Wednesday, 16 February 2011 16:49

Louisiana Should Not Be Chump State To Business

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 John Maginnis--Louisiana Politics  In the future, these times may be looked back upon as when the nation's domestic energy situation turned on a wellhead, and for the better.

   Through new discoveries and advanced exploration techniques, massive deposits of natural gas are being extracted from shale formations in north Louisiana, Texas, western states, even back east in Pennsylvania and New York. Cleaner burning natural gas, enough reserves to heat American homes for a century, could form the bridge from coal and oil to a future, still decades away, powered by alternative fuels.


    And for as long as oil is king, there now appears to be more of that around too from new plays in North Dakota, south Texas and, quite possibly, in central Louisiana's Tuscaloosa Shale, running from Avoyelles to Washington Parish. Given that we're not going to stop using oil any time soon, the more that's produced domestically the less dependent the country will be on foreign sources.

   That Louisiana has a piece of the pay dirt has been a boon to the economy in northwestern parishes, starting with the feeding frenzy of mineral rights leasing three years ago and evidenced by good-paying oilfield jobs, newer cars and nicer homes in hardscrabble rural areas, as well as bolstered sales tax and income tax collections. The possibility that even a fraction of that beneficence could soon spread through economically pressed communities like Marksville, Greensburg and Franklinton lifts hopes like only easy money can.

    Yet, while all this is going on, state severance tax collections are falling like a rock.

    Despite 800 wells in the Haynesville Shale and the most gas production since 1984, severance taxes will drop $42 million to about $700 million this fiscal year, and are headed for south of $600 million by 2013, according to state revenue projections.

    How is that possible? It's largely because in 1994 the state Legislature, to encourage a new exploration technology called horizontal drilling, granted a tax exemption on the first two years of production or until the well's expenses are recovered, whichever comes first.

   Instead of digging a shaft straight down and extracting the gas around the bottom,  the horizontal method drills down into a reservoir and then sends out spokes in each direction for thousands of feet. It's more expensive than a vertical well and environmentally riskier due to the chemicals injected, along with water and sand, to fracture the shale. But also horizontal drilling is now commonplace in Louisiana.

   The tax exemption cost the state $200 million in fiscal year 2010 when gas prices were high and still $100 million with much lower prices this year, according to legislative economist Greg Albrecht.

   The exemption would work better if the new wells went on producing for years like traditional ones. Instead, hitting a Haynesville well has been described as popping the cork on a champagne bottle-it fizzes quickly. About 85 percent of a well's production occurs within the first year by state estimates, though some industry studies cite a slower depletion rate.

   Yet critics of the exemption are short-sighted, say LSU economist Loren Scott and oil executives, pointing to Haynesville well costs that are 60 percent higher than shallower shale wells in Pennsylvania. With drilling rigs not that expensive to move, Scott argues that the tax exemption is keeping Haynesville in play and is generating sales taxes from exploration and income taxes on royalties and employment.

   Albrecht counters that it's not the tax break spurring production--16 cents per thousand cubic feet of gas, or about 4 percent of current $4 prices--but the near certainty of striking gas with every well.

   It's an argument with two sides that the Legislature ought to examine to determine if the exemption should be kept, rescinded or adjusted to, say, 50 percent or one year. But instead of being decided on its merits, the governor and lawmakers appear to want to avoid the subject altogether, preferring to deal with a $1.6 billion deficit with fiscal gimmicks and one-time money instead of reconsidering this exemption and others that may have out-lived their usefulness.

   This is not about burdening free enterprise with a new tax scheme. The severance tax is established policy in this state and every other blessed with finite mineral resources. It should be administered efficiently and wisely. To be friendly to business is one thing; to be the Chump State is quite another.

by John Maginnis

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