Independent Oil Producers Key to Economy
By K.J. WEBB
PRECISION DRILLING: This well is located in Garvin County, Okla. and is owned by Precision Petroleum Corp. of Shawnee, Okla.
Editor’s Note: This article is second in a series in Newspapers and Online concerning the oil industry in Oklahoma. also published oil industry related articles from 2005 through 2007, which have been republished under the title “Oil: Titan of Greater Tulsa.” These articles may be obtained by emailing Newspapers at email@example.com.
When most consumers think of the oil industry and who provides the nation’s oil supplies, ExxonMobil, Shell and Chevron come to mind. People might be surprised to learn that America’s independent oil producers account for nearly 45 percent of total domestic oil production, and 65 percent of natural gas production.
Clearly, independent oil producers are fundamental to meeting American consumers’ energy needs. According to data from international economic forecasting firm Global Insight, independents drill approximately 94 percent of America’s oil and natural gas wells, with Oklahoma’s independent producers playing an important role. Figures provided by the Oklahoma Independent Producers Association () show that in 2009, Oklahoma produced 67 million barrels of oil, accounting for nearly 3.5 percent of the country’s oil production.
In addition, Oklahoma’s oil industry and its nearly 3,000 independent producers generate a substantial number of jobs in the state. In 2009, Oklahoma jobs in production and drilling numbered 71,224. It’s also important to note the job multiplier effect provided by drilling and production. The Oklahoma Energy Resources Board () statistics show that, in Oklahoma, every 1,000 oil production jobs support an additional 3,210 jobs, and every 1,000 drilling jobs support an additional 3,118 jobs.
Nationally, one out of every 62 jobs is attributable to independent producers’ upstream activities. According to Bruce Vincent, chairman of the Independent Petroleum Association of America and of president Swift Energy Company, “Jobs created by the onshore independent producers comprise three percent of the workforce in this country. Independents are a major contributor to domestic job growth.”
Oklahoma’s independent producers’ economic impact on the state is substantial. According to the , direct activity in Oklahoma from the oil and gas industry in 2009 was estimated to be $26.2 billion, with drilling activities contributing $4.6 billion.
Combined, oil production and drilling activity account for 20 percent of Oklahoma’s gross state product. Moreover, Oklahoma’s independents pay annual gross production taxes that account for over 10 percent of total state collections (which is nearly ten times higher than the national average of 1.5 percent in states with taxable production).
Oklahoma’s gross production tax collections for 2011 are estimated to be nearly $1 billion. On a national level, independent oil producers paid corporate and severance taxes amounting to $37 billion. In fact, Vincent says, “The oil and natural gas industry pays federal taxes at a rate of 47 percent (in addition to substantial local and state taxes) and is the second largest contributor to the U.S. Treasury, right after income taxes.”
“If you look at returns on capital compared to other public companies, the oil and gas industry is right in the middle. It’s just easy to pick on the oil and gas industry because it’s good political fodder.”
The domestic oil industry, including its independent producers, play a fundamental and critical role in providing energy, jobs and substantial tax revenues on both a state and federal level. Therefore, the current Congressional regulatory and tax increase proposals aimed at the oil and natural gas industry seem misguided and counterproductive. According to the , some of the proposed energy tax and climate change legislation would have a devastating impact on the industry, the 9.2 million American jobs it supports, as well as the American economy and energy security.
According to Vincent, “When discussing increasing regulation, one of the biggest threats is on the regulatory side through the Environmental Protection Agency () and their position on hydraulic fracturing of wells. It’s a serious concern because about 80 percent of natural gas wells drilled in the next decade will need to be hydraulically fractured.”
Hydraulic fracturing is a proven technology that has been used since the 1940s in more than a million wells in the United States to help produce oil and natural gas. The technology involves pumping a water-sand mixture into underground rock layers where the oil or gas is trapped. The pressure of the water creates tiny fissures in the rock. The sand holds open the fissures, allowing the oil or gas to escape and flow up the well.
Vincent explains, “I can appreciate the concern for the environment. However, studies by the U.S. and the Ground Water Protection Council have confirmed no direct link between hydraulic fracturing operations and groundwater impacts. The knows of no case of hydraulic fracturing contaminating the water supply, but it continues to push for increased burdensome regulations and federal oversight.” The result, if the is successful, is increased production costs, time delays, and holding back job growth.
Added to the regulatory burdens pushed by the is the continual threat of increasing taxes on the oil industry. This is particularly onerous because tax breaks are directly tied to cash flow. “Independent producers have a history of spending 150 percent of cash flow reinvesting into exploration and production, which provides energy, creates jobs and drives positive economic growth,” says Vincent. “Eliminating the tax breaks will reduce cash flow significantly, investment in wells will decline, revenues will decline and jobs will be lost.”
Vincent says that the end result is negative. “The government is ultimately reducing its future revenues by the economic burdens it places on independents by eliminating tax breaks.” An important point to note, at a time of economic recession, the oil and natural gas industry is generating more revenue and creating more jobs. It makes sense, therefore, to support policies that strengthen, rather than burden, the nation’s energy industry.
It seems clear that current proposals and administration’s attempts to increase taxes on the oil industry threaten jobs, America’s energy independence and national security. A strong domestic oil industry is vital to Oklahoma’s economy and jobs, to national energy independence, positive economic and job growth, and national security.
Websites of interest: www.ihs.com, www.oerb.com, www.oipa.com, www.ipaa.org.
Next month: Energy Independence is Essential for National Security.