On Sunday The Advocate reported that while some 800 wells in north Louisiana’s Haynesville Shale pump out billions of cubic feet of natural gas (with total potential reserves estimated at more than 200 trillion cubic feet) state projections show Louisiana’s mineral revenue will fall by tens of millions of dollars, at least for the next four years.
The reason for that, the story surmises, is that horizontally drilled wells are exempt from severance taxes until a company recovers the cost of the well or for 24 months, whichever happens faster. The paper then quotes Greg Albrecht, chief economist for the state Legislative Fiscal Office, who points much of the finger of blame at the Haynesville Shale, saying that the state gets little or nothing from that north Louisiana production of natural gas. Read “La. misses shale riches” here.
In the mid-1990s the state Legislature approved a severance tax exemption for horizontal drilling, hoping to incentivise the use of that new technology. So with horizontal drilling now a common technique in our nation’s search for these resources, should the incentive stay? Not according to Dave Meloy, who identifies himself as an oil and gas policy consultant from Lakewood, Colo., in making the case in the letters section of Monday’s Advocate for increasing Louisiana’s revenue by $120 million per year for the next 40 years by eliminating the incentive.
Not so fast says the Louisiana Oil and Gas Association’s Don Briggs, who Monday morning fired off a response to Albrecht’s assumptions:
There has been some discussion of late in regard to the Legislative Fiscal Office statements that the State of Louisiana has seen a decrease in mineral income, despite the rising price of oil and growth in the Haynesville Shale. It is their assertion that a major reason for declining revenues is due to untaxed natural gas production in the Haynesville Shale and the belief that drillers are shifting rigs from non-tax-exempt fields in south Louisiana to tax-exempt fields in north Louisiana. This could not be further from the truth.
In reality, oil and gas development in south Louisiana has declined for years due to a variety of production and economic concerns. Drilling that occurs in the Haynesville is for natural gas and companies who operate in the shale are predominantly natural gas operators. These companies, many for the first time, have made the decision to conduct operations in northwest Louisiana from their corporate headquarters in the states of Texas, Oklahoma, Wyoming, and Colorado, among others. Most Haynesville Shale operators have never had major operations in South Louisiana.
Current low natural gas prices and high oil prices have shifted competition from pure natural gas shale plays like the Haynesville to shale plays that contain both natural gas and oil such as the Eagle Ford, Niobrara, Anadarko Basin, and Bakken formation. Additionally, Haynesville well costs continue to rise to between $9-12 million, making them some of the most expensive onshore wells to drill in the country.
The amount of severance tax dollars the state receives is dependent on the price of natural gas. However, the severance tax rate is set for the current year, based on the prior year's average price. As the U.S. experienced record-high natural gas prices in 2008, this lead to inflated projections for state collected taxes in 2009 and 2010. Because of declining natural gas prices, the state is now facing a severance tax rate that is half of previous years collection. In the end, future projections of revenue are just that — projections. No one could have predicted the natural gas market drop from $13/mcf in 2008 to less than $4/mcf in 2009.
Additional questions were raised concerning the rate of depletion of Haynesville wells resulting in limited tax revenue. It is important to understand that once a well reaches payout, from that moment on, severance taxes are then paid to the state on all production. If wells are producing at a significant rate and pay out in a timely manner, the state will receive its share of severance tax dollars much sooner.
A chief economist with the state’s Legislative Fiscal Office claims, “For all practical purposes, we may essentially get little or nothing.” This statement is in stark contrast to the actual dollars paid to state and local governments by Haynesville Shale operators.
From 2008-2010, the utilization of Louisiana’s severance tax relief program resulted in the injection of over $13 billion in investment by companies working in the Haynesville Shale. Haynesville developments have brought new dollars to the state in the form of corporate taxes, sales taxes, ad valorem taxes, and new personal income taxes. To date, nearly $1 billion has been paid to local governments, parishes, and the state. In years 2010-2014, it is estimated that Hayneville operators will pay over $1.2 billion in taxes to the state. These numbers are far from “little or nothing.”
According to Briggs, any attempt to repeal this severance tax incentive is shortsighted. He maintains that the long-term effects would dramatically decrease growth in the Haynesville Shale — and future revenue for Louisiana.
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