Severing the Fracking Tax Break
Should Louisiana repeal its 20-year-old severance tax exemption for horizontal wells? LSU economist Jim Richardson believes the time for that particular economic incentive has passed.
“In 1994, nobody knew how to do horizontal drilling. Today, everybody knows how to do horizontal drilling,” Richardson says of the tax break implemented to encourage what was then a new technology.
Louisiana Mid-Continent Oil and Gas Association president Chris John says the severance tax exemption for fracking wells keeps Louisiana in the shale production game.
“If it were to be repealed, I believe that would un-level the playing field that we have among other states,” John says.
Mississippi has a similar tax break in place. Texas does not.
In Louisiana, horizontal wells don’t pay severance tax for the first two years of production, or until the drilling company recoups the cost of the well — whichever comes first. John says while horizontal wells do pay off big when they hit, they are much more expensive to drill. And they have a shorter production life than vertical wells.
“The longevity of the recoverable natural resources is much shorter than a conventional well,” John says in justification of the severance tax exemption.
The wells are drilled at an angle to a depth of 12-15,000 feet, then are drilled horizontally through the brittle layered rock known as shale. Hydraulic fracturing (fracking) breaks the oil or gas out of the shale in a big burst. The well produces about half its total product in the first year, and in 3 to 5 years, the well is done. So when the wells are most profitable, the state doesn’t see a dime of severance tax.
“A couple of years ago, it cost us $250-million,” Richardson says, referring to the big fracking boom in northwest Louisiana’s Haynesville Shale.
Richardson says the severance tax exemption will cost the state far more when drilling begins in earnest in the Tuscaloosa Marine Shale. That massive oil deposit runs across the entire lower third of the state.
“They’re saying that you have almost nine billion barrels of oil there,” Richardson says of the geologists’ predictions.
And, he adds, the severance tax exemption will mean Louisiana won’t get revenue it desperately needs.
“You’re talking about six to seven billion dollars. You’re not talking about petty change.”
I agree that the severance tax is too high and should be lowered. I don't think that will happen with the money problems that the State has now or at any point in the future.
The problem, as I see it, is none of the people against the severance tax exemption are being forth right in the true benefits that the exemption brings to the State. What I think it comes down to is a way for the anti-fracking people to stop the development of shale drilling. If "John Q Public" can be convinced that the companies are getting away with not paying taxes then the shale drilling will stop because the exemption is killed. If no one explains this then the public will not know the true intent of the kill the exemption push.
Joe, I'm interested in a practical debate on how the state solves its revenue problem and how O&G revenues fit into that debate. I don't see this as a conspiracy to inhibit fracking. And I don't think that the number of "anti-fracking people" in LA is enough to be concerned with. As usual a few vocal activists garner an unwarranted amount of media attention and actually represent a very small segment of voters. The public debate will be largely among citizens and elected officials who generally support the industry and don't want to see any tax changes that reduce development. There should be absolutely no hesitancy however to reduce the severance tax if that revenue loss is off set by a tax on oil and gas produced outside of the state boundaries but transported and processed within the state.
I expect we'll see a lot of opinions about a wide range of "incentives" that have never been fully analyzed as to their cost/benefit reality. One of the first that the media has covered is the film tax credits. As much as we like having movies and television series shot in LA we may have to admit that the money spent is greater than the return realized. Everything should be on the table with the realization that we will be inundated with public relations efforts by every special interest that currently receives incentive support or may be the subject of new taxes.
That concept of taxing oil and gas that is transported through the State I think was shot down years ago. That would be clearly unconstitutional. I think the US Constitution clearly states that taxes or tariffs or Imposts or Duties cannot be enacted by any State on good imported or exported across State lines. That would inhibit the free flow of goods between States. That would inhibit commerce. The Constitution clearly states in Article I Section 10 Paragraph 2: "No State shall, without the consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it's inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the use of the Treasury of the United States ; and all such Laws shall be subject to the Revision and Controul of the Congress". A tax of that type is not going to happen. We've been there done that 40 years ago and it was shot down.
The very people that are pushing this Severance Tax repeal is the Green Crowd and their agenda is to stop fracking by any means. As for LSU losing funding from the State - I have no sympathy. They have set themselves up as an elitist university. If that's what they want then let the elite fund it. As we can see with the LSU Foundations and their shenanigans that is not happening.
State Senator Foster Campbell promoted a tax on transportation and processing 10 years or so ago. It wasn't unconstitutional then and I doubt it is now. It is being discussed by legislators as I post this response. I doubt that what is being contemplated is prohibited or it would not be under discussion. Its possible that the tax does not fall under the definition of duties or imposts. I don't think it is a "green conspiracy". I think it is one of a number of revenue measures that will be considered in this legislative session. The LSU economics professor didn't start this debate, merely comments on it.
SLS 15RS-175 ORIGINAL
2015 Regular Session
SENATE BILL NO. 15
BY SENATOR NEVERS AND REPRESENTATIVE RITCHIE
TAX/TAXATION. Constitutional amendment to levy a tax on the use of hydrocarbon
processing facilities and to dedicate the proceeds. (2/3 - CA13s1(A)) (1/1/16)
This legislation would be a nightmare to administer. Anyone down line from the first taxpayer could be considered libel for the tax at any point.
Also, they are dedicating fixed amounts (over 1 Billion dollars) to agencies with a guarantee that the legislature will continue to support the agencies at the current rate. The Act clearly states that if any part of the Act fails then the rest of the Act stands. So if the collection of the Tax is stricken down the appropriation stands. This is very dangerous. Where would the State get this money to fund these agencies at this level?
You're opinion noted, Joe, I think it will be an interesting debate. How much debate it prompts will be one indicator of just how dire legislators consider the state's financial plight. There are few options to raise the kind of revenue that is required to avoid deep cuts to critical services. I think it's a good time to consider that the energy industry has changed materially and that the existing tax structure is no longer a good fit.
I think a "practical debate how how the state solves its revenue problem. . ." in which "everything should be on the table . . ." ought to involve a careful consideration of the Stelly Plan. The Baton Rouge Advocate called the elimination of the Stelly Plan "Jindal's original sin." The State of Louisiana would get a larger share of my declining royalty income but that tax cost would be somewhat offset by lower sales taxes. Such tax restructure would greatly benefit the middle and lower income earners in Louisiana. I know such will not happen under the current administration but I hope that in some future circumstance the voting public of Louisiana will seriously consider so doing.
cocodrie man, I agree. The Stelly Plan was a reasonable trade off and was debated quite thoroughly before passage. The later revision of the law was a mistake IMO. When the state was flush with federal funds after the hurricanes too many legislators gave into the temptation to cut taxes. Sounds good at the time. Looks like a big mistake later when times get lean and revenue falls short of covering basic services.