Arkansas severance tax revenue on record pace

Natural gas severance tax revenue for the first four reporting months of 2013 is ahead of the same period in 2011 when the collections eventually reached a record annual tally of $58.905 million.

The January-April collections total $19.714 million, well ahead of the $15.787 million during the same period of 2012, and 6% higher than the $18.585 million during the record-setting 2011. The severance tax data is compiled by the Revenue Division of the Arkansas Department of Finance & Administration using monthly tax reports filed by producers.

“I think the big difference is going to be the quantity and the market price,” said Kelly Robbins, executive vice president of Arkansas Independent Producers & Royalty Owners, adding that natural gas prices remain historically low but have risen in recent months.

Natural gas prices (based on the Henry Hub spot price) have almost doubled since May 2012, with the price rising from just above $2 per MMBtu to a little over $4 per MMBtu. According to the U.S. Energy Information Administration (EIA), the cooler than normal Spring has kept natural gas prices higher than normal.

“Since late February 2013, the weather turned colder than normal, as measured by the gas-weighted heating degree-days compared to the 5-year average. Natural gas consumption was thus higher and prices rose more than $1 per MMBtu through the end of April,” noted the EIA report.

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.

With production in Arkansas’ Fayetteville Shale Play dramatically diminished in the past few years, the price of natural gas does have more of an impact on severance tax collection levels.

Robbins said there are about 15 rigs in the Fayetteville Play – located in north and central Arkansas – compared to more than 55 rigs about five years ago, and down from 22 a year ago. The monthly average for natural gas rigs in Arkansas during 2010 was 39.

It’s not just Arkansas seeing a reduced number of rigs drilling for natural gas. The North American natural gas rig count was 354 as of May 31, down from 588 during the same period in 2012, and down from 1,606 in August 2008.

The price factor is evident when looking at collections during the past three years. In 2010, when prices ranged between $4 and $5 per MMBtu, the state collected $54.4 million on 939.4 million MCF. Compare that to collections of $40.96 million in 2012 on more than 1.15 billion MCF.

In 2005 the price approached $15 per million BTU, which began a push by producers to use fracking and other innovative and unconventional drilling methods to find and produce natural gas.

Robbins said he would not be surprised to see activity return to Arkansas if natural gas prices continue to rise. However, the Fayetteville Shale Play natural gas does not have the economic advantages of the “wet gas” from other U.S. plays. Wet gas can provide ethane, butane and other liquid natural gases that can be sold to generate a more diverse revenue stream.

“What has happened is that the Fayetteville Shale Play is a dry natural gas and it doesn’t have a lot of other uses. So the companies are moving to the Marcellus (Shale Play) and other areas with more wet gas where the by-products often it make it more economical to go after,” Robbins said.

On a national level, higher natural gas prices also curb the use of natural gas in other areas. The EIA recently reported that the use of natural gas to generate electricity is declining as the rising price makes coal more economical.

“Natural gas used to generate electricity so far this year is below the high level during the comparable 2012 period, when low natural gas prices led to significant displacement of coal by natural gas for power generation,” noted the EIA report. “In early 2013, coal recovered some market share as natural gas prices rose. By late March, wholesale natural gas prices at the Henry Hub trading center were back to $4 per million British thermal units (MMBtu). In response, electricity generators used 16% less natural gas this March compared with March 2012.”