The Gas Play (Commentary)

When activity in the Fayetteville Shale Play escalated, estimates for its positive impact on Arkansas were astounding.

Jobs, wealth, economic growth in otherwise stagnant counties and increased tax revenues were all seen as positive attributes. A 2008 study by the University of Arkansas, commissioned by natural gas firms, estimated an $18 billion economic impact.

At the urging of former natural gas executive Sheffield Nelson, Gov. Beebe and the Legislature raised the long-stagnant severance tax rate on natural gas to ensure the state was benefiting from the drilling in a more direct way. Those additional dollars are being spent on highways.

The most critical detail for the Fayetteville Shale Play to deliver the highest level of benefits for everyone directly impacted was a continued high price for natural gas. The price peaked at about $11 per thousand cubic feet in 2008, but has been down to the $3 range recently. In 2007, executives said costly drilling methods required a price level of at least $6 to be viable.

Now we have one of the largest players, Chesapeake Energy Corp., ready to sell its assets in Arkansas. Nelson wants a ballot initiative that would raise the severance tax to 7 percent while closing loopholes to raise more money for highways. Royalty payments and drilling activity levels have plummeted. Add to all that the glut of natural gas from shale developments across the country, and the $18 billion glow is much dimmer than expected.

Chesapeake’s announcement wasn’t stunning, considering the financial challenges it has faced. The positive spin is Fayetteville Shale is valuable and its assets could be sold for a premium price. The negative spin is Chesapeake is more bullish on its other natural gas properties.

Meanwhile, Southwestern Energy Co. has opened $25 million offices in Conway, which indicates a long-term commitment. Southwestern moved its corporate offices from Fayetteville to Houston years ago, but its investment has been substantial.

The initial wealth created by the Fayetteville Shale Play was substantial and had the potential to positively impact Arkansas families for generations. Those who were conservative with their newfound riches will be fine, and those who spent wildly may be wishing they hadn’t.

However, I think history will show the overall economic impact of the natural gas industry helped Arkansas survive the recession. The jobs and income generated provided an enormous boost to the state and local communities.

Nelson’s obsession with increasing the severance tax remains fascinating. It’s not something he would have advocated while he was CEO of Arkansas Louisiana Gas Co. His fallout with the Stephens family, which has massive natural gas holdings in the state, continues to play out with these kinds of proposals. The messages of Arkansas’ severance tax being too low and needing more revenue for highways provide easy, reasonable cover for his underlying obsession. 

Jeff Hankins can be reached at [email protected].