Abstract

In the United States both state and federal government have provided incentives in recent years to maintain production, increase production, and discover new production. On the state level, the incentives involve mostly abatement or rebate of severance taxes. Oklahoma and Louisiana (and possibly other states) have had severance tax relief statutes in recent years that are producer helpful in maintaining production in times of low oil prices. All of the incentives are noted but the two discussed most require no investment by the operator. This paper gives a brief history of the statutes which might be considered relatively generous. In the case of Louisiana, the major statute could be considered farsighted in nature. Oklahoma's incentives history shows a rapid willingness to adjust to help maintain production. The paper also comments on the applicability of use of the statutes.

Introduction

History shows (as can be noted from Fig. 1) that oil prices above $20/bbl have not been sustainable since the oil price crash of 1986. Reference 1 notes that major producing states with a large number of stripper wells including Oklahoma, Texas and New Mexico showed large percentage declines in 1998 due in part to low oil price and stripper wells (wells producing 10 BOPD or less) with lifting costs approximating $15/barrel. Table 1 (taken from Reference 2) shows stripper well data including well count, production, and reserves for Louisiana, Oklahoma, New Mexico and Texas. Based on post 1985 oil price history, it is not surprising that states have provided incentives to maintan production.

This study does not attempt a thorough review of incentives provided by all states. As will be discussed herein, Louisiana and Oklahoma have provided useful incentives which have undoubtedly helped in maintaining production. In some respects, their major incentive tied to oil price could be considered somewhat more generous than anything provided by other states. The incentive appears to relate to the State's type production in some respects. They also become effective at a relatively high oil price. Although the current prices do not permit use of the incentives, it is worthy of note that a recent survey of Houston banks predicts oil prices in the 18 $/bbl range from 2000 through 2002 (Reference 3).

Based on the premise that the oil incentives are comparatively generous, it is interesting that on a per barrel basis the State's overall take from oil including all taxes is relatively low. That fact can be noted from Fig. 2 which is taken from Reference 4. A non detailed review of the States's production incentives follows.

Oklahoma

A look at oil price history (Table 2) and production history (Table 3 and Fig. 3) gives some indication as to not only why the incentives exist but why they have been improved since being put into law in 1994. Based on 1996 producing well count (Reference 2), average per well production for that year was approximately three BOPD. Depletion state of the fields is also reflected by an average annual GOR of 3184 which can be derived from Fig. 3. Production on Fig. 3 is a composite of 21,484 producing properties which reflects a wide diversity of ownership and little room for economics of scale. Low revenue coupled with moderate to high operating costs leaves little room for profit. Thus, any reduction in the seven percent gross production tax would help significantly.

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