The good times are back for the volatile energy sector in Oklahoma, where revenue from taxes on oil and natural gas production hit a record high in March.
The state, a top-five U.S. producer of those energy commodities, announced last week that the taxes generated gross revenue of $165.3 million last month, an 82% increase from a year earlier, while collections over the last 12 months were 138.6% higher at $1.37 billion.
“We know that the next several months are going to be great, too, because our (March) numbers are based on two months prior and we know that in February (oil) averaged over $90 a barrel and was $110 a barrel during March,” Oklahoma State Treasurer Randy McDaniel told The Bond Buyer.
March revenue was from January production when West Texas Intermediate crude oil averaged $83.22 per barrel and Henry Hub natural gas sold for $4.38 per million British thermal units before rising to $4.69 in February and $4.9 in March, according to the U.S. Energy Information Administration.
After
Texas, New Mexico, North Dakota, Alaska, and Oklahoma were the top producers of crude oil as of December 2021 in an EIA ranking. Texas was also the top state for natural gas marketed production in 2020, followed by Pennsylvania, Louisiana, Oklahoma, and West Virginia. A majority of states collect severance taxes on the two commodities with 29 taxing natural gas and 31 taxing oil, according to data provided by the Federation of Tax Administrators.
The Lone Star State’s natural gas production tax has generated $2.22 billion so far in fiscal 2022, which began Sept. 1, and is on track for beating an all-time high of $2.339 billion reached in fiscal 2006. In fact, the state’s fiscal 2022 forecast calls for $2.67 billion. The
At $3.118 billion though the first seven months of fiscal 2022, oil production tax revenue In Texas was just 10.6% less than collections for the entire previous fiscal year.
Revenue from those taxes flows into the state’s general and school funds with 75% of the collections that come in above 1987 levels split between the rainy day and state highway funds at the end of the fiscal year. A $1.46 billion deposit at the end of November boosted the rainy day fund’s balance to around $11.4 billion.
North Dakota has also experienced volatility. Its oil and gas tax revenue dropped after the pandemic hit in 2020, falling 83% under forecast in July of that year at $35.6 million, compared to July 2019, when collections totaled $228.4 million, according to reports from the state’s legislative council.
Last month, revenue was 49% over forecast at $247 million, with 53% of the revenue flowing into North Dakota’s general fund and Legacy Fund. So far in the state’s fiscal biennium, which began July 1, 2021, collections are 29% over forecast at $1.68 billion.
In Oklahoma, gross production tax collections dropped to as low as $19.6 million in June 2020, marking a 78.7% decrease from June 2019, as oil prices plummeted amid pandemic lockdowns.
“The governor and others have been pushing for more reserve funds,” McDaniel said. “There is a mindset we want to be prepared for future volatility.”
Oklahoma currently has $371 million in its constitutional reserve fund and $171 million in its revenue stabilization fund.
Michael D’Arcy, a Fitch Ratings analyst, said the state is setting itself up for longer-term risks after it cut individual and corporate income tax rates last year and considers further tax cuts this year.
“In the short term, they’re going to be able to shrug off much of the revenues lost from tax reductions because I think the gross production tax is going to do very well for the next couple of years. The question is what happens when everything comes down to earth,” he said, adding that heftier reserves would provide a better cushion.
Oklahoma and New Mexico were the only two of nine oil-dependent states where severance taxes’ share of total tax revenue grew instead of fell between fiscal years 2014 and 2020, according to a
She warned that “states that are largely dependent on oil would be better served with more diversified economies and revenue structures that avoid such wild swings in tax revenue.”
S&P Global Ratings hit Oklahoma and New Mexico with negative outlooks on their AA ratings in 2020 because they “were both dealing with the duo shock of the oil and gas sector and the pandemic shock,” according to S&P analyst Oscar Padilla. The outlooks have since been revised back to stable.
New Mexico, where about a third of the state’s general fund revenue is derived from oil and gas production, taps some of its severance tax revenue that is largely generated by oil and gas to pay off bonds issued for capital projects. The state had $816.6 million of senior severance tax bonds and $33 million of supplemental severance tax bonds outstanding as of Dec. 31, 2021, according to a January disclosure filing by the State Board of Finance.
Oil and gas tax revenue deposited into the severance tax bonding fund totaled $138.8 million last month, compared to $62.6 million in March 2021.
In a June 2021 report, Moody’s Investors Service, which rates the New Mexico severance tax bonds Aa2 and Aa3, noted the volatility of the pledged tax revenue, saying it was mitigated by ample coverage levels, a conservative debt structure, a requirement to maintain 12 months of debt service in the bonding fund, and other factors.
Not all big energy producing states have severance taxes.
Pennsylvania Gov. Tom Wolf, a Democrat,
Last year, he proposed a plan to provide rapid reemployment assistance to workers impacted by the pandemic funded by a severance tax on natural gas extraction that would raise an estimated $300 million annually.
