REVENUE LOST: (LOUISIANA) SEVERANCE TAX GIVES PRODUCERS BIG BREAK
Ken Stickney, kstickney@gannett.com 4:16 p.m. CDT August 24, 2015 theadvertiser.com
The state of Louisiana may have missed out on some $1.1 billion in severance tax collections over the last five years due to a continuing state exemption that provides horizontal well operators substantial breaks or, in some cases, what amounts to a free pass.
Legislative Auditor Daryl Purpera released a report Monday evaluating the effect of the severance tax suspension during the years of 2010-2014, determining that the tax suspension has resulted in “significant revenue loss for the state.” That loss includes $1,106,318,092 in lost severance taxes on natural gas and $42,260,789 in lost taxes on oil, the report said.
“That’s quite a bit of money, $200 million a year we could use in other ways,” Purpera said in a Monday telephone interview. He said the study was done to provide information to the Legislature.
Despite the exemption, the state still gets substantial revenue from oil and gas producers. Louisiana imposes a relatively high severance tax rate of 12.5 percent of the value of oil produced and 16 cents per 1,000 cubic feet of gas. During fiscal years 2012 through 2014, the study said, the state received about $2.4 billion in severance tax revenue from oil and gas production.
The study notes that the severance tax suspension began in 1994 as the state tried to encourage development of horizontal wells. The tax suspensions run for the first 24 months of production — what has become the most productive period for the wells.
Since the exemption was implemented, the state has certified 3,025 wells as horizontal and worthy of exemption, most of those in the Haynesville Shale in northwestern Louisiana. But the report suggests that producers may no longer need incentives to drill horizontal wells — the technology is recognized as productive and producers are using it. Since 2007, the number of horizontal wells certified by the state has increased 600 percent, with huge increases in 2010-2012.
In a 2015 study of state taxes, “Louisiana Tax Study, 2015,” experts suggested to the Legislature that it eliminate the severance tax exemption. Of 13 leading states for oil and gas production, Louisiana is the lone state to provide such an exemption, the auditor’s report said.
“The 1994 law was put into effect to give incentives. But nowadays horizontal drilling is active; we need to look back to see if we still need to incentivize,” Purpera said.
Of particular concern in the revenue discussion were wells drilled for natural gas production. The report said because production wanes after the first two years, or even ends before two years pass, some well operators may never pay severance taxes on their well.
The Revenue Department analyzed 50 horizontal wells and found that, in general, production was halved by the end of the first year and reduced 69 percent by the end of the sixth quarter, significantly reducing the amount of severance taxes that would eventually be collected.
The report also notes that the Legislature in 2015 passed a bill, House Bill 549, that imposes a tiered severance tax exemption based on the price of oil and gas. But the benchmarks for applying the severance tax — oil must be reach the market rate of at least $70 a barrel, gas must be priced at at least $4.50 per million BTU — are substantially higher than the current price.
The Legislative Fiscal Office has said very little revenue could be generated by the bill for several years.
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Replies to This Discussion
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Permalink Reply by Bgn64 on -
So help me understand this. If the operators are not paying the severance taxes for the first 2 years, then why do I have 4 wells under production for about a year and a half in which I have severance tax deducted every month? I'm in Lincoln parish if that matters.
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Permalink Reply by Skip Peel - Mineral Consultant on
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First you have to check to see if the operator of your wells applied for tax relief under one of the two rebate programs for your particular wells. The program is not location specific. So ask your operator by way of your customer service representative. If they have not applied or their application has not yet been processed/approved then they are paying the severance tax, and thereby so would you. If they are granted an exemption in the future and get a rebate, then you should also receive any back taxes you paid.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Tell me the well(s) and I'll tell you if an approved application is entered in the database.
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Permalink Reply by Skip Peel - Mineral Consultant on
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No, HC5. Yes, HC1-4. I suggest you send MRD customer service an email with a request for a prompt refund of the taxes paid on your portion of production. Use these links:
http://ucmwww.dnr.state.la.us/ucmsearch/UCMRedir.aspx?url=http%3a%2...
http://ucmwww.dnr.state.la.us/ucmsearch/UCMRedir.aspx?url=http%3a%2...
http://ucmwww.dnr.state.la.us/ucmsearch/UCMRedir.aspx?url=http%3a%2...
http://ucmwww.dnr.state.la.us/ucmsearch/UCMRedir.aspx?url=http%3a%2...
HORIZONTAL WELL REQUIREMENTS
- Form STRP-HW (.pdf or .xls)
- Detailed Itemized Well Cost Statement
- Form WH-1
- Directional Survey
- First production must commence after July 31, 1994.
- Well must be horizontally drilled or recompleted with 80° deviation from the vertical and at least a 50 foot penetration into the sand.
Note: Horizontal recompletions are defined as horizontal drilling in an existing well bore. Horizontal recompletion costs are limited to only those costs associated with the horizontal portion of the well bore. Extensions of existing horizontal well bores, in the same sand, are not considered horizontal recompletions.
**Eligible for a two year exemption from the date of first production or until payout of qualified costs, whichever comes first.
http://dnr.louisiana.gov/index.cfm?md=pagebuilder&tmp=home&...
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Permalink Reply by Skip Peel - Mineral Consultant on
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Let's us know what they have to say. We may need to start a separate thread on this subject in the Lincoln Parish Group.
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Permalink Reply by Bgn64 on
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Thanks so much for posting this article Skip but what it fails to mention(at least according to MRD) is that the severance tax is suspended for the first two years of production or until the well is paid out. The wells in question were paid out in 3-6 months so that is why I'm nowpaying the severance tax even though the wells have been producing less than 2 years.
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Permalink Reply by Skip Peel - Mineral Consultant on
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The lost state revenue is the same whether the severance tax abatement is 90 days or 730 days. Of course it's great for operators and royalty interests for the term to be a short as possible as that indicates very good well economics. Congratulations. We should all be so fortunate to pay that tax.
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Permalink Reply by Bgn64 on
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Right you are. I don't mind paying my fair share of taxes but was at first concerned that the tax was wrongfully being collected from me but that was not the case. I feel that Wildhorse and now MRD are both competent and fair companies and as a land/mineral owner feel that I have been treated fairly.
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