Commentary

The Industry Doth Protest Too Much

By Joyce Hale |

Taxpayers throughout the state are on the hook for damage done to highways from thousands of trucks drilling and servicing gas wells.

A severance tax is imposed on the removal of nonrenewable mineral resources. It is charged to producers and those with a working or royalty interest.

Mineral removal ultimately leaves a region poorer, so the tax, is in essence, an impact fee. Since the average person is unfamiliar with this tax, those who benefit by keeping it low, mislead consumers when saying an increase would drive up energy costs for heating and cooling.

The truth is pricing for the gas we use is regionally determined when a convergence of pipelines from producing states is combined and priced to meet the average costs the various producers experience.

Erath, La., is a small town and junction point for pipelines known as the Henry Hub. This is the pricing point for contracts traded on the New York Mercantile Exchange and owned by Sabine Pipeline LLC. From there, the gas interconnects with many interstate and intrastate pipelines.

When calculating costs, it is assumed producers will be expected to pay a severance tax, so this is already part of the allowance considered in hub pricing. Raising Arkansas’ severance tax comparable to other states in the region will simply align severance taxes in the Fayetteville Shale play with what neighboring states are already collecting.

Jobs will continue regardless of the severance tax for numerous reasons. Undeveloped leases must be developed to keep them from expiring.

The last thing a company wants is to renegotiate an expired lease once mineral owners are savvy about values and protections they wished had been included in earlier contracts. Many Fayetteville Shale leases are reaching maturity and must be developed even while current pricing is on a downward trend.

Extremely large companies with foreign ownership now control a high percentage of the gas leases in Arkansas. Their multibillion dollar purchases were made from very deep pockets with the long view in mind. They are capitalized sufficiently to withstand the current market decline, knowing it will eventually return as soon as the glut from overproduction is gone and demand returns. An increase in the severance tax would not be a game changer for the likes of these giants, BHP Billiton (Australia) and British Petroleum.

With only $54.9 million received last year in natural gas severance to offset $454 million in drillers’ highway damage, it is time to fit the tax to the situation. The initiative petition proposes a straight 7 percent wellhead tax with none of the current exemptions. More information can be seen online by searching Committee-for-a-Fair-Severance-Tax. This additional revenue will create jobs since the primary purpose is for repairs to highways, streets and roads. Obtaining more than 62,500 petition signatures is required to give the public their one chance to say who they want to pay for the drilling industry’s road damage.

 

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