives that stepped in to assist with the budget impasse, also recommended a wind production tax in their budget proposal.

Mark Yates is the Oklahoma director for the Wind Coalition. He said he hoped the Legislature-induced uncertainty in the market would come to an end.

“We’re hoping for a session with some stability, where there aren’t major changes, especially from an investment standpoint,” he said.

He said his organization is hopeful that will be the reality under the new gubernatorial administration and with some leadership changes in the Legislature.

There haven’t been any mentions of mandates on the industry, but Senate Appropriations Chairman Roger Thompson introduced a bill that would let companies sell their credits back to the state. The idea is that Oklahoma can afford to take a loss right now while the economy is strong and revenues are high, and that it would hedge against existing debt to those companies that might be more difficult to carry in the future.

Oil and gas companies also saw some changes to their tax structure. Gross production taxes charge drillers a portion of each barrel’s value. The default rate is 7 percent per barrel, but companies pay an incentive rate for the first 36 months. Until 2017, that rate was 1 or 2 percent on all of those wells. In 2017, lawmakers adjusted that rate on some of the oldest wells, and in 2018, lawmakers raised the rate on all wells to 4 percent for the first 36 months.

The industry also saw some regulatory updates in that time. Lawmakers passed what was known as the long laterals bill in 2017. It amended the 2011 Shale Reservoir Development Act. One provision allowed operators to drill 2-mile horizontal wellbores in any rock layer; the original law limited those longer laterals to shale layers. It made drilling operations more cost-effective for the state’s producers. That change sparked some controversy. Companies that employ vertical drilling, an older technology, were concerned that long laterals could tap into the resources they were already developing if the areas overlapped. Mineral rights attorneys also expressed some concern about how the law could make clarifying titles difficult.

Chad Warmington is president of OIPA-OKOGA, the newly formed oil and natural gas industry trade association created by the merger of the Oklahoma Independent Petroleum Association and the Oklahoma Oil & Gas Association. He said his members won’t be asking for anything controversial this year, and it’s unlikely they’ll ask for major regulatory changes.

He said that if oil prices continue dropping, the industry would likely be asked what should be done to compensate for revenue losses. State finance officials have projected more than $600 million in surplus revenue, but that is based on a model that places oil prices in the $50-to-$60 range.

“If we get to session and oil drops back down to 40 bucks, we’d have a wide-scale panic in the industry,” Warmington said. “It may be all hands on deck.”

Barring that situation, the organization is hoping there won’t be much talk about the gross production tax at 23rd and Lincoln come February and through the following months.

“Peace and quiet was on our Christmas wish list,” he said.

Unlike wind, oil and gas, solar energy has enjoyed that quiet over the past few years. When lawmakers worked to reduce the amount of zero-emissions tax credits the state was dispensing, they exempted the solar industry from any reductions.  Although wind and solar power have comparable potential in Oklahoma, the state consistently ranks in the bottom five nationally for solar development. In 2015, Oklahoma produced about 6,000 megawatts of wind-generated electricity, officials with the secretary of energy and environment said in an earlier interview. In the same time, the state produced about 5 megawatts generated from solar panels.

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