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Fayetteville Shale Cited by Advocacy Groups in Calls for Tax Hike

The Fayetteville Shale of Arkansas is showing a lot of promise for natural gas producers. Now, two advocacy groups hope that promise translates into more dollars for Arkansas residents.

In an eight-page report, the Arkansas Advocates for Children and Families called for a discussion to consider raising the state's severance tax on natural gas production. The report was released at the same time as another by the nonprofit Southern Good Faith Fund (SGFF), which wants the severance tax changed to create an Arkansas Higher Education Trust Fund.

"The Fayetteville Shale presents a unique opportunity to increase the number of college graduates in Arkansas," noted SGFF's Mike Leach, director of the public policy program.

In its eight-page report, "Digging Deeper: Reforming the Arkansas Severance Tax for Working Families," the Arkansas Advocates group said that "the recent Fayetteville Shale developments have changed the dynamics of already weak industry claims about the downside of a higher Arkansas severance tax. These new projects differ from former drilling programs in that virtually all new wells are located near major natural gas pipelines that cross Conway, Van Buren and other counties, and likely will carry most, if not all, of the product to states north of Arkansas, thereby avoiding state and local taxes and franchise fees."

The report noted that at current prices, "the market value of the Fayetteville Shale production has been estimated at $300 billion over the 30-year life of all the fields. The present severance tax would generate about $120 million in revenue during this period; however, a market-based rate of 5% would raise nearly $15 billion during the same period. That money could then be used to remove the sales tax on electricity for families, among other things."

Arkansas' severance tax on gas is the lowest in the country.

"Unlike most states, which levy severance taxes based on market value, Arkansas' severance tax on natural gas is levied on the volume produced ($0.003/Mcf), a rate that has remained unchanged since 1957," noted the report. "At today's prices, the Arkansas severance tax on natural gas is equivalent to 0.04% of market value. That is only about 1/200th the amount of Texas, the highest state in the region at 7.5%."

According to HISTECON Associates Inc. and data from the Arkansas Department of Revenue (August 2006), producers in Texas pay $0.562/Mcf on the volume produced. County ad valorem taxes are the same in Arkansas and Texas, $0.50/Mcf. Total producer-paid taxes on gas production in Arkansas, which includes severance, conservation ($0.009/Mcf), county ad valorem and corporate income taxes, is $0.32/Mcf. In Texas, the total is $0.62/Mcf.

The group's report estimated that if Arkansas' severance tax was 5% of the market value of gas, the state would have collected $851.8 million in the past 25 years instead of the $12.7 million it actually collected in that time. At a 3% rate, the taxes would generate $4.5 billion over that period; at 4%, the taxes would generate $6 billion. In fiscal 2006, the state's severance tax on gas generated $552,861.

The chance of consumers "bearing the brunt of this increase is minimal," said the authors. "Natural gas markets are competitive and gas suppliers enter into long-term contracts with utilities at prevailing market rates, thus making it difficult for producers to pass tax increases on to consumers. In addition, the majority of major producers who would be affected are headquartered out of state."

The largest producer now operating in the Fayetteville Shale play is Southwestern Energy, and current production is about 85 MMcf/d. However, CEO Harold M. Korell said last month that the company's gross production from the Fayetteville play could reach 300 MMcf/d by the end of 2007 (see Daily GPI, Dec. 20, 2006).

According to the latest information from the Arkansas Oil & Gas Commission, XTO Energy Inc. is the state's leading gas producer, followed by Stephens Production Co., Southwestern, The Houston Exploration Co., Merit Energy Co., Hanna Oil & Gas, Sedna Energy Co., Chesapeake Operating Inc., Reliance Gas Co. and Ross Explorations Inc. All of the producers except Hanna are headquartered out-of-state.

The report responded to criticism that an increase in the severance tax would lead to job losses.

"A recent study by Wyoming economists found that an increase in severance taxes has little or no effect on jobs or production. This occurs for two basic reasons: state severance taxes are deductible from federal taxes, and severance taxes are only paid when the resource is actually produced. Producers drill where the gas is located, not where taxes are lowest."

The Arkansas Advocates group said Friday there are no plans to lobby for a severance tax increase this year. The report was issued to encourage a public debate, a spokesman said.

In a luncheon sponsored jointly by the Associated Press Managing Editors and the Society of Professional Journalists, Arkansas Gov.-elect Mike Beebe was quoted as saying, "As a practical matter, I don't think it's on the table as an option." He said that the state's Senate had voted for increases to the severance tax in 1983, but the bill never made it out of committee. And raising the tax would require a three-fourths vote by the state legislature. "I haven't seen any indication that it's likely to get done, and I've got a lot of other issues I want to do first," Beebe said.

The eight-page Arkansas Advocates report may be found at www.aradvocates.org/_images/pdfs/paycheck_webquality.pdf .

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