Incentive encourages gas drilling
By TED GRIGGS
Eliminating a tax break for horizontal drilling could cost the Louisiana millions of dollars in revenue rather than increase the severance taxes collected from wells in the Haynesville Shale, according to an industry-funded study.
“What my work shows is that the benefits to the state treasury from this economic activity swamp the cost to the state of having the exemption in place,” said economist Loren Scott, author of the study for the Louisi-ana Oil and Gas Association.
A state law exempts horizontally drilled wells from severance taxes until the drilling company recovers the cost of a well or for two years, whichever happens faster. The state Legislative Fiscal Office and Department of Revenue have estimated that the state has missed out on more than $200 million in severance taxes in the past three years.
In 2010, that meant Louisiana didn’t collect an estimated $125.3 million in severance taxes, Scott said. But the state gained $367.7 million in revenue through the incentive program. That works out to a gain of nearly $3 in revenue for every dollar given up through the tax break.
From 2008-09, exploration and production companies pumped $11.4 billion into northwest Louisiana’s economy, he said.
Scott said one might argue that the state could collect the severance taxes and the other revenue, but the reality is that the Haynesville Shale, and Louisiana, must compete with other shale formations.
And the Haynesville has a few features that make it less attractive than other shale formations, Scott said, including:
n It has higher drilling costs, $9 million to $9.7 million per well compared with around $6 million elsewhere.
n Wells produce only natural gas, which makes them less lucrative than formations that produce oil and gas.
n Wells have one of the lowest rates of return on investment, 15.9 percent, less than half the return on wells in the Eagle Ford and Marcellus formations in Texas and Pennsylvania.
Other formations are already attracting drilling rigs from the Haynesville, Scott said. On Feb. 26, 2010, the rig count in north Louisiana was 137; a year later, that number was 112.
Eliminating the tax break would speed up the migration of rigs elsewhere, he said.
Eddie Ashworth, director of the Louisiana Budget Project, said oil companies drill where there is oil and gas, not because of tax breaks.
“You can have the greatest tax incentive program in Hawaii, and there’s not going to be a single oil company that’s going to go over there and drill wells because there’s no oil and gas over there,” Ashworth said.
The Haynesville was, at the time of its discovery, the largest gas play in the country’s history, Ashworth said. Even though other shale formations have higher rates of return, the Haynesville remains “a very, very attractive play.”
“You know that because what the oil companies are willing to pay for drilling rights,” Ashworth said.
Before the Haynesville, mineral leases in the area ran around $100 to $150 an acre for the first year, he said. Once the shale was active, the payments soared to $26,000 an acre, and that had nothing to do with the incentive program. The prices were based on the huge amounts of natural gas and low drilling risk, he said.
Although legislators have said there is little chance the tax break would be repealed, and Gov. Bobby Jindal has said there is no chance he would sign any law changing the exemption, the state’s oil and gas industry remains nervous.
Randy Haynie, an industry lobbyist, said the worry is that the Legislature, facing a $1.6 billion shortfall, will seize upon the exemption as an opportunity to pick up $90 million in one chunk without considering the bigger picture — a drop in activity in the Haynesville and lower overall revenue for the state.