With record high oil prices, Kansas motorists aren't getting any breaks these days. The same can't be said of the Kansas oil industry.
The state's oil patch is booming thanks to oil prices of more than $50 per barrel. But the industry also is benefiting from a state tax break that could be costing Kansas coffers from $35 million to $50 million a year.
And with the state's budget expected to be tight again this year, some industry observers are wondering whether lawmakers may look to repeal the tax break.
"The industry is definitely doing well right now," said Tim Carr, a geologist specializing in oil and gas research at the Lawrence-based Kansas Geological Survey. "They (lawmakers) might look for some more funds from the industry. The Legislature usually thinks about those sort of things."
The 1980s-era law exempted wells producing five barrels of oil or less per day from paying the 4.33 percent severance tax the state collects for oil pumped within the state.
In 2003, that meant nearly 92 percent of Kansas wells were exempt, according to data from the survey.
The severance tax on oil is structured differently than the tax the state collects on gas wells. That system exempts wells producing gas valued at less than $86 per day from the tax, allowing wells with relatively small production to be taxed when gas prices are high.
The oil exemption was put in place to encourage the low-volume wells, called stripper wells, to remain in production when oil prices are low. But with most oil experts agreeing that the typical Kansas well begins making money when the price of oil reaches about $25 per barrel, the severance tax is no longer the difference between an operator taking a profit or a loss.
"They're certainly making a profit now," Carr said.
Not a 'tax break'
Analysts fear tight oil supply a long-term scenarioRepealing the exemption could provide a significant boost to the state's revenues. Kansas Department of Revenue officials are predicting the state's severance tax on oil will produce $22 million in the current fiscal year, which began July 1.
Some simple math shows it could be more than that, if not for the exemption. Carr is estimating the state will produce 34 million barrels of oil this year. At $40 a barrel, that oil has a market value of $1.3 billion. A 4.33 percent tax on the full $1.3 billion would produce $58.8 million, or about $37 million more than the projected level.
If oil were to stay at $50 a barrel for the entire year, the state would stand to gain about $51 million in new revenue.
Edward Cross, executive vice president of the Kansas Independent Oil and Gas Assn., said repealing the exemption would create more harm than good for the state.
"We don't really view this as a tax break," he said. "We view it as an incentive to produce more oil here. Every barrel that we can produce here is one that we don't have to export from somewhere else."
Oil experts agree the exemption saved large portions of the Kansas oil industry during the 1990s when oil was selling for less than $10 per barrel.
"If that exemption hadn't been in place, those small wells would have been plugged, cemented and gone forever," Carr said. "What it (the exemption) did was save those wells so they could be pumped today."
At today's prices, though, several legislators said it was unlikely oil producers would shut down their stripper wells if the severance tax exemption were eliminated.
"There's probably no risk that they'll abandon them at $40 a barrel or above," said Rep. Tom Sloan, R-Lawrence. "There is a point that wells become unprofitable and sometimes the severance tax is the straw that breaks the camel's back. But I think we're quite a ways from that point."
But Cross said the number of wells would decline if the exemption were eliminated. He said producers might not stop pumping immediately. But as small wells break and need thousands of dollars in repairs, Cross said, producers would be more likely to abandon them if the tax were in place.
Legislative talk
Whether state lawmakers will seek to change the exemption is unclear.
"I have not heard anyone discussing it, but I also didn't know that we were talking about $35 million, either," Sloan said.
Sen. Stephen Morris, R-Hugoton, said he thought the issue could come up for discussion this session, but did not predict any changes for the next year. He said many small Kansas oil producers were still trying to financially recover from the rough period of the 1990s.
"If the price stays up consistently for a while, we probably need to re-evaluate the structure of the severance tax," Morris said. "But we need to be careful. We don't want to hurt this industry."
There are opponents of any change to the system. Rep. Dennis McKinney, D-Greensburg, said the price of oil was too volatile to begin charging the severance tax on small wells.
"Even if you do change it, the revenue may only be there for a year or two because the price of oil could easily drop again," McKinney said. "In the meantime, you have given a kick in the teeth to people who take a lot of risk."
He also said the industry needed the exemption to help recover from the down times of the past decade.
"When Boeing lays off employees in Wichita, we all scramble to respond to the problem," McKinney said. "But when oil dropped to $8 a barrel and we were losing thousands of jobs scattered throughout the state, we didn't do much of anything."
Cross, at the oil and gas association, said producers knew legislators might be tempted to look at removing the exemption because of the state's tight budget.
"It is hard for me to say what is going to come up in the legislative session," Cross said. "But I know we're preparing to take a defensive posture this session."
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