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There has been discussion of late in regard to the Legislative Fiscal Office statements that the State of Louisiana has seen a decrease in mineral income due to untaxed natural gas production in the Haynesville Shale. This could not be further from the truth.

Louisiana’s Severance Tax Relief Program allows the suspension of severance taxes due on production from a qualifying well for a variable time period depending on the category. Under the current program, wells that qualify under the “Horizontal well” and “Deep well” categories are eligible for a two year severance tax exemption or until payout of qualified costs, whichever comes first.

A chief economist with the state’s Legislative Fiscal Office claims that about 85 percent of a Haynesville wells’ total production is generated in the first six months and that the state would receive little or nothing in revenue due to the horizontal drilling incentive. Unfortunately, these numbers do not sync up with actual data.

To begin, production rates do decline rapidly in the Haynesville, however they do not decline at the rates suggested by the state’s economist. Petrohawk Energy, one of the top drillers in the Haynesville, noted in a detailed report that a typical Haynesville well will produce one-third of its total volume in the first year. That means that after two years, over 50 percent of the well’s reserves will be subject to taxation by the State.

The amount of severance tax dollars the state receives is dependent on the price of natural gas. However, the severance tax rate is set for the current year, based on the prior years average price. As the U.S. experienced record-high natural gas prices in 2008, this lead 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 years 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.

At an average of $10 million dollars per well, Haynesville Shale developments depend heavily on the horizontal drilling incentive. Another fact to consider is that current low natural gas prices and high oil prices have shifted competition from pure natural gas shale plays like the Haynesville to shale plays that contain both natural gas and oil such as the Eagle Ford, Niobrara, Anadarko Basin, and Bakken formation.

As the state begins to tighten its belt to alleviate the $1.6 billion budget shortfall, it’s imperative that we avoid policies that stand to harm sectors that truly generate investment, job creation, and revenue within the state. Repealing the severance tax incentive is a shortsighted policy approach that would do more damage to the state than good. The long-term effects of a repeal would bring about a decline in Haynesville Shale growth, and more importantly would chase away significant future tax revenue from the state.

Don Briggs is president of the Louisiana Oil & Gas Association.

Original Article