Severance tax revenue shows steady growth

As Arkansas’ natural gas industry continues to mature, severance tax revenue has steadily increased each year since the Legislature raised the levy on natural gas production in 2009, according to monthly revenue information from the Arkansas Department of Finance and Administration.

Year-over-year, state tax collections from severance tax revenue rose 8.1 % to $58.9 million in 2011 from $54.5 million in 2010. The first year that the state levied a 5% tax on shale production in 2009, severance tax revenue jumped from only $1.3 million in 2008 to $27.4 million a year later.

For the first five months of 2012, severance tax collections total $18.734 million, down 19% compared to the $23.139 million during the same period in 2011.

Tom Atchley, DF&A’s excise tax administrator, said current severance tax amounts reported by the state’s Revenue Office are based on the “revenue month, not the report month.” He said a tax payment received in April may not be due until May.

COLLECTION SHIFTS
For example, severance tax collections in February reached an all-time monthly high of $6.05 million in February and fell below $3 million for the first time in nearly three years in April, according to DF&A’s monthly severance tax figures. Tax collections in January and March were $3.36 million and $3.72 million, respectively.

“April tax (collections) were low because we had a producer that did not file a timely payment,” Atchley said of the monthly disparity. “A late payment also caused February’s revenue collections to be high.”

Overall, severance tax collections averaged $4.9 million each month in 2011.

The severance tax data is compiled by the DFA’s Revenue Division from monthly tax reports filed by producers with the department, Atchley said. Tax treatment for traditional and high cost wells did not differ between fiscal years 2003 and 2008.

However, since Act 145 went into effect in 2009, separate and distinct tax methods are used to tax conventional output and unconventional, high-cost shale production.

GAS POLITICS
The natural gas industry is campaigning to put off a measure by former gas exec Sheffield Nelson and the Arkansas Municipal League to raise the severance rate for high-cost natural gas production from 5% to flat tax of 7%.

If Nelson and allies get 65,000 signatures on petitions by July, the tax will go on the November ballot. The former gas exec says loopholes in the current law still leaves most gas taxed at 1.5%, well short of 5%. He says the state needs the additional revenue to fix highways and roads damaged by out-of-state drillers.

The natural gas industry and anti-tax groups, including the Arkansas State Chamber of Commerce, say a severance tax hike would harm the ongoing economic expansion in the Arkansas play and move jobs to other natural gas-producing states.

Despite the fierce severance tax fight, it is clear that Fayetteville Shale development is still thriving — even with decades-low wellhead and market prices for natural gas. Natural gas spot prices have recently traded near $2.65 per 1,000 cubic feet (Mcf). Only four years ago, Henry Hub prices for natural gas peaked at $13.31 per Mcf.

PASSING THE TRILLION MARK
Still, DF&A’s monthly revenue data confirmed that Arkansas’ annual marketed natural gas production topped a trillion cubic feet (Tcf) for the first time in state history in 2011, jumping more than 16% to 1.09 Tcf from 939 Tcf of production in 2010.

The City Wire recently reported that the state was poised to reach the historic benchmark in fiscal 2011, based on preliminary data from the U.S. Energy Information Administration. The distinction makes Arkansas the eight-largest marketer of natural gas in the U.S., behind surrounding natural gas producing states like Texas, Oklahoma, Louisiana and top-ten newcomer Pennsylvania.

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.

Between 2003-2008, before Act 145 went into effect, annual production of marketed natural gas production in Arkansas jumped nearly 188% from 152 billion cubic feet (Bcf) to 438 Bcf. Altogether, nearly 93%, or 1.01 Tcf of state’s natural gas sales in 2011 came from unconventional, high-cost shale production, a trend that has continued in 2012.

INDUSTRY ACTIONS
Fayetteville Shale leader Southwestern Energy has already announced that it plans to invest nearly $1.1 billion in the Fayetteville Shale in 2012. Earlier this month, the company reported that it had invested $363 million to place a total of 146 wells into production in the first quarter.

“Subsequently, the company surpassed the milestone of 2 Bcf per day of gross operated production from the play on April 12 and, on May 2, celebrated the milestone of cumulative gross operated production of 2 Tcf of natural gas from the play since 2004,” the company said in its first quarter earnings report.

Southwestern President and CEO Steve Mueller cautioned, however, that low gas prices are cutting into the company’s profits and cash flow. Even with hedges, the company’s average realized gas price in the first quarter of 2012 was $3.49 per thousand cubit feet (Mcf), down 15% from $4.12 per Mcf in the first quarter of 2011.

“Looking ahead, we continue to respond to current prices and remain vigilant in reducing costs, keeping our balance sheet in good shape and drilling the best projects,” Mueller said.

Still, there is already evidence that the industry is shifting capital and manpower away from dry gas developments like the Fayetteville and Barnett plays to wet gas and oil-rich shale areas in Pennsylvania, Colorado, Texas and other states — due to low gas prices.

Earlier this month, former Fayetteville Shale giant Chesapeake Energy said it plans to spend nearly 90% of its 2013 budget drilling for oil, not natural gas. Chesapeake sold its Fayetteville Shale assets to Australia-based BHP Billiton in 2011 for $4.75 billion in cash.

Southwestern Energy, ExxonMobil's subsidiary XTO Energy and BHP operate more than 99% of the unconventional gas wells in the Fayetteville shale, Arkansas Oil and Gas Commission data shows. Southwestern has lease rights to 800,000 net acres in the play’s eastern section and 125,000 net acres in the western section, according to the company’s annual report.