A handful of Wyoming lawmakers say a tax cut for the oil and gas industry could help with depleted fossil fuel revenue and the large deficit that’s left in the state budget.
Senate File 98 is an attempt to entice developers to drill in the Cowboy State by offering a tax break in the third year of production, said one of the bill’s sponsors, Senate President Eli Bebout, R-Riverton. The bill could also keep operators around longer, after the amount of hydrocarbons they are collecting slows down, he said.
Those opposed to the bill question whether a tax cut would increase revenue and argue that the responsible development of Wyoming’s natural resources does not involve a tax cut for oil and gas operators.
Seeking a tax cut for oil and gas while Wyoming is staring at an imposing budget deficit may seem like a tough sell. However, Bebout’s sponsorship is likely to ensure a meaningful hearing from other lawmakers.
“If we pass this through, I think you will see more drilling rigs,” Bebout said. “It helps our revenue picture.”
As proposed in Senate File 98, a well would enter a two-year tax lull 25 months after it is drilled. Wyoming’s 6 percent severance tax would be cut in half. The tax rate would return to normal after year four.
The timing is relevant for anyone familiar with current oil and gas production, Bebout said.
The majority of wells drilled in Wyoming today are horizontal wells, drilled down and then parallel to the surface. A flush of production occurs in the first few years of operation that is much greater than traditional drillers could have hoped for.
The bill would have companies pay the full severance tax rate for the initial production, but offer a discount on years three and four when volumes decline, Bebout said.
“When you drill these long horizontal wells, they are very expensive and there is a substantial commitment by the operators who drill those wells,” he said.
They are willing to spend the money because of how much oil comes out initially, he said. It’s after that, when the resource wanes, that firms may need a push to keep producing.
To Bebout, SF 98 would provide that push.
Wyoming is facing an $850 million hole in its budget, depending on how it’s counted, over the next two years. The crisis was caused by a bust in the fossil fuel sectors, which generate the lion’s share of state revenue. The downturn has spurred discussions on economic diversification and non-industry tax streams throughout the interim.
But, a rise in crude oil prices has brought a renewed optimism to Cheyenne just in time for the session. New revenue-generating strategies have lost traction as lawmakers’ confidence in the Wyoming tradition of taxing industry to pay the bills looks promising again.
At least, some say, the price improvement offers a cushion before lawmakers have to decide on fundamental changes to how Wyoming generates income.
But though improvements in the price are encouraging, Wyoming is in steeper competition with other parts of the country than it’s ever been, said Bebout, who is the registered executive for Nucor Oil and Gas LLC in Fremont County.
“The prices help everywhere,” Bebout said.
Dollars are flowing to the Bakken, Colorado and Texas instead of Wyoming, he said, noting that Wyoming’s oil and gas industry has to contend with federally-owned land and minerals. Industry often argues that federal permitting both slows down development and increases its cost.
Bebout’s company does not have any current applications with the state for new drilling that would be affected by the bill, according to state records.
The tax incentive would make Wyoming more competitive, Bebout said.
“I think it will work,” he said.
The fiscal note attached to Senate File 98 estimates a loss to Wyoming’s general fund of $1.7 million in 2021 and a loss of $3.5 million to the Budget Reserve account that year. Those amounts were calculated based on production volumes in Wyoming between 2012 and 2014.
Shannon Anderson, a lawyer for the Powder River Basin Resource Council said the bill is interesting approach, but an unproven one.
“If the idea is to somehow attract additional oil and gas development in the state, it’s been shown through study after study that a tax break doesn’t generate that incentive,” she said.
Anderson pointed to a 2000 study commissioned by the Wyoming Legislature that modeled a 4 percent reduction in the oil and gas severance tax.
Drilling did increase by about 5 percent, and with it the sales and use tax dollars went up. But, severance tax revenue fell by 43 percent.
“Severance tax losses are partially offset by increased sales tax collections (due to increased drilling), but the overall story is one of a substantial net loss in tax revenue,” the authors wrote.
For Anderson, a bill like SF 98 should have been vetted by lawmakers in committee, not stuck on the roster the week the budget session begins, she said.
Incentives and studies aside, the Powder River Basin Resource Council opposes the bill, she said.
“These are one-time resources,” Anderson said. “Wyoming only has a chance to tax them once. It’s really important that we capture that value back for the citizens of the state.”
A call to the president of the Petroleum Association of Wyoming was not returned by press time. Buck McVeigh, executive director of the Wyoming Taxpayers Association, said his association was still considering the bill and its merits. The bill was a late addition to the mix, added Wednesday morning — the third day of the legislative session.
SF 98 has five sponsors: Sens. Bebout, Drew Perkins, R-Casper, and Brian Boner, R-Douglas, and Reps. Mike Greear, R-Worland, and David Miller, R-Riverton.