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Report: Louisiana Makes Money on Severance Tax Break

Gas producers know they have to spend money to make money, and Louisiana shale patch players are hoping their state's lawmakers remember that maxim if a repeal of Louisiana's horizontal well severance tax investment incentive comes up for their consideration.

A new study paid for by the Louisiana Oil and Gas Association (LOGA) maintains that while the state last year gave up $125.3 million in revenue because of the exemption, it gained $367.7 million because of it. Put another way, the state made $2.94 for every dollar it gave up, study author Loren Scott of Loren C. Scott & Associates said.

The incentive gives producers a reprieve from severance taxes on the first two years of production from horizontal wells or until the producer makes up the cost of drilling the well in revenues, whichever comes first. Louisiana, like many states, is strapped for cash, and some have called for the elimination of the incentive, which was created in 1994, to ease a $1.6 billion budget shortfall.

LOGA President Don Briggs said he knows of no formal measure to repeal the tax. But there has been talk of it and that's enough to move his group to act, especially when gas prices are as low as they are.

"With these [natural gas] prices payout [of well costs] doesn't happen within two years," Briggs told NGI's Shale Daily. "There's lots of rumors with the budget deficit like it is that there was going to be an attempt to take the severance tax exemption away. We just thought it was important to have a study done to see what it looked like.

"We're getting a jump on it. We just know that they've been talking about it."

The Louisiana legislature is to convene its 2011 regular session on April 25.

Louisiana, of course, is home to the Haynesville Shale. While the play is eclipsing the Barnett Shale of North Texas in terms of output (see Shale Daily, March 22), it is one of the most expensive of the Lower 48 shale plays to drill, according to Scott, with costs of $9-9.7 million per well. The Haynesville also produces dry gas when liquids-rich gas and oil are favored by the market and producers. It has one of the lowest rates of return on investment among the shale plays at 15.9%, according to Scott.

"The Haynesville Shale is already losing rig activity to other shale plays...Removing the horizontal tax incentive would make the Haynesville Shale even less competitive and hasten the exodus of exploration activity out of northwest Louisiana," Scott said.

According to NGI's Shale Daily Unconventional Rig Count, the Haynesville is one of five shale plays that have seen a decline in activity from a year ago. In the Haynesville the rig count is down 26% from a year ago, a decline second to that of the Arkoma-Woodford at 31%. Meanwhile, the other eight shale plays tracked have seen increases ranging from 7% to 300%.

From 2008 to 2009 exploration companies spent more than $11.4 billion in northwest Louisiana, generating $573.5 million in revenue to the state treasury, according to Scott.

"A sensitivity analysis was conducted to determine what would happen to the state budget if removing the horizontal incentive caused activity in the Haynesville Shale to drop by 25% or 50%. For every year from 2012 to 2014, the state treasury ended up collecting less money from removing the incentive, not more," said Scott. Baton Rouge, LA-based Scott has been following the development of the Haynesville for years. Last year he reported that Haynesville activity in 2009 generated about $10.6 billion in new business sales (see Daily GPI, June 7, 2010).

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