The persistent low price of natural gas and the move by energy producers to produce higher-margin domestic oil and other liquids has pushed Arkansas severance tax collections lower more than 33% for the first 10 months of 2012.
Severance tax collections from natural gas totaled $33.273 million between January and October, 33.36% lower than the $49.935 million for the same period in 2011.
Based on the October figures, the state is not likely to match the 2011 record production of 1.092 Tcf (trillion cubic feet) of natural gas produced and $58.905 in severance tax collections. The boom in production resulted from significant increase in production in Arkansas’ Fayetteville Shale Play that stretched across north and central parts of the state.
The severance tax data is compiled by the Revenue Division of the Arkansas Department of Finance & Administration using monthly tax reports filed by producers.
In 2009, the first year of the severance tax hike, Arkansas joined the list of the nation’s top marketed natural gas producers when sales of Arkansas natural gas spiked 57.5 to 690 billion cubic feet (Bcf). Arkansas natural gas sales rose another 36.1% to 939 Bcf of annual production in 2010, according to DF&A and EIA figures.
A portion of the severance tax collections since 2009 are used for road and other infrastructure support in the counties seeing the increased natural gas production.
Natural gas prices remain at or below $3 per million BTU. In 2005, the price approached $15 per million BTU. And while the January futures contract rose above $3.40 per million BTU in early Tuesday trading, the commodity outlook does not indicate a return to drilling activity seen in the past few years.
The U.S. natural gas rig count is down to around 415, considerably lower than the 1,606 rigs active in August 2008.
“There’s just no strength right now,” James Williams, president of WTRG Economics in London, Ark., said in a Bloomberg News story. “Oil prices have been wobbling around and gas prices have gotten weaker. We’re looking at more downward pressure on the rig counts unless prices recover.”
Bill Steve Walker, president of Fort Smith-based Stephens Production Co., does not see a near-term rise in natural gas prices. He instead believes prices will remain “range-bound” between $2.50 and $5 per million BTU. But he is optimistic the price of natural gas will push higher.
“All of the movement toward natural gas to be used in vehicles, and possibly the exporting of natural gas as LNG … it (prices) will come back. It may not come back as quickly as we in the producing community would like to see it, but we’ll see those prices return,” Walker explained.
He also said the re-election of President Barack Obama will allow the Environmental Protection Agency to “continue on their path against” coal-fired power generation, thereby resulting in more natural gas used for electric-power generation.
Was 2010 and 2011 a “bubble” for the energy industry in Arkansas?
Kathy Deck, economist and director for the Center for Business and Economic Research at the University of Arkansas, said that is too “strong a term” but noted that the pace will slow.
“I think we will see continued development of this resource. It just won’t happen as quickly,” Deck said.
She said more use of compressed natural gas (CNG) in trucking and work fleets along with more power generation using natural gas could help boost prices to the point that production returns to the Fayetteville Shale Play.
However, falling gasoline prices reduce the incentive to convert vehicles to CNG, Deck said. The AAA reported Wednesday (Dec. 19) that the average U.S. price per gasoline gallon was $3.226, the lowest since Dec. 22, 2011.
An updated Fayetteville Shale Play economic impact study found that production in the Play between 2008 and 2011 created total economic activity of more than $18.5 billion. The updated study, produced by the Center for Business and Economic Research at the University of Arkansas, was released in May 2012.
Total annual state employment impacts increased from more than 14,500 people to more than 22,000 people during the 2008-2011 period.
The study reported that survey responses from energy and production companies indicated an estimated 23.8% reduction in spending in the Play as a result of lower gas prices. Even with the decline, the study said the projected expenditures were 5.8% higher than the companies projected for 2012 in 2008.
Still, the low prices are expected to be an anchor on the sector.
“The biggest risk factor to the 2012 projections continues to be sustained low natural gas prices. While the current low price environment is assumed in the estimates, further price declines and unanticipated operational cost increases could have significant effects on overall economic product and employment impacts statewide,” noted the report.
Deck said the impact report will be updated, but no date has been set.