When Arkansans think of Mississippi, it usually is related to economic problems the two states share in the Delta or some kind of ranking of states that has Arkansas at or around No. 49 and Mississippi at 50. Thus the oft-heard phrase: Thank God for Mississippi!
Now, however, Arkansas is chasing Mississippi in the category of incentivizing natural gas producers by lowering the severance tax to attract drilling efforts.
Effective July 1, Mississippi’s severance tax rate for horizontal drilling in the Tuscaloosa Marine Shale Play, which extends into Louisiana along the Gulf Coast, is 1.3 percent per new well until payout, or 30 months, whichever is less. In Arkansas, that rate is 1.5 percent for either 24 or 36 months, depending on the type of well.
That may not sound like much, but drilling rigs will pull up and relocate for less. In Arkansas, fewer than 15 drilling rigs are in operation, compared to as many as 60 at the height of activity in the Fayetteville Shale Play. Mississippi didn’t get all of those; some went to North Dakota, some to Texas, some to Louisiana and some to other states, including Mississippi.
The Mississippi Development Authority sees the tax-rate reduction in its state as an economic development tool.
"The Tuscaloosa Marine Shale in southwest Mississippi has the potential to provide remarkable opportunities for the region’s residents and the state as a whole," Brent Christensen, MDA executive director, said in a May 9 news release. "The passage of the severance tax reduction bill will help attract corporate investment, support economic growth and spur job creation throughout the region."
Mississippi didn’t go as far as Louisiana, which offers a two-year severance tax exemption unless the well pays out before then. Oklahoma’s incentive rate is 1 percent for four years and Texas has a 10-year incentive rate of 1.5 percent.
The Fayetteville Shale Play in Arkansas has provided jobs, new wealth for mineral rights owners, an economic uptick in communities near drilling operations and overall economic improvement for the state. Operators have, for the most part, been good citizens, too.
Randy Zook, chief operating officer of the Arkansas State Chamber of Commerce, said the move in Mississippi means Arkansas must be vigilant about incentives offered by other states.
"This is another confirmation that it’s a moving target," he said.
Competition between Arkansas and any state surrounding it is well documented, especially when it comes to athletics. When football prognosticators begin the process of determining how many Southeastern Conference games the Razorbacks can win, most start with the Mississippi schools, although victories against Ole Miss or Mississippi State are no longer a given. Arkansas-LSU games are noted for their last-minute heroics on both sides; Arkansas-Tennessee has provided some of the most exciting games in SEC history; and Texas … well, it’s Texas. Although the Longhorns aren’t on the schedule anymore, they still remain in many Arkansans’ minds, the biggest rivalry in history for the Razorbacks. Arkansas-Missouri is a rivalry in the making. The Razorbacks don’t play Oklahoma in football, but fans of both would love to see a bowl match-up.
As a state, Arkansas works with and in competition with surrounding states when it comes to economic development. One such rivalry is for natural gas exploration.
While the Tuscaloosa Marine Shale Play in Mississippi and Louisiana provides a wetter natural gas and produces a fair amount of oil to boot, the dry natural gas of the Fayetteville Shale Play is very high quality and highly coveted by producers.
But, natural gas producers are no different from consumers; everybody wants the best deal. Consumers won’t pay an extra $1,000 for a new car if they can buy a vehicle of equal value for less at a dealership down the road.
While it’s true that Arkansas’ 5 percent post-incentive severance tax rate is 1 percent below the standard rate in Mississippi, the impetus for producers to relocate a drilling rig now favors Mississippi.
When producers choose a state other than Arkansas to locate a rig, the state loses the economic impact that rig provides.
Arkansas’ severance tax rate is not too low, as some have claimed. To the contrary, it’s not low enough.