They come from opposing sides of Arkansas’ political divide and have different ideas about where the proceeds should be spent, but Gov. Mike Beebe, a Democrat, and Sheffield Nelson, a former Republican candidate for governor, agree that the state’s severance tax on natural gas production needs to be raised.

In recent days Beebe has said the Arkansas General Assembly should consider legislation that would raise the state’s severance tax, currently one of the lowest in the country, with the revenue going toward road improvements in areas damaged by gas industry-related trucks and other equipment. Beebe said 70% of the money should go to the state and the remaining 30% split between cities and counties. That formula is already used to disburse money raised through the state’s tax on gasoline.

Nelson, a former CEO of Arkla Inc., the states’ largest gas company, has said that he will lead an effort to put an initiated act before voters in 2008 calling for an increase in the state’s severance tax on natural gas. Local newspapers in Arkansas reported that Nelson said the severance tax should set at 7% of the gross price, the same as that charged by Oklahoma. The resulting revenue — estimated at more than $50 million annually — should be spent primarily on higher education, Nelson said.

The promise of increasing production from the Fayetteville Shale in northern Arkansas has prompted the state’s government and others to look for a method to gather more dollars for Arkansas residents. Since 1957, Arkansas’ severance tax on natural gas has been 3 cents/Mcf. In fiscal 2006, the state’s severance tax on gas generated $552,861. Producers in the state also pay ad valorem taxes at 50 cents/Mcf and conservation taxes at 0.9 cent/Mcf. Most of the natural gas produced in Arkansas is shipped out of state.

While a super-majority consisting of 75% of legislators in the Arkansas General Assembly would have to vote in favor of legislation to raise the severance tax, only a simple majority of voters would be needed to approve an initiated act on the 2008 ballot. The Arkansas Senate voted for increases to the severance tax in 1983, but the bill went no further, dying in committee.

In January, two advocacy groups issued separate reports calling for an increase to the state’s severance tax (see NGI, Jan. 8). Arkansas Advocates for Children and Families said it wanted the severance tax changed to create an Arkansas Higher Education Trust Fund, while a second group called for a market-based increase and said the money could be used to remove the sales tax on electricity for families, among other things.

According to the latest information from the Arkansas Oil & Gas Commission, nearly 60.8 Tcf was produced in the Fayetteville play through Aug. 3. In its most recent quarterly earnings presentation, Southwestern Energy, the largest producer now operating in the play, reported a 56% gain in output from Fayetteville, where it produced 14.7 Bcf, up from 10.7 Bcf in 2Q2007 and 3.8 Bcf in 3Q2006 (see NGI, Nov. 5). The company said it expects Fayetteville Shale production for the full year to be approximately 51 Bcf.

A temporary tax on natural gas production to help localities pay for road projects had been under consideration since Beebe came into office at the beginning of the year. Beebe has said such a temporary tax may also be put before the state legislature when it convenes in Little Rock in 2009.

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