Nat Gas Exec: Raising Severance Tax Is ‘the Wrong Thing For Arkansas’

Southwestern Energy Executive Vice-president and General Counsel Mark Boling says his greatest concern in Arkansas isn’t tougher regulation. It’s a higher cost of doing business.

"The attempt to increase the severance tax at this time – which is a very, very difficult time for folks in the natural gas industry – is going to make it even more difficult for us to continue with the development plans we have," Boling told Talk Business on Thursday.

The largest stakeholder in Arkansas’ Fayetteville Shale play, Houston-based Southwestern Energy represents an industry under fire in Arkansas on a number of fronts: political, environmental and economic.

On Friday, HB 1992 is expected to be heard in the House Insurance and Commerce Committee. The bill purports to eliminate a lower severance tax rate for "high-cost gas wells," which Southwestern’s hydraulic fracturing processes qualify. With the Henry Hub spot price for natural gas hovering around $3.90/btu, the natural gas industry is working in a much different economic environment than in 2008 when it negotiated paying a higher severance tax in Arkansas, Boling said.

"It’s a different environment and everyone needs to realize that," said Boling, who notes that spot prices were in the $7 to $8 range at the time. "The more and more we make it difficult to be competitive there, then that just drives the decision and they have to be purely economic ones."

In addition to HB 1992, the Arkansas Legislature is considering roughly two dozen other bills that could impact the natural gas industry. Not all are bad for the industry and not all – even tougher environmental disclosure requirements – are opposed by Southwestern.

"I think the legislation that has been proposed is not all that surprising," Boling said. He contends that Southwestern is supportive of several efforts to disclose fracking fluids and reduce noise levels in operations.

A potential citizen-led initiative to raise the severance tax on natural gas to a flat 7% could be on the ballot in November 2012 if former natural gas company executive Sheffield Nelson is successful with his efforts. Boling says that effort poses a greater threat to investments in Arkansas by Southwestern and its peers.

"I think it is absolutely the wrong thing for Arkansas, a wrong thing for the economy," said Boling. He disagrees with Nelson’s assumptions that Arkansas is far behind surrounding states with severance tax rates. Boling argues that Nelson isn’t accounting for exemptions and exceptions for high-cost wells in those states.

"The natural gas industry has undergone a paradigm shift," he said in reference to the falling natural gas prices. "If the proposal that Mr. Nelson says he’s going to put on the ballot succeeds, it would have a dramatically negative effect on Arkansas and the natural gas industry in Arkansas."

EARTHQUAKE ACTIVITY
The industry is also on the hot seat in Arkansas for potential ties to earthquake activity in the Fayetteville Shale play.

State regulators are studying the natural gas industry’s drilling and water injection processes in Arkansas, which some suggest may be triggering recent swarms of earthquake activity in north central Arkansas. Boling says that the quake activity shouldn’t have anything to do with drilling or hydraulic fracturing. He says they take place in shallow land formations and use little energy.

But Boling admits that the salt-water injection of waste fluids into the earth could be a cause of the earthquakes. He’s in favor of the moratorium efforts being conducted by the Arkansas Geological Survey office and the Arkansas Oil and Gas Commission to address concerns.

"There is some science to support the theory that deep salt water injections, especially in the areas where there is faulting, can induce – they call it ‘induced seismicity’ – it can induce the faults to move because the natural tectonic stresses are being modified by the injection of the water," said Boling.

"I think it is a prudent course of action to make sure that’s not being the case because it could very well be. And the last thing that anybody wants to do is to be injecting water into an area that could generate seismic activity above and beyond what is normal in the area," he added.

No disposal sites associated with Southwestern Energy are under the Oil and Gas Commission moratorium review.

DIVERSIFICATION
Southwestern has seen some of its competitors – including Chesapeake Energy, XTO Energy and Petrohawk – gobbled up by multi-national, diversified oil and gas firms. ExxonMobil bought XTO’s and Petrohawk’s Arkansas assets in 2010. Last month, Australian-based BHP Billiton struck a $5 billion deal to buy Chesapeake’s Arkansas shale play assets.

Boling said that Southwestern is exploring new ventures outside of Arkansas’ boundaries because it can’t ignore the rising cost of oil.

"I think with the current environment, we have to be looking at everything," he said. "When you have the huge difference that we currently have between natural gas prices and oil prices, every company including ours has to look for projects that are either going to be liquids rich or oil because it just makes sense."

"We can’t continue to drill wells if it doesn’t make economic sense to do so," Boling said.