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LOGA, Louisiana Officials Lock Horns Over Tax Revenue

A Louisiana government official's statement that the state will see a decrease in tax revenues in coming years due to natural gas drillers moving their operations from taxable areas in South Louisiana to tax-exempt fields in North Louisiana "could not be further from the truth," according to Louisiana Oil & Gas Association (LOGA) President Don Briggs.

"In reality, oil and gas development in South Louisiana has declined for years due to a variety of production and economic concerns," Briggs wrote in a statement posted on the LOGA website.

Briggs was responding to an article published Saturday by The Advocate newspaper of Baton Rouge, LA, in which Greg Albrecht, chief economist for the Louisiana Legislative Fiscal Office, claimed that the state's mineral revenue will decrease by tens of millions of dollars over the next four years because horizontally drilled wells are exempt from severance taxes for two years or until the cost of the well is recovered.

"For all practical purposes, we may essentially get little or nothing," Albrecht told The Advocate.

A horizontal well severance tax exemption approved by the state legislature in 1994 cost Louisiana more than $200 million during the 2010 fiscal year and at current production levels will cost the state another $100 million in lost tax revenue this fiscal year, he said. And a decrease in taxed drilling in South Louisiana -- at the same time that tax-exempt drilling is increasing further north -- will result in a decrease in severance taxes of as much as $162 million annually by 2014 compared with last fiscal year, the Legislative Fiscal Office estimates.

According to Briggs, drilling in the Haynesville Shale is performed mostly by natural gas operators that have never had major operations in South Louisiana.

The amount of severance tax revenue the state receives is dependent on the price of natural gas and the tax rate is based on the prior year's average price, he said.

"As the U.S. experienced record-high natural gas prices in 2008, this led 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 year's 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."

The state can expect to receive severance tax dollars from wells in the Haynesville once they begin producing and their cost is recovered, Briggs said.

"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 NGI's Shale Daily Unconventional Rig Count (see shaledaily.com), activity in the Haynesville has slowed over the last year, likely due to relatively low natural gas prices. In February 2010 more than 190 rigs were actively searching for oil and gas in the region. In February 2011 that number fell to just north of 140 rigs.

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