Beebe Unsure About Severance Tax Support

Gov. Mike Beebe said Wednesday (Jan. 25) he is “re-evaluating” his support for a proposed ballot initiative that would raise Arkansas’ severance tax.

Sheffield Nelson, a former natural gas company executive, has received ballot title approval from Arkansas Attorney General Dustin McDaniel for a referendum to raise the severance tax on natural gas to 7% and exclude current loopholes. The tax could raise as much as $250 million a year, with the money dedicated for Arkansas highways.

Nelson now qualifies to collect signatures to place the measure on the 2012 general election ballot. “The Natural Gas Severance Tax Act of 2012” would need 62,507 valid voter signatures to qualify for the ballot.

Beebe told The City Wire that the recently announced potential for oil and natural gas in the Smackover Brown Dense Formation in south Arkansas has caused him to reconsider a prior stance in that he would probably vote for the planned initiative to raise the tax but wouldn’t actively campaign for it.

However, officials with Southwestern Energy have announced a “New Ventures” program in which they use new fracking technologies developed for natural gas to drill in older oil fields in Columbia County near Magnolia. The company plans to spend $240 million on its “New Ventures” efforts in 2012, but it did not provide a breakout of that spending for the Smackover Brown Dense play.

About half of the play that could be a new source of oil and natural gas production is in Louisiana. Beebe said he is “a little worried” that an increase in the Arkansas severance tax combined with the reduction of loopholes for initial drilling could put Arkansas at a competitive disadvantage.

Beebe called a special session in 2008 that resulted in severance tax increases that were, in part, negotiated with the natural gas industry. Nelson has said the 2008 effort was a good start, but that Arkansas can afford to raise the tax more without harming the industry’s activity in the state.

Critics of Arkansas’ severance tax argue that the current levy on natural gas is based on the volume of natural gas produced rather than the market value. Louisiana has a rate on volume of gas produced of $0.16 per thousand cubic feet (mcf). That rate is updated or revised each year in July, based on spot price.

Other states with significant reserves of natural shale gas include Texas with a severance tax rate of 7.5%; Oklahoma, 7%, and Michigan and West Virginia, like Arkansas, are at 5%. Pennsylvania has no severance tax, but is considering one. Many states have exemptions and conditions that can lower severance tax rates.

Michael Tilley with our content partner, The City Wire, is the author of this report. He can be reached by email at [email protected].