Arkansas Blog

I'm sure that, by now, AT bloggers are tired of seeing my rants about the gas severance tax. This is the last opportunity for a realistic tax, but we have an industry-sponsored sell-out waiting for the rubber stamp of legislative cowards. As soon as the Governor's ink dries on the imitation increase, people will begin to realize that Arkansas has been duped. But the wind will have been taken out of the sails for the effort to pass an honest severance tax.

The industry loves to trot out Ma and Pa landowners to weep about how unfair a severance tax is, but don't want us to know how the companies cheat people out of their mineral rights and their share of royalties. They crow about the jobs created, but they don't say how folks are going to be able to pay for the infrastructure and environmental damage for the decades after the gas and the jobs disappear.

The companies are happy about the complicated exemptions they'll be getting, knowing that the state will have to trust the companies' figures. During the next session, though, the companies will complain that the scheme they devised is so complicated that they'll have to get a rebate of their taxes to maintain the paperwork.

With the exemptions, grace periods, arbitrary definitions, and the financial skullduggery to reduce their other tax obligations, such as income taxes, the real increase in state revenue may actually be inconsequential.

Fifty years after the Stephens' gas cabal graciously permitted Arkansas to raise its ghost of a severance tax up to a pittance, we are eagerly congratulating ourselves for being taken as fools again. When the gas is gone, we'll have little of value to pass on to the next generation in Arkansas other than another painful lesson learned.

"When the gas is gone, we'll have little of value to pass on to the next generation"

Well, seein as how I don't own any land under which there is gas, I can't imagine what value I would pass on to my heirs. I have a feeling most of those chiming in don't own land in the area either.

"I'm sure that, by now, AT bloggers are tired of seeing my rants about the gas severance tax. "

You finally got one right!

Thanks, Jim. We hear you, those of us with our eyes and ears open, that is.

To add some statistics from the Governor's great "5% tax deal" that is greased in the capitol this week:

The shale wells are taxed at 1.5% for the first three years of production. That applies to existing shale wells from the time they began producing, but still the 1.5% begins only on January 1, 2009. Then, if the rig has not paid for its own setup, drilling and operation after three years, which is the so-called “payout” point, there is an extension of the 1.5% until it does "payout". If another year goes by and Chesapeake still hasn't made all their money back and then some, the well will finally be taxed at 5%. But wait, that is only if it still produces more than 100 Mcf per day. So if a well isn't still scoring at least around a thousand bucks a day for Chesapeake, it will go into a 1.25% tax instead of the 5%.

Considering Rod Bryan collected 12,000 signatures personally, I figure a few dozen dedicated soldiers could revive Nelson's fair 7% tax for the ballot. It seems to me that the only reason the wind is out of the sails for that ballot initiative is that most people heard 5% and thought it was good enough. Maybe that is why Beebe didn't mention any "one point fives" in his announcement.

Thanks for that info, newamerica. When I heard how quickly the gas companies agreed to Beebe's proposal, I wondered what part of the farm he was giving away in the devil-borne details. It wasn't until a KUAR report this morning that I heard of "exceptions" to the 5% rule, but I had assumed they were there in one form or another. Incidentally, hickintheheights, I AM an owner of land and mineral rights, yet I am still leery of the gas boys and the deal they've struck-- especially so, I might say. Moreover, I think the public at-large should be concerned about the effect of these operations on 1) our roads (I've seen them torn all t' hell by the gas rigs in White County) and 2) our natural environment. Regarding the latter, gas extraction from shale uses huge amounts of water and creates some pretty awful wastewater, contaminated with salts and heavy metals. Litigation continues on the Grand Prairie Irrigation project, demonstrating how precious our underground watertables are becoming (easy to forget in the face of the recent rainfall records we've seen). Is there a chance that extraction of natural gas is going to further endanger that nearly irreplaceable resource, as well? (no pun intended)

I wondered how likely it is that a given well will reach 100 MCF/day (see posting by 'newamerica' above). In northern Faulkner County, they seem to be drilling wells about 250 feet apart. That is, the gas companies may shrewdly get around the tax by just tapping each gas pool with multiple wells, spreading the yield to under 100 MCF/day/well. Some info I found in an online article suggests that this would be quite feasible:

"Of particular interest are the rate classes of wells that produce gas in Oklahoma. The Energy Information Administration (EIA) of the U.S. Department of Energy has classified the Oklahoma gas wells producing in 1999 by average production rate (Fig. 14), showing that 97% of the wells produced less than 800 MCF per day. In fact, about two thirds of the gas wells active in 1999 produced less than 100 MCF per day (Hinton, 2001)." [Boyd, D.T., Oklahoma Geology Notes . v. 62, no. 4 . Winter 2002]

And that's for conventional wells-- I would imagine that shale fracking produces smaller average yields than a conventional gas well, no?

If you want it, the Hinton (2001) citation is here:

Hinton, David (ed.), 2001, Petroleum profile: Oklahoma: U.S. Department of Energy, Energy Information Administration, Web site: http://tonto.eia.doe.gov/oog/info/state/ok.htm

Yep, wells in the Antrim Shale (Michigan) produce, ON AVERAGE, about 150 MCF/day AT THEIR PEAK (!) (which follows six to 12 months of dewatering). This means that the vast majority of wells in the Antrim Shale are producing under 100 MCF/day. Can we expect the Fayetteville Play to be different?

SOURCE: Schlumberger, 2005; http://www.oilandgasinvestor.com/pdf/ShaleGas.pdf

OK Jim, I'm befuddled. Who will ultimately pay this tax. The gas companies or the mineral rights holders?