The severance tax aftermath | Arkansas Blog

Thursday, April 3, 2008

The severance tax aftermath

Posted By on Thu, Apr 3, 2008 at 5:51 PM

We can finally put months of severance tax obsession and speculation to bed, but perhaps it's worth one final look at what the bill will do and where it will fall short for some people. The terms and numbers are familiar by now. Every well in production will be assessed for the tax.  On 'high-cost' gas, which essentially means gas from the Fayetteville Shale play, the rate will be 1.5 percent for at least the first three years of a well. If gas companies have not recovered their investment on the well by the end of the fourth year, they can apply to have the 1.5 percent rate extended for a fourth. After that, the rate goes up to 5 percent until the well stops production. The tax will apply retroactively to wells that have already been built. 95 percent of the windfall goes to roads, the rest to general revenue.

One thing to keep in mind: Though the price of natural gas on the futures market is quite high (almost $10 on the NYMEX), the market price of gas -- and therefore severance tax revenue -- is not calculated solely based on that figure. According to yesterday's law, the market value of the gas is 'the producer's actual cash receipts from the sale of natural gas to the first purchaser,' less the cost of treatment and delivery costs. Gas producers sign contracts to deliver to companies like CenterPoint, and the money they make from that transaction is what's taxed. While the futures market is a good indication that their taxable revenue will be high, the NYMEX price is not the 'market value' as the law intends it.

It was above all a compromise bill. Some will undoubtedly be disappointed with the rate and consider it too low, just as some didn't want a tax at all.

Some will also be disappointed with its total lack of environmental provisions. A resolution that would have coordinated environmental oversight died in committee last month, and there wasn't time to revive it before the session. I'm not sure how much teeth it would have had -- it would not have had the force of law -- but it would have at least constituted some acknowledgment of the environment by the legislature. Rep. Betty Pickett, who sponsored the resolution, told me she recently discussed environmental issues with Governor Beebe and that they had had a good talk. We'll see if that translates into legislation next session.

There is little in the way of funding for the environment in the bill. At the signing ceremony yesterday, Governor Beebe said that of the five percent of severance tax revenues going to the general fund, some could go to the Department of Environmental Quality. The rest will go to fund special applications for roadwork and to pay back the general fund for the revenue it received from the old severance tax. Whatever is spent on the environment is sure to be little, a sliver of five percent.
Then there's the question of Sheffield Nelson and his incredible leverage of influence. Undoubtedly Nelson pushed the process forward, as Governor Beebe acknowledged multiple times. The greater question was whether there would have been a tax at all without Nelson's initiative. Rep. Robbie Wills, who will be House Speaker next year and who represents a district in the heart of the Fayetteville Shale, wasn't totally sure himself, although he seemed to be leaning toward a the position that this was an idea whose time had come. The drastic increase in Shale Drilling makes me also think that it was only a matter of time, but who knows. Maybe the anti-tax forces could have mustered forces with a little more preparation. (And they still may try to raise the issue in a future session.)

And don't forget the bottom line. Oklahoma and Texas have often been cited as benchmark states for Arkansas to follow in drafting a tax. Both states offer exemptions. Oklahoma's is total and for four years, after which the state charges producers a 7 percent rate; Texas offers a reduction that can last for up to ten years before a 7.5 percent rate kicks in. From those rates, Texas made nearly $1.9 billion last year, while Oklahoma made $643.4 million. Arkansas' severance tax is expected to bring about $57 million in 2009 and about  $100 million in 2013, according to numbers from the Governor's office. Both Texas and Oklahoma produce more gas than Arkansas does, and more, most likely, than it will in the future.

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