Severance tax collections slide 50% for second straight quarter, zero drilling rigs in Arkansas

Monthly and quarterly severance tax collections in December slumped to historic lows in Arkansas as natural gas rig crews across the state have been furloughed or packed up their drilling equipment for the foreseeable future.

For the second quarter of fiscal 2016, or the three-month period ended Dec. 31, severance tax revenue collected on marketed natural gas sales drooped to only $9.98 million, down 50.1% compared to $19.98 million in the same period in fiscal 2015.

At the same time, Arkansas began 2016 with zero rigs operating in Arkansas for the first time since July 2013, according to Baker Hughes weekly rig count. That follows Southwestern Energy Inc.’s surprise announcement in late December that the Texas driller was mothballing its two remaining natural gas rigs in the Arkansas shale play until spot prices turn around.

This is the second straight quarter in the fiscal year that began July 1, 2015, where severance tax collections for natural gas in Arkansas are down more than 50%, monthly tax data compiled by the Revenue Division of the Arkansas Department of Finance & Administration shows.

In the first quarter of fiscal 2016, or the three-month period ended Sept. 30, severance tax revenue collected on marketed natural gas sales plunged 54.4% to only $10.87 million, compared to $23.86 million in the same period in fiscal 2014.

On a month to month basis, the state’s drill-bit collapse has left tax revenue for natural gas production at only $2.98 million at the end of December, down 62% from $7.82 million a year ago. That decline was also noted in the December revenue report, as collections came in nearly 65% below forecast.

The severance tax data is compiled by DFA’s Revenue Office using monthly tax reports filed by producers. Current severance tax amounts reported by the state’s Revenue Office are based on the “revenue month, not the report month.” In 2009, the Arkansas Legislature raised the levy on natural gas production, applying tax rates of 1.25%, 1.5%, and 5% depending on the well classification by the Arkansas Oil and Gas Commission.

The major reason for the decline in revenue collection is that the three largest drillers in the Fayetteville Shale – Southwestern Energy, BHP Billiton and ExxonMobil – have taken all of their drilling rigs offline as the price of natural gas has fallen well below the industry’s breakeven point, which for most oil and gas companies is about $3 per million British thermal units (MMBtu).

According to the data from London, Ark.-based WTRG Economics, natural gas exploration in the U.S. is down 55% from a year ago, mainly due to spot gas prices that closed down seven cents at $2.396 per MMBtu in trading on the New York Mercantile Exchange.

ARKANSAS NOT ALONE WITH WOES
Despite the recent slide in severance collections, the impact on the Arkansas’ overall budget is not as drastic as other more energy-dependent states that collect significant taxes from fossil fuel extraction. In fact, several energy-producing states are re-evaluating current and upcoming operating budgets and taxation structures to address revenue shortfalls, according to a report released Tuesday (Jan. 12) by the U.S. Energy Information Administration.

In that report, the EIA noted that six states (Alaska, Texas, North Dakota, Wyoming, Oklahoma, and West Virginia) are strongly affected by this budget squeeze. For example, Alaska’s severance tax revenue has fallen further and faster than other states because its tax is based on the operators’ net income rather than on the value or volume of oil extracted.

In 2015, when average net incomes after operating and capital expenses were near zero, the state derived practically no revenue from this tax, versus more than $5 billion in 2012. Based on 2014 data, severance taxes accounted for about 72% of the state’s tax revenue. Given the sharp decline in severance tax revenues, the governor recently proposed a 6% state income tax as well as scaling back the payout of dividends to residents from Alaska’s Permanent Fund.

In Texas, the state comptroller of Texas said in November that revenues from natural gas production and oil production and regulation were down 48% and 51%, respectively, from a year ago. Texas’s economy is more diversified than that of other major oil-producing states, and severance taxes account for a lower percent of its total tax receipts (11%) in 2014.

In Oklahoma, severance taxes accounted for only 8% of that state’s revenue base in 2014, but collections from state sales taxes and individual and corporate income taxes are also significantly affected by oil and natural gas prices. The state faces a fiscal year 2017 budget deficit of $900 million on a general fund budget of nearly $7 billion. In December 2015 the state declared a revenue failure, which requires state agencies to reduce spending, and allows for use up to 37.5% of the state’s budget stabilization fund.

In West Virginia, severance taxes accounted for 13% of West Virginia’s tax revenues in 2014. Falling coal production and low natural gas prices in the third quarter of 2015 resulted in the lowest total tax collection since 2008, mostly as a result of decreased severance tax receipts, helping create a projected fiscal year 2016 budget deficit of more than $250 million.

West Virginia’s coal production in 2015 was down more than 15% from 2014. Lower natural gas prices have more than offset an increase in the state’s natural gas production, resulting in lower natural gas severance tax receipts. In October, West Virginia’s governor announced 4% reductions to state budgets.