Our Views: Wells a bust for the state
Call it the great Haynesville Bust.
Yes, the Haynesville Shale deposits that are America’s new great source of natural gas. In northwestern Louisiana, on land, not offshore in federal waters where the state gets little tax benefit from energy production. But it turns out that Louisiana isn’t getting much tax benefit from the Haynesville play, because of its own decisions. A new state budget downturn is forcing some cuts this holiday season, during the middle of the state’s fiscal year.
How can that be? The Haynesville drilling is booming. Even if natural gas prices are far off their peak, the drilling activity alone — on land, again — should provide for extra money for education, health care and other purposes in the state budget.
“As far as I know, there has been about a thousand wells drilled and not one dry hole,” said Foster Campbell, the Public Service Commission member from the area.
Alas, as economists reported to the state this week, most of that production is exempt from state taxation. In the 1990s, when horizontal drilling and hydraulic fracturing were new methods, the state passed at the behest of the powerful oil industry a 100 percent tax exemption for the cost of drilling wells. Once the well paid its drilling costs, or two years had elapsed, then the state would start to collect severance taxes. That “incentive” to promote new methods was never examined, apparently, again. It was just kept on the books. Apparently, no one in the state’s brains trust — from Gov. Bobby Jindal on down — ever thought that this deserved discussion. Certainly not before the Haynesville Shale exploded into production.
It is not yet clear from the presentations to the state revenue estimating committee how many or how soon many of those 1,000 wells that Campbell spoke of will start paying tax revenues. Natural gas wells tend to produce on a steep curve early and moderate quickly; maybe the severance tax break will be used up in a year or so. And yes, there are lease payments and other money that the state gets to tax, directly or indirectly, from the shale activity. But the severance taxes will be a fraction of what would have been received from full taxation from the get-go.
Drillers argue that wells can be more expensive in Louisiana, and thus the tax break for the industry is justified. This view was certainly never shared before the Haynesville Shale broke out; in fact, the special interest method of lying low and avoiding discussion of the costs to the state was successful in avoiding public attention to this tax break.
Ultimately, in the case of budget cuts this week, the fact that the Haynesville Bust occurred is a self-inflicted wound by state politicians in hock to powerful interests.