Arkansas’ natural gas severance tax revenue on pace to set a new record

Arkansas’ natural gas severance tax revenue is on track in fiscal year 2023 to set a new record and top $100 million if trends continue in the next four months. The gain comes in the face of industry criticism that President Joe Biden’s energy policies would curtail production.

Through the first eight months of the fiscal year (July 2022-February 2023), the natural gas severance tax has generated $61.556 million, or an average of $8.46 million a month. The average is well ahead of the $6.552 million in fiscal year 2015, when collections set a record of $78.634 million.

Fiscal 2023 is part of a two-year trend in which revenues have recovered from a dramatic decline that began in fiscal year 2016 when revenue was $31.858 million, well below the 2015 record. Revenues reached a recent low of just $14.067 million 2020.

Following are the past 10 years of Arkansas natural gas severance tax revenue.
2022: $60.915 million
2021: $18.978 million
2020: $14.067 million
2019: $38.347 million
2018: $36.579 million
2017: $38.152 million
2016: $31.858 million
2015: $78.634 million
2014: $77.345 million
2013: $50.662 million

Based on Arkansas’ collection formula, severance tax revenue is primarily the function of price and production. Natural gas prices have trended higher in recent years but have been lower in recent months, with the Henry Hub price at $2.50 per MMBtu (metric million British thermal unit) as of Feb. 28.

Following are the Henry Hub price per MMBtu highs and lows during the past three years.
2022: $8.81 (August), $4.38 (January)
2021: $5.35 (February), $2.71 (January)
2020: $2.61 (November), $1.74 (April)

MARKET UNCERTAINTY
“Right now, it’s (severance tax revenue gains) mainly prices because we are still not drilling new wells. And that’s really because of what is going on in the world,” Rodney Baker, executive director of the Arkansas Independent Producers and Royalty Owners, told Talk Business & Politics. “The industry has really struggled with prices, but now we’re really starting to see those prices improve.”

Baker said President Joe Biden’s “war on hydrocarbons” has created “a lot of uncertainty” in the energy industry, so there is no new drilling in Arkansas. He said the U.S. Environmental Protection Agency is considering a “methane tax,” causing producers to think twice before starting a new well.

The methane tax, which still needs to be implemented, is part of the Inflation Reduction Act signed by President Biden in August 2022. It does not apply to all wells and is estimated by the Congressional Research Service to generate $1.13 billion in fiscal year 2026. The law also provides $850 million in EPA grants to the industry to take action to limit methane release, which is a known contributor to climate change.

“The methane emissions charge applies only to methane emissions from specific types of facilities that are required to report their greenhouse gas (GHG) emissions to the Environmental Protection Agency’s (EPA’s) Greenhouse Gas Emissions Reporting Program (GHGRP). The charge starts at $900 per metric ton of methane, increasing to $1,500 after two years, which equates to $36 and $60 per metric ton of carbon dioxide equivalent, respectively,” noted a CRS report on the methane tax.

Baker said some producers are completing Arkansas wells previously drilled and/or opening up closed wells to take advantage of the higher prices.

Indeed, the closely watched Baker Hughes rig report (no connection to Rodney Baker) shows no active drilling rigs in Arkansas as of Feb. 24. There were 753 active rigs in the U.S., with 370 in Texas, 106 in New Mexico and 64 in Louisiana. And of the 753 rigs, 600 were active on oil wells and 151 with natural gas. (Talk Business & Politics has asked the Arkansas Oil & Gas Commission about the number of active natural gas wells in Arkansas and will update this story when/if the number is provided.)

So far, however, Biden’s energy policies have done little to slow the production of U.S. oil and natural gas. A Jan. 10 report from the U.S. Energy Information (EIA) predicted that U.S. natural gas production will rise to a record high in 2023 of 100.34 billion cubic feet per day and could reach 102.29 billion cubic feet per day in 2024.

A Feb. 7 EIA report estimated U.S. oil production of 12.4 million barrels a day in 2023, which would surpass the record set in 2019 ahead of the COVID-19 pandemic.

SEVERANCE TAX DISTRIBUTION
According to the Arkansas Department of Finance & Administration, the first $675,000 in severance tax revenue per fiscal year is deposited in Arkansas’ general revenue fund. After that, 95% is deposited as special revenues and distributed according to the Arkansas Highway Revenue Distribution Law, which is 70% to the state highway department, 15% to all cities, and 15% to all counties.

The other 5% of collections are deposited in the “Road and Bridge Repair, Maintenance and Grants Fund,” which is used exclusively for grants to counties for damages resulting from trucks and other heavy machinery used to extract natural gas. Such grants are distributed to those counties pro rata based on each county’s active unconventional natural gas wells.