Dr. Gregory Upton January11, 2021
LSU Center for EnergyStudies
1071 Energy, Coast, &Environmental Building
Baton Rouge, LA 70803
RE: LSU Center of Energy Studies Proposal to theLegislature
Dear Dr. Upton,
The Louisiana Oil &Gas Association has read your legislative report and recommendation to changethe tax rate for natural gas. While weappreciate the work you’ve undertaken to provide data from the LSU Center forEnergy Studies, we do not agree with the conclusions the report draws regardingchanging the tax rate.
Your report encouragesthe legislature to increase taxes on natural gas. First and foremost, it iscritical to remember that the Haynesville Shale is currently the only economicbright spot in all of Louisiana’s upstream industry. Disincentivizing economic activity this waywould be detrimental not only to the current activity in the shale play butalso any future investment into this area. Louisiana needs to cherish the only active horizontal play in our state.This plan would tax the life out of it.
It has been said thatthis change in tax structure will be “revenue neutral.” In other words, the natural gas players, whoare fairly active, will make up the monetary difference for the lack ofrevenues being brought in by the inactive oil players. According to the Department of the Treasury,for the past three years, Louisiana’s revenue from Severance Taxes on oil hasdeclined, from $328,000,000 in 2018, to $285,000,000 in 2019, to $180,000,000(annualized) in 2020. This revenue lossis a huge problem and indicates structural changes are needed to repair thelegal, taxation, and regulatory environment on oil, not punish gas. Investment dollars have been running out ofLouisiana for years due to the overly litigious nature of our state. Louisiana should address lawsuit abuse andadvance meaningful reform on both Legacy Lawsuits and Coastal ErosionLawsuits. Using the proposed logic inyour recommendation, if the state’s revenue on oil continues to decline overthe next few years, will we just keep raising the rate on gas again, and thenagain and again?
Something else toconsider is the current market condition of commodity prices. It is possiblethat market forces will correct the loss in revenues, and they will one day fixthemselves. The price of oil hasreturned to $50/barrel, the Haynesville now has nearly 50 rigs in a $2.50natural gas price environment, so the state’s tax revenues should rebound ontheir own, without having to needlessly harm the Hayneville Shale companies.
The answer is thatLouisiana must be ready to compete with other states on a taxationfooting. We have the highest SeveranceTax rate in the continental US on oil, and plenty of barriers in existencealready for natural gas. In other states like neighboring Texas and Oklahoma,natural gas companies can deduct marketing costs including gathering,processing, transporting, and fees charged by marketing companies from theirtax rate. Plus, these other states tax their producers on the amount theyreceive in the field, not Henry Hub strip (your recommendation uses Henry Hubstrip). The combination of the marketing costs and the price differentialon gas can cut the proceeds by a significant amount, historically as much as50%. In this fact pattern, the effective rate would go up to 8% or morein some cases. You illustrate the rate going to 6% on July 1, 2023,so the tax rate could get in the 12% range. This has happened in recentyears with the existing tax.
Finally, anothersignificant key component to consider is that gathering, processing andtransportation costs are fixed, meaning they do not go down with pricing. Thus, the tax rate under your proposal would increase as a percentage ofrevenue as prices go down.
We believe there are also someinaccuracies about property taxes and sales taxes. You mention that mineral reserves are notsubject to property tax in Louisiana. This is not true. Theassessors have found a way to tax reserves under the current law through thetaxation of the cost to drill and equip a well. Furthermore, the industryworked with the assessors to try to amend the LA Constitution to allow thetaxation of the income approach to value for property tax purposes. Thiswas done because the existing system provided terrible results as the wells matured,with the declines falling faster than the decreases in property taxes. With respect to sales taxes, the total rates in OK and TX (state and county)are in the 5% to 6.75% range, as compared to total rates in the 8.5% to almost10% in the Haynesville Shale parishes.
Thank you for the industrystudies that your department continues to provide. We look forward to hearing back from youregarding our concerns.
Interim President, Louisiana Oil &Gas Association