Abstract

Louisiana’s Oil and Gas E&P companies are in dire need of immediate severance tax relief not only to survive the unprecedented series of events currently unfolding on the industry, but also for Louisiana to be competitive with the severance rate in other states. In the past, commodity price downturns were a result of supply exceeding demand. Operators adjusted to this type of environment by cutting capital expenditures and other expenses to a level that allowed the industry to continue operating.

The current downturn is unique and significantly more challenging. Not only is there a calculated supply attack orchestrated by Saudi Arabia and Russia, there is an epic demand destruction event taking place with the national lockdown. These simultaneous problems are creating a market where most producers are losing money on each barrel of oil produced. The market’s supply and demand imbalance for oil has become so pronounced that it is impossible to predict when prices will return to a profitable price level.

In 1974, Louisiana increased the severance tax rate on oil to 12.5%, which is the highest rate in the United States by a significant margin. For example, Mississippi, Oklahoma, Arkansas, and Texas severance tax rates are at 8%, 7%, 5%, and 4.6%, respectively. At the time of the increase every major oil company had a significant presence in the state and new giant oil fields were routinely being discovered in South Louisiana.

These large fields could tolerate this punitive severance tax rate due to their sizeable oil and gas reserves. This is no longer the case. Today, most of the state’s production comes from small independent operators and the days of large oil discoveries in Louisiana are past. Most of the state’s current operators have wells that produce less than 50 barrels of oil per day, which are marginally economical at the $40–50 per barrel range. As of today, oil is trading below $20 per barrel, which is absolutely devastating for these small companies. As a result, many wells are currently not producing and will continue to be shut in. These shut-ins will lead to numerous bankruptcies, loss of jobs, and permanent reductions in severance tax revenue for the state and ad valorem tax revenue for numerous parish governments.

The 12.5% severance tax rate might have been tolerable in 1970s when the state’s oil production was over 2,000,000 barrels per day. However, this tax rate is punitive and no longer appropriate, especially since the state’s daily oil production rate has fallen to approximately 85,000 barrels per day. No doubt, this high severance tax burden will contribute to the elimination of a large percentage of the remaining oil companies operating in the state.

Louisiana Law has a severance tax incentives under R.S.47:633 for incapable wells and stripper wells whereby the severance tax rate is reduced for incapable wells that qualify as wells making less than 25 bbls a day to 6.5% and for stripper wells that make less than 10 bbls a day to 3.125%. A reduction of these tax rates are necessary to meet today’s oil and gas industry, along with an increase in the number of bbls per day to 30 bbls for stripper wells and 50 bbls a day for incapable wells.

In addition, the State of Louisiana passed a tax severance incentive under R.S.47:633 for any horizontal wells drilled, whereby the severance tax was suspended for a period of 24 months or until payout. This incentive has helped keep a small number of rigs running in north Louisiana as operators drill wells for the Haynesville shale but does nothing for the small independent oil and gas companies who want to raise money to drill conventional type prospects which do not require horizontal drilling. Please see Figure 1 of comparison of Haynesville wells versus all other wells for 2018 and 2019.

In order to help give incentive for new wells drilled in the state which was at an all-time low prior to the price collapse, this incentive needs to be permanently extended to all new wells, not just horizontal wells, or the severance tax rate should be permanently lowered on new wells to a level comparable to rates in effect in our neighboring states.

This type of action for Severance Tax Incentives would provide a significant boost to an industry that is on the verge of total collapse.

Figures 2-10 provide additional supporting exhibits.