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Consumer rates not likely to rise if severance tax increased, experts say Monday, Mar 3, 2008 By Jason Wiest Arkansas News Bureau LITTLE ROCK - Raising Arkansas' severance tax likely would not drive up rates consumers here and elsewhere pay for natural gas, industry experts say. They say producers operating in Arkansas, and the royalty owners who have leased their mineral rights to them, would have to absorb a tax hike because of competitive pressures from producers outside the state. "There are a lot of producers and a lot of marketers competing to provide natural gas to gas utilities and they can't remain competitive and pass that cost along," said Chuck Harder, director of regulatory policy and external relations for CenterPoint Energy Inc., Arkansas' largest natural gas utility with about 381,000 residential customers. Gov. Mike Beebe and former gas company executive Sheffield Nelson are pushing for an increase in the state severance tax, which is among the lowest in the nation, spurred by new exploration in the Fayetteville Shale play in northern Arkansas. A 2006 University of Arkansas study estimated activity in the shale play would add $5.5 billion to the state economy through this year. Producers in the Fayetteville Shale play, particularly the two largest, Southwestern Energy Co. and Chesapeake Energy Corp., have said that if the severance tax were increased that they would invest less in the Fayetteville Shale. Southwestern Energy has estimated it would invest more than $1 billion in Arkansas this year. "Every dollar paid in severance tax at the very least is a dollar that won't be invested in the Fayetteville Shale," said John Thaeler, spokesman SEECO Inc., a subsidiary of Southwestern Energy that is handling company operations in the Fayetteville Shale. Thaeler made the comment in November and has repeated it since. The possibility of a decreased investment could translate into a decline in production, which would cut supply. But any cut in supply would not be great enough to affect prices consumers pay, according to Kathy Deck, director of the UA Center for Business and Economic Research in Fayetteville. "Prices are set on a national basis - the market is much broader than Arkansas," Deck said. "In as much as users buy their gas on a national marketplace, cuts in production in the Fayetteville Shale would not affect price in any significant way." Last year, production from the Fayetteville Shale totaled less than one-half of 1 percent of total national production in 2006, the most recent figures available from the U.S. Department of Energy. National production in 2006 was 23.5 trillion cubic feet of natural gas, while production in the Fayetteville Shale the following year was 88.8 billion cubic feet, although that number will increase as production is rapidly expanding, Deck said. Since a cut in production in the Fayetteville Shale is unlikely to affect prices paid by consumers, the threat of less investment in the play would have more of an affect on such things as economic output, job creation and royalty payments, Deck said. Those are significant benefits of production in the play, Deck said. The 2006 university study also estimated the shale play would generate more than $350 million in state and local revenue, and nearly 10,000 jobs by the end of this year. Harder said an increase in the severance tax would not absolutely mean less investment in Arkansas by natural gas companies. "We really don't know what impact (a tax increase) would have," Harder said. "That's just one of a number of factors that would influence whether a gas company would continue to invest in the state." If natural gas prices rose, for example, it could still be attractive for companies to invest in extracting gas in Arkansas, despite a higher severance tax, Harder said. While an increase in the tax and a decrease in production are unlikely to affect consumers of natural gas, royalty owners would be affected by both. "We're against any increase in the tax, but it's probably going to happen," said Dwight Brown, president of the Arkansas chapter of the National Association of Royalty Owners. At three-tenths of one cent per 1,000 cubic feet of natural gas extracted, Arkansas current severance tax generated less than $700,000 for the state. Nelson has submitted an initiated act that would raise the severance tax to 7 percent of the market value of natural gas at the time of extraction, which he says could generate between $60 and $100 million annually for higher education, highways and local governments. Nelson must collect almost 62,000 signatures by July 7 to certify the measure for the November general election ballot. Gov. Mike Beebe opposes the measure because it would not devote all of the proceeds to roads. The governor favors raising the tax through legislative action and has challenged the natural gas industry to help come up with an increase that is fair. Raising the tax through legislative action would require a three-fourths majority vote in both chambers. Beebe has raised the prospect of a March special session to increase the tax and also has said he might promote his own initiative for the November ballot. |
