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Wednesday, June 13, 2012

New study on Arkansas's gas severance tax

Posted By on Wed, Jun 13, 2012 at 3:11 PM

Dr. Charles Venus releases his study on gas severance tax
  • Dr. Charles Venus releases his study on gas severance tax

The campaign to raise the natural gas severance tax has come up with its own analysis to counter recent studies funded by the Arkansas State Chamber of Commerce and Conway Chamber of Commerce on the positive impact of gas drilling in Arknasas.

Sheffield Nelson, who's leading the tax campaign, commissioned Dr. Charles Venus, who's been a member of the Governor’s Council of Economic Advisors and a tax advisor to Govs. Rockefeller and Bumpers, to do an analysis on the impact of the gas severance tax. Nelson is leading the a petition drive for a ballot measure to increase the severance tax to 7 percent. It's now capped at 5 percent, but can be much lower depending on the type of well that produces the gas.

Venus agreed to do the study for expenses only, about $3,000, which he primarily passed along to researchers. The University of Arkansas was paid $47,900 by the State Chamber for a report it did on the impact of gas exploration in Arkansas. The Conway Chamber of Commerce hasn't said what it paid for a Texas researcher's report on the impact of a tax increase.

Venus found that the economic impact of a 7 percent severance tax (either a 2 or 5.5 percent increase, depending on if you go with the limit on the books or what the average gas company actually pays), will raise Arkansas’s gas revenue from 2011’s $55.5 million to $209 million annually, about as much as major explorer Exxon Mobil makes worldwide in a day. Venus said the impact would be positive because the money would go to highway construction. It would create 6,200 direct highway jobs and 9,300 indirect and induced jobs. Nor should Arkansans’s gas bills increase, since our residential gas comes largely from Oklahoma and Louisiana.

In the past few years, natural gas prices have plummeted to about $2 per thousand cubic feet. According to Nelson, where it used to take 21 months or so to drill a single well, now a company can drill a well in three days. The U.S. has gone from a shortage, to a surplus, to a glut, and facilities that once imported gas are now transitioning to gas exportation. In 2010, which is the latest year for data are available, Arkansas produced 4 percent of the nation’s natural gas. Seventy-one percent of that gas is exported via pipeline to other states. Because the majority of Arkansas’s production is recent, the state is bound to old contracts with other states. This means that in Arkansas, producers extract gas at costs 17 percent under the national average, despite the fact that Arkansas residents pay 19 percent above the national average for gas.

Alaska has the highest severance tax, at 28 percent, followed by Montana at 12.16 percent and Alabama, at 10 percent. Among our neighbors, Texas’s tax is 7.5 percent, Oklahoma’s is 7.1 percent (and a raise is currently being considered) and Louisiana’s is 4.48 percent. Arkansas’s 1.5 percent puts it as fourth from the bottom, as far as state gas severance taxes go. In most states, as in Arkansas, a gas company is exempt from tax until it pays itself back for its well costs. Essentially, these companies only pay taxes after they begin making profit. (Nelson’s tax reform would force companies to pay tax from the beginning). In some cases, companies never pay full tax on certain wells because by the time infrastructure (wells) are paid for, they’ve been either drained or nearly drained. Low-producing wells are taxed below the state’s five percent.

In Arkansas, the top gas companies are BHP Billiton, Southwestern Energy, and Exxon Mobil – all of which are extremely profitable and none of which is based in-state. In 2011, Exxon Mobil made $41 billion and saw a 26.6 percent return on equity, which Venus compared to the less than 1 percent return most CD’s are currently earning. According to Venus, the Arkansas jobs created by these companies are temporary, and end when the drilling does. But, despite the fact that the state might actually benefit from a slow-down, to allow the glut to subside and prices to recover, he’s convinced that gas companies won’t leave the state even if Arkansas raises taxes. “If you were making 26 percent return on your investment, would the loss of one day’s profit stop you?” he asked.

Arkansas is an economically conservative state, and many voters are tax weary. But, according to Nelson, the $455 million in damage to state roads (not counting county and city roads) will have to be paid for eventually. The taxes are coming – it’s a matter of if they’re coming from Arkansas residents or out-of-state corporations.

Nelson is running a petition drive to get the severance tax increase on the ballot in November 2012. He says he's confident the measure will make the ballot, but the Arkansas Municipal League, which is helping gather signatures, has said the drive so far is short of the number of signatures needed. The petition needs almost 63,000 signatures to make the ballot. On July 6, the deadline, Nelson will release the number of signatures. The threshold must be met if canvassers are to get additional time for more signatures in the event some are struck. Both Nelson and Venus appear convinced that even if Arkansas increases its tax, and even as drilling increases in other states, Arkansas’s market share is firm. Nelson mentioned that companies have recently discovered that they overestimated the amount of gas in Pennsylvania and that legislators in Pennsylvania and New York are implementing environmental restrictions that will make it harder to drill in those states.

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