Arkansas severance tax revenue up 50% in FY 2014, poised to hit $100 million

Severance tax collections in Arkansas reached an all-time high of $77.3 million in fiscal 2014, pushed upward by stronger natural gas prices and better drilling techniques and production at the wellhead, industry experts say.

For the fiscal year ended June 30, 2014, gross natural gas severance tax revenue were up more than 50% from $50.6 million for fiscal 2013, according to tax data compiled by the Revenue Division of the Arkansas Department of Finance & Administration.

At the same time, collections of $8.44 million in July, the beginning of fiscal 2015, put the state on track to top $100 million for the first time since the state began keeping such records.

J. Kelly Robbins, executive vice president of the Arkansas Independent Productions and Royalty Owners (AIPRO), said he was excited to see record collections in fiscal 2014 after “several flat years.”

“There are a number of variables and reasons that we are seeing severance tax collection at an all-time high, but things started to turn around after the price of natural gas stopped bleeding,” Robbins said.

Officially, the fiscal year for the state of Arkansas begins on July 1 and ends on June 30. In fiscal 2014, the highest monthly severance tax collection occurred in April, when state severance tax coffers brought in $9.1 million.

According to Tom Atchley, DF&A’s excise tax administrator, severance tax amounts reported by the state’s Revenue Office are based on the “revenue month, not the report month.” For example, tax payments received in July may not be due until August.

In 2009, the Arkansas Legislature raised the levy on natural gas production, applying tax rates of 1.25%, 1.5%, and 5.0% depending on the well classification by the Arkansas Oil and Gas Commission. That means wells drilled when the Fayetteville Shale was booming are no longer “new,” Robbins said, and are now being taxed at the maximum five percent rate. Once extracted from the well, tax is collected from producers based on the current market value of gas sold. 

The record tax bounty for fiscal 2014 halts a three-year decline that began in fiscal 2011, when natural gas futures began a long slide and bottomed out in April 2012 as prices fell below $2 per million British thermal units (MMBtu). On Thursday, the contract prices for natural gas closed on the New York Mercantile Exchange at $4.013 per MMBtu.

‘SPACE-AGE’ DRILLING
Besides higher and more stable prices, the severance tax bounty in Arkansas and other energy-producing states like Pennsylvania, Texas and Colorado is also largely driven by so-called “fracking” and other advanced horizontal drilling techniques now widely available in most U.S. oil and gas shale plays, industry experts say.

For instance, Fayetteville Shale leader Southwestern Energy placed 147 new wells into production in the Arkansas play in the second quarter, resulting in net gas production of 124 billion cubic feet (Bcf) in the second quarter of 2014, compared to 121 Bcf a year ago. Gross operated gas production in the Fayetteville Shale was nearly 2,073 million cubic feet (MMcf ) per day at June 30, 2014.

“Our results this quarter are helping to pave the way for another record year in 2014,” Southwestern CEO Steve Mueller said after the Houston-based oil and gas giant released its second quarter earnings on July 31. “Our production grew 18% and our wells in both the Fayetteville and Marcellus projects continue to perform better than expected.” 

Today, Robbins said, the oil and gas industry’s capital-intensive upstream sector is built on improved science and futuristic exploration and production techniques that have lessened the country’s dependence on foreign energy sources from places like Iran, Saudi Arabia and Venezuela.

“It is literally almost space-age, NASA-type of exploration,” Robbin’s said of the industry’s multi-well drilling pads. “With every well that is drilled, the producers gain more knowledge on how to extract these valuable resources that fuel our economy.  And as they drill more in a particular area or play, they are able to do it quicker and more efficiently.”

For instance, Southwestern placed 26 operated wells into production with an average drilling time of five days or less in the second quarter, something almost unheard only a few years ago when average well drilling times often exceeded 20 or more days, Robbins said.

ARKANSAS RIG COUNT DECLINES
Consequently, the industry’s sophisticated drilling expertise has also led to the decline in the number of drilling rigs needed to extract natural gas from the shale rock and ship it to market. For instance, there were 338 rotary rigs drilling for natural gas in the U.S. this week, down from 401 rigs operating during the same period a year ago, according to Baker Hughes’ weekly rig count.

According to a recent report by the U.S. Energy Information Administration, the number of gas-oriented drilling rigs in a particular region has long been a common predictor of natural gas production in the past. 

Not anymore.

“Technological advances have led the way to the widespread use of new oil and natural gas extraction techniques that have opened up a hydrocarbon resource base dramatically larger than previous estimates,” the EIA report concluded. “Because of these new methods of extraction, generally in wide use since 2007, natural gas production has steadily risen, while the number of active rigs characterized as targeting natural gas has fallen dramatically.”

In Arkansas, there are currently only a dozen drilling rigs exploring for natural gas, down from 13 operating rigs a year ago, Baker Hughes data shows. In the fall of 2011, when gas prices were nearing $3 per MMBtu, there were 33 rigs operating across the state of Arkansas, mainly in the Fayetteville Shale play.

Today, despite fewer drilling rigs, Arkansas is the nation’s ninth largest marketers of natural gas in the U.S. In 2012, Arkansas topped a trillion cubic feet (Tcf) of marketed natural gas production for the first time, joining powerhouse energy producing states like Texas, Wyoming, Oklahoma and Louisiana in the exclusive club.

Meanwhile, one of the unintended consequences of the improved techniques in the state’s now-mature Fayetteville Shale play is that fewer roustabouts, roughnecks and other blue collar rig hands are needed to man drilling pads. According to the most recent employment report from the state Department of Workforce Services (DWS), Arkansas’ natural gas and mining sector lost 1,000 jobs in 2013.

In 2011, there were 11,100 workers in the natural resources and mining sector. That number is now down to 9,700, the lowest level since 2007.