Shale Daily / NGI All News Access

Louisiana: Drillers Going Where the Taxes Aren't

Producers active in Louisiana -- where they enjoy an exemption from state severance taxes on production from horizontal wells -- are increasingly eschewing conventional drilling to take advantage of the tax break, and that's showing up in state revenue figures, according to a recent forecast from the state's Legislative Fiscal Office. However, industry advocates advise: look at all the other taxes producers are paying.

"...[I]t appears that development of the Haynesville Shale has effectively diverted other severance-taxable production, resulting in net losses of direct mineral revenue to the state," wrote the state's chief economist, Greg Albrecht. "While the Haynesville Shale has been responsible for an 88% increase in total state gas production since FY07 [fiscal year 2007], gas production exclusive of Haynesville has dropped by over 28%."

The tax break gives producers 100% relief from severance taxes on production from horizontal wells until the well cost is paid out by production or 24 months, whichever comes first. The state's producers and their friends, including Gov. Bobby Jindal, last year avoided repeal of the severance tax exemption (see Shale Daily, March 30, 2011), which one industry-funded study found generates $2.94 for every dollar it gives up in severance tax revenue (see Shale Daily, March 25, 2011).

In a revenue forecast issued last month, the Legislative Fiscal Office said that since October 2009 "much larger than usual severance tax refunds have been made [to producers] almost every month." The refunds "jumped even more" in the second and third quarters of 2011, to nearly $31 million and $57 million, respectively. Refunds were nearly $28 million last October and nearly $20 million in November, the office said. From the fourth quarter of 2009 to the first quarter of last year refunds averaged $24 million per quarter.

"Exacerbating the effects of exempt production is an apparent absolute loss of baseline natural gas production subject to the severance tax," the Fiscal Office said.

In a rebuttal to an editorial in The Advocate newspaper of Baton Rouge, LA, Louisiana Oil & Gas Association President Don Briggs criticized the Field Office findings and the paper's characterization that the Haynesville has been "a bust" for the state.

"To say that the Haynesville Shale has been a bust is a far exaggeration of the truth," Briggs wrote. "The article's shortsighted focus on severance tax revenue does not pay credence to the larger, macro-level impact that the Haynesville has had on our state. Natural gas extraction operations in the Haynesville generated over $40 billion in direct and indirect economic growth between 2008 and 2010. Over that time period, the Haynesville Shale has supported over 100,000 jobs and provided Louisiana with nearly $1.3 billion in local and state tax revenue. The state receives tax revenue in the form of corporate taxes, sales taxes, ad valorem taxes and personal income taxes."

Also weighing in was the author of last year's study supporting the severance tax exemption, Loren Scott of Loren C. Scott & Associates. "Actually, our work suggests that revenues to the state coffers would actually DECLINE if this incentive was repealed," he wrote in The Advocate. "Your editorials focused only on the severance tax effect on the budget, not the total effect. Our analysis estimates that in 2010 the state gave up $125.3 million in severance taxes but gained $367.7 million in other taxes due to income, sales, gasoline and other taxes collected on the massive economic activity the Haynesville brought to Louisiana."

Briggs told NGI's Shale Daily that the Field Office findings and newspaper's editorial could be the rattlings of another run at repealing the severance tax exemption during the state's upcoming legislative session, which begins in March.

According to NGI's Shale Daily Unconventional Rig Count, the Haynesville/Bossier has seen a 38% decline in rig count from a year ago with 97 active rigs reported as of last week.

While production from the Haynesville has pulled up the state's total gas production by 88% since FY 2007, non-Haynesville production has fallen 28% since that time, the Fiscal Office said. "Thus, the state's revenue base not only forgoes unanticipated revenue from the Haynesville production itself, but also is experiencing an unanticipated reduction in baseline production and revenue from non-Haynesville activity. This unanticipated production loss has been getting larger over time."

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