Executive Summary

Louisiana provides an incentive to exploration firms that use horizontal drilling to

extract oil and gas in the state. The horizontal well severance tax investment incentive

provides a reprieve from severance taxes for the first two years of production or until

revenues are enough to cover the cost of drilling the well, whichever comes first. In the

face of Louisiana's budget shortfall, some have recommended removing this incentive.

The following study will outline that a repeal of this incentive would actually cause

state revenues to decline, not increase. The following key points of this study highlight

why the retention of this investment incentive is important to the state of Louisiana and

the continued development of the Haynesville Shale:

• For every dollar the state gave up via the horizontal well severance tax

investment incentive it gained $2.94 in revenues to the State Treasury. Using the

Department of Revenue's Tax Exemption Budget data, we estimate that in 2010, the

state gave up $125.3 million, but it gained $367.7 million.

• The Haynesville Shale Play is one of many resource plays in the U.S. and Canada

competing for exploration activity and capital investment.

• Among the shale resource plays, the Haynesville Shale is:

          o One of the most expensive to drill at $9-$9.7 million per well

          o Produces only dry gas.

          o Has one of the lowest rates of return on investment (15.9%) of any of the

              shale plays

• The Haynesville Shale is already losing rig activity to other shale plays---the rig

count in that region has already declined from 137 to 115 February over February.

Removing the horizontal tax incentive would make the Haynesville Shale even

less competitive and hasten the exodus of exploration activity out of Northwest

Louisiana.

• Exploration companies have pumped huge amounts of money into Northwest

Louisiana. Over 2008-09, they spent over $11.4 billion. We estimate in 2009 alone,

this spending generated $573.5 million in revenues for the state treasury.

• A sensitivity analysis was conducted to determine what would happen to the state

budget if removing the horizontal incentive caused activity in the Haynesville Shale

to drop by 25% or 50%. For every year from 2012-14, the state treasury ended up

collecting less money from removing the incentive, not more.

Our survey of 7 firms that conduct over 85% of the exploration activity in the

Haynesville Shale reveal that only one firm ever operated in South Louisiana, and that

firm only drilled seven wells over 2000-10. A south-to-north shift was not the cause of the recent severance tax decline.

Link to complete report:  http://loga.la/incentive.pdf