Louisiana lawmakers want to cut taxes for oil. They'd pay for it by upping taxes on natural gas.
Louisiana lawmakers want to cut taxes for oil. They'd pay for it by upping taxes on natural gas.
- BY BLAKE PATERSON | Staff writer nola.com
A package of bills aimed at boosting oil production and making Louisiana's tax code more competitive with those of neighboring states sailed through the Louisiana House Thursday. But the measures could face headwinds in the Senate, amid questions over their long-term impact on state coffers.
House Bill 600, sponsored by state Rep. Brett Geymann, a Republican from Lake Charles, would cut the severance tax rate on crude oil extracted from new wells nearly in half, reducing revenues by around $87 million over a five-year period, according to a legislative fiscal note.
To offset those losses, Geymann's House Bill 495 would limit a severance tax exemption for natural gas produced from horizontally drilled wells, resulting in $99 million in additional revenue during the same period, according to its fiscal note.
Taken together, the bills would mean slightly more tax money for Louisiana over the next five years. But long term, the changes would likely result in a net reduction of tax revenues, according to an economist who worked on the proposal and said the higher taxes on gas activity would not make up for the losses from oil drilling.
Reducing Louisiana's severance tax on oil has long been a priority of the business lobby, energy industry and Republican elected officials, including Gov. Jeff Landry and House Speaker Phillip DeVillier, R-Eunice. At 12.5%, it's the highest severance tax in the continental U.S. and hasn't changed since 1973.
Landry's transition committee argued that reducing the tax would "incentivize and amplify drilling in south Louisiana," and DeVillier sponsored bills each year from 2020-2023 that would've reduced the rate, though none became law.
During Landry's special tax session last fall, Republican state Rep. Neil Riser of Columbia again tried to reduce the tax with a 40-page bill that would have revised the tax rate for both crude oil and natural gas and the method for calculating their value and quantities. But the bill was eventually whittled down to two pages and, though enacted, made few changes to existing law.
After that fizzled, Landry, DeVillier and Geymann brought in Greg Upton, executive director of LSU's Center for Energy Studies, to help craft a simpler proposal that would be revenue-neutral over a five-year period, Upton said.
Finding the sweet spot
Supporters of the proposals argue that cutting the severance tax on oil to 6.5% will result in more oil production, particularly in south Louisiana.
“Getting the severance tax lowered on oil will bring some much-needed prosperity back to the coast,” state Rep. Jacob Landry, R-Erath, told lawmakers at a committee hearing Monday. Landry is the president of Industrial and Oilfield Services, Inc., an oil and gas construction firm.
"We’re looking at projects that are feasible now with the lower severance tax," he added.
Geymann said he hopes that the tax cut will spur enough new oil production to make up for the loss in revenue.
"In my thinking, if you incentivize an industry, and they have more production than they normally would, you would see an increase in revenue," he said.
But Upton said that's unlikely. While more wells would be drilled, Upton said he doesn't think it would be apple significant enough to offset the revenues lost from reducing the tax in the first place.
In long run, Upton said, the changes are likely to result in less revenue for Louisiana.
That’s because the severance tax reduction in HB600 is only for new oil wells, so as time progresses, more and more wells will be at the lower rate, resulting in fewer revenues over time, Upton said.
Meanwhile, the boost in revenue from limiting the tax exemption for natural gas will be felt more immediately. Louisiana currently exempts severance taxes on natural gas produced from new horizontal wells for the first 24 months of operation or until the cost of constructing the well is recuperated. HB495 reduces that to 18 months or until well payout is achieved.
The measure is also aimed at making Louisiana more competitive with its neighbors. The severance tax on oil is 4.6 percent in Texas and 5 percent in both Arkansas and Mississippi, though Texas and four other states also charge property taxes on oil and gas reserves in the ground, while Louisiana doesn’t.
Meanwhile, natural gas production in Louisiana is taxed at a relatively low rate. "It's just true that oil has a way higher tax burden than natural gas in Louisiana," Upton said.
Geymann said he's working with both oil and natural gas interests to make sure everybody is happy. "You don't want to hurt one to help the other," he said. "We're trying to find that sweet spot where everybody can win."
On the decline
The severance tax used to be a big generator of state revenues. In the 1970s, mineral revenues — which include severance, royalties, bonuses and rental payments — accounted for upwards of 40% of state revenues.
But oil production on state lands and water bottoms has been on the steady decline since the with-it oil bust in the 1980s. In fiscal year 2024, mineral revenues accounted for roughly 7% of state revenues.
The state severance tax doesn't apply to oil produced off-shore in federal waters, which has increased in recent years.
Local governments will be watching the tax changes closely. Twenty percent of severance tax collections, by law, go to parish governments, though the amount that's remitted to each local government is capped at around $1.3 million. Lowering the severance tax could mean less money for parishes that don't meet that cap.
Skip Peel - Mineral Consultant
Politics is always influenced by special interests. O&G in Louisiana is a highly influential special interest. For that reason, you will never, ever get the whole truth from the politicians that carry water for the industry in legislative sessions.
Here are some facts and my opinions.
The “economist” quoted in the fourth paragraph knows nothing about Louisiana oil production or is making a statement based on what he/she has been told. Based on yearly oil volumes reported to the state, total “state oil” will reach theoretical zero in about ten years. The productive life of the Haynesville Shale including the Mid Bossier production will be twenty to twenty-five years or longer. State oil will be long gone before state natural gas.
In paragraph five, although it is true that Louisiana has the highest oil severance tax, that is a misleading statement. The 12.5% tax is for oil wells defined as “capable” meaning they produce more than 25 barrels a day. Only 6.3% of Louisiana state oil wells are “capable”. An “incapable” oil well produces less than 25 barrels a day but more than 10 barrels a day. 13.7% of state oil wells are “incapable”. A “stripper” oil well produces less than ten barrels of oil a day. It should be noted that the vast majority of Louisiana stripper oil wells produce much less than 10 barrels a day. A good example is the Caddo Pine Island Field in north Caddo Parish where the average well produces about one fifth of a barrel a day. I’ll come back to the Caddo Pine Island Field in a later comment.
The claim in paragraph six that a reduced tax would “incentivize and amplify drilling in south Louisiana” is true to a modest extent. The truth is that drilling for oil in south Louisiana is less than modest and in steep decline just like all state oil production. The benefits would be negligible and benefit a very small handful of companies. Most likely the companies that make substantial contributions to the politicians pushing this legislation. A reduction in rate to 6.5% will have zero wide spread affect. And the claim that the rate would “bring much needed prosperity back to the coast” is a total exaggeration but not surprising coming from a legislator who is also “the president of Industrial and Oilfield Services Inc., an oil and gas construction firm.
The ”hope” that the tax cut will spur enough new oil production to make up for the lost revenue as stated by Geymann is an indication that he understands little about the state of oil production in Louisiana. And as Mr. Upton accurately states, “While more wells would be drilled” he doesn’t think they would be sufficiently significant to offset the revenues lost. Mr. Upton goes on to say the result will be less revenue for the state but that ignores the fact that the reduction in horizontal severance tax will more than make up what is lost in a reduction of oil severance tax. The reduction should not be from 24 months to 18 months. The horizontal well exemption should be reduced by half at least.
The O&G industry and their political allies love to trot out the comparison to Texas which is an apples to oranges comparison that defies the facts. Yes, Texas may have a 4.6% severance tax on oil but Texas produces about sixty-nine times the volume of Louisiana – 2,003,844,281 barrels to 30,383,589 barrels. Texas oil severance contributes to a much larger percent of state tax revenues. The 5% Arkansas oil severance tax is a misleading metric since Arkansas production is only about 16% of what Louisiana produces. These are junk statistics meant to provide a misleading opinion of Louisiana oil.
The current 7% percent that oil severance taxes contribute to Louisiana state revenue will soon be 5% or less and the reduction in the tax will do nothing significant to increase production although it will put more money in the pockets of a half dozen or less south Louisiana oil companies.
The Caddo Pine Island Field has been in production for over 110 years yet it was still ranked as the fifth largest producing field in 2024 out of 825 listed fields.
The O&G state database lists 825 Louisiana oil fields in 2024. Of those 7 reported negative production, 178 reported zero production, 109 reported less than 1000 barrels, 208 reported less than 10,000 barrels and only 3 fields reported production in excess of 1,000,000 barrels and not by much. That’s a field average of 2740 barrels a day. About what a handful of Permian Texas oil wells produce in a day. It is incredibly disingenuous to compare Louisiana oil to Texas.
https://www.dnr.louisiana.gov/assets/tad/data/severance/la_severanc...
PRODUCING WELL PROFILE, OIL WELLS, 2024
Production Bracket Number of Wells Annual Production
bbl/day No. bbls
>0 - 1 14,194 1,319,657
1 - 2 1,396 739,677
2 - 4 1,072 1,195,093
4 - 6 554 1,026,170
6 - 8 308 797,324
8 - 10 318 1,081,027
10 - 12 147 618,887
12 - 15 219 1,149,343
15 - 20 223 1,477,706
20 - 30 400 3,557,659
30 - 40 181 2,375,217
40 - 50 94 1,552,164
50 - 75 153 3,481,651
75 - 100 80 2,613,153
100 - 150 43 1,944,729
150 - 200 30 1,830,605
200 - 300 17 1,485,920
300 - 500 12 1,910,209
500 - 1000 0 227,398
1000 - 2000 0 0
2000 - 5000 0 0
>5000 0 0
Total Wells: 19,441 Total Annual Production: 30,383,589 barrels
The average Louisiana oil well produced 1,563 barrels a year, 4.3 barrels a day.
May 11
Steve P
The suggestion or implication by the bill’s authors is that there are significant untapped oil reserves in the State, but those reserves are “uneconomic” due to the high severance taxes. What do geologists say about the untapped oil reserves in Louisiana? In NW La, there are scattered shallow oil formations, but I doubt that a lowering of the oil severance taxes will substantially increase drilling.
I’m sure that if you asked those shallow oil exploration companies if they would drill more wells if the severance taxes were cut in half, would they say “oh, absolutely” because they have nothing to lose and the potential for increased margins on future wells they drilled. But, if the reserves aren’t there, then they aren’t going to drill. Period!
on Sunday