Throughout 2017’s prolonged session of the Oklahoma Legislature, the politics surrounding calls for new tax revenue have partially pitted two energy industries against each other: petroleum and wind.
A hard stalemate caused by debate about gross production taxes on oil and gas and wind development ad valorem exemptions has resulted in problems for both industries. Chiefly, the rhetoric coming out of the State Capitol is turning off companies looking to invest in Oklahoma.
“What we have seen so far is rig counts are down in the state of Oklahoma while they’re up everywhere else in the nation, and I’ve received calls from wind CEOs telling me they are having a very hard time bringing investment into the state of Oklahoma because of the uncertainty regarding the regulatory environment,” said House Majority Floor Leader Jon Echols (R-OKC). “The worst thing we can do for the state of Oklahoma is to continue to be in these continuous cycles of special sessions. What the private sector needs is certainty. They need to know these are the rules we are playing by so they can make their necessary adjustments.”
Echols’ comments came days before lawmakers convened Monday for the state’s second special session of 2017. In regular session and in its first special session, the Legislature was unable to pass a deal on how to fill a large budget hole with new revenue. Negotiations centered around tax incentives afforded to oil and gas production and (to a lesser extent) wind development.
“It’s a real challenge,” said Oklahoma Independent Petroleum Association president Tim Wigley. “Kind of the new face in oil and gas is the private equity investments in Oklahoma.”
Wigley and other industry leaders say that by toying with the notion of raising gross production taxes — to 4 percent, 5 percent, 7 percent or beyond — the Legislature and other political players are providing capital-intensive companies plenty of reason to drill in other states that are not discussing GPT-rate changes.
“I know this battle has been raging for a number of years, but when you’re coming out of one of the toughest downturns price-wise that we’ve seen in a long time (…) it’s just a tough time for a lot of these companies,” Wigley said. “Oklahoma is not their only play. They have choices.”
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Meanwhile, wind companies have choices, too, and with the OIPA helping push a narrative of wind energy receiving too cushy of an incentive system, pressure has mounted for lawmakers to obtain new revenue from that industry as well.
“There’s real concern about what we’re hearing daily about tax credits, increased taxes on wind, and really an anti-wind rhetoric coming out of the Capitol. It’s got investors across the country concerned,” said Mark Yates, Oklahoma director of the Wind Coalition. “From an industry standpoint, all eyes are on Oklahoma right now. These development companies, the investors, the financial groups involved in these investments, are all looking at Oklahoma as ground zero. They’re looking at the rhetoric coming out of 23rd and Lincoln.”
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Echols: ‘Whatever we do, we must do it quickly’
The rhetoric at 23rd and Lincoln has died down, but perhaps only temporarily. With a projected $600 million budget gap staring political leaders in the face for 2018’s legislative session, Gov. Mary Fallin has been in communication with business leaders about trying to find a grand revenue plan acceptable to all parties necessary in meeting the 75 percent threshold for new revenue measures.
Echols said he hopes a decision is reached quickly in special session and regular session to help mitigate the uncertainty for businesses.
“Even during the last special session, we had a compromise that got 72 percent of legislators in agreement, and it’s still not law because of the 75 percent requirement,” Echols said. “So whether or not we are going to use cash and live to fight another day or whether we’re going to find some compromise that everyone can agree on, what is worse than either of those is this ridiculous uncertainty and these constant special sessions. Whatever we do, we must do it quickly.”
Otherwise, Echols said, new economic projects could be jeopardized.
The Wind Coalition’s Yates provided an example.
“I’ve gotten a couple calls in the last two weeks from companies in Houston looking to buy wind projects in Oklahoma. I think the overall concern is, ‘Can you trust the state of Oklahoma?’ Because, at the end of the day, it’s really about how the risk has gone up if you want to invest in Oklahoma,” Yates said. “If Oklahoma goes back on its word and eliminates or caps these existing (wind) credits, it sends a message that there’s volatility in Oklahoma’s market. It’s not a mature market. It’s a market we can’t trust. So any new project or any amount of money that anybody is going to invest in the state of Oklahoma, you have to factor in a growing risk and concern that, well, our investment may not be safe because there’s not a stable tax or regulatory market moving forward.”
Both industries took hits from the Legislature this year. Oil and gas producers saw “legacy wells” — horizontally drilled between July 1, 2011, and June 30, 2015 — go from paying a 1 percent GPT to a 7 percent GPT. And in April, the Legislature passed and Fallin signed a bill shutting off new applicants for the Zero Emission Tax Credit. That credit initially helped draw wind investments to Oklahoma more than a decade ago but also became a rallying cry for conservatives who oppose corporate subsidies — at least for wind.
‘A pretty free ride on the backs of oil and gas’
Some of the same voices crying loudest for the removal or modification of wind tax credits have been vocal in their support of maintaining the state’s low gross production tax incentive rate for the first 36 months of new oil and gas wells.
That dichotomy — epitomized by Continental Oil CEO Harold Hamm’s Windfall Coalition — has pitted the petroleum and wind industries against each other at certain times.
“It was a legislative priority for us heading into the regular session this year that there at least be a discussion about their program,” Wigley said of modifying wind’s tax structure. “Of course, their program ended in July, but if you’re already in the program, you continue to get payouts. Our concern all along was, there just needs to be somewhat of a leveling of the playing field because, with no gross production tax, no manufacturing sales tax, they talk about the fact that they pay ad valorem tax, but that’s partially what’s refunded back. So it’s been a pretty free ride on the backs of oil and gas.”
But Yates disagrees, arguing that companies made two-decade investments with a promise of a five-year ad valorem exemption calculated into their business models.
“We can have debates on whether Oklahoma structured these tax credits properly. Other states have done it differently,” he said. “To give you an example, Kansas has a 10-year on their ad valorem exemption as opposed to a five (-year). But on their 10-year (exemption), the state did not pick up the tab. The local community and local counties did.
“So there are other incentives out there that other states are offering that those states are sticking with.”
That, Yates believes, will be remembered by national companies considering future wind projects. He said Wigley and OIPA should understand how disruptive changing tax rules can be on an industry.
“I’m trying to bridge the gap. There shouldn’t be a divisive nature between oil and gas and wind,” Yates said. “I would 100 percent agree — from an industry standpoint, an investment standpoint, a business-decision standpoint — that unstable tax policy and regulatory environments that are changing year-to-year makes it almost impossible to excite investors or bring investors into the state.
“It’s a massive problem. It’s a big-time issue, and I would agree with oil and gas on that point that it has a chilling impact on future investment.”
Fighting ‘really not good for either one of them’
Yates said The Wind Coalition features many diversified energy companies, meaning arguments that try to pit petroleum against wind are intentionally misleading from their source.
“The story that’s not being told is that, when we say ‘wind,’ the narrative has been that these are just companies that are only invested in wind,” Yates said. “For the most part, these companies are diversified energy companies that are involved in oil and gas, that are involved in wind, some of which are involved in coal. So to make the claim that we’re just going to go after wind, that’s not an accurate picture of what’s going on.
“There’s companies within the Wind Coalition that are just as concerned about the climate for oil and gas.”
Echols said he hopes both industries can get along for the good of the state.
“I’m pro wind, and I’m pro oil and gas. I’m pro jobs and economic development in the state of Oklahoma,” Echols said, adding that the owners of petroleum and wind companies do not live in his district. “Who does live in my district is the employees of those companies, and those companies continuing to do well is good for my area.”
He characterized the two industries’ “fighting” as mutually “harmful.”
“Now, I voted for a higher GPT last year, and I ran a bill that changed the wind tax credit last year that sunsetted immediately,” Echols said. “I’m not saying those industries should get whatever they want, because that’s not true. It’s our job as a Legislature to look at what makes the most sense for all of the citizens of the state of Oklahoma, not just business big or small. But when those two industries are attacking each other like they are now, it’s really not good for either one of them, and it adds a great deal of stress on the state and stress on the economic environment of the state.”
Echols said the risk of spending virtually an entire year in legislative session means neither oil and gas nor wind lobbyists “can lay the weapons down.”
“I think the endless special sessions exacerbate their fighting, and their fighting exacerbates the endless special sessions,” he said. “We’re in a vicious cycle we need to get out of.”
(Update: This story was updated at 8:25 a.m. Wednesday, Dec. 20, to expand reference to legislation passed in 2017.)