Oklahoma legislative leaders are certainly paying attention to the collapse in oil prices, something that has some oil and gas companies bringing a halt to oil exploration. Their worry is about the state budget and how gross production tax revenue will be affected.
Rep Kevin Wallace chairs the House Appropriations and Budget Committee and as the political news website Non-Doc reported this week is one of three primary people tasked with negotiating and building the state budget.
Wallace has seen the lows and the highs, moving from vice chairman to chairman during 2017’s state fiscal nightmare and enjoying the fruits of a historic 2018 tax package that allowed for more than $600 million in new education appropriations over the past two years. The largest chunk of that revenue increase came from gross production taxes on oil and gas wells.
When the OPEC news unfolded Sunday, Wallace (R-Wellston) was bombarded with text messages.
“It’s definitely not what you want to hear, especially when things were going fairly smoothly as far as a budgetary year where we knew what we had to work with,” Wallace said Monday at the Capitol. “Now it’s just one more wrinkle. We’ll get through it. It’s definitely not going to be a $1.3 billion shortfall like we’ve lived through before, so we will survive.”
State Chamber of Oklahoma President Chad Warmington called the situation a perfect storm for the state’s energy sector.
“We’re competing in a global market where you’ve got significant oversupply issues, and with Russia and OPEC unwilling to restrict production, cheap oil is flooding a market that is already oversupplied,” Warmington said. “Layer that with what’s going on with coronavirus and all of the global economic crisis, it’s a bad one-two punch.”
Petroleum Alliance of Oklahoma chairman David Le Norman said the state’s producers have little choice but to weather the storm.
“It is too early to say what will happen with commodity prices in the longterm. However, we know the 350,000 hard-working, resilient people of Oklahoma’s oil and natural gas industry will do their best to support each other, weather the storm and continue to fuel our nation’s economy,” Le Norman said in a press release Monday. “Unfortunately, Oklahoma has been caught in the crossfire of these geopolitical issues beyond our control, exacerbating existing challenges and further threatening damage to our economy.”
It’s also possible some Oklahoma companies may not survive. Chesapeake Energy had already been in distress prior to this week’s downturn, with its stock price tumbling to just 15 cents in trading Monday. In 2008, that stock was at $62-per-share.
“I think that is in the cards,” Warmington said when asked if bankruptcies in the state’s energy sector were possible. “The modern oil and gas industry is not structured to be competitive in markets like this. The shale companies have been built on a growth model, and expanding footprint and growing production. To do that you have to borrow lots of money. Those companies aren’t able to get access to that lending right now. They can’t grow without that outside cash. Then, on top of that, the price right now lowers the value of their assets. It’s a double whammy.”