Deep horizontal drilling for oil and gas is enormously expensive. The fracking process to release oil and gas from the shale reached by those deep wells is enormously controversial. But when one of those wells comes in, it’s enormously profitable.
“I know for a fact that companies absolutely want to drill those wells because we have that incentive,” Louisiana Oil and Gas Association president Don Briggs says of Louisiana’s severance tax exemption for deep horizontal wells. Passed by the legislature in 1994, it seemed like a good idea at the time, as it was encouraging new technology.
But in the 21 years since that law was passed, deep shale wells have become more commonplace. Prices for oil and gas have plummeted, and the numbers of active rigs drilling for oil and gas have dropped precipitously.
“We are competing,” Briggs says of continued drilling activity in Louisiana. “Other states don’t have that lucrative little incentive that we have.”
Lucrative, yes. Little, no. A report issued last week by the Louisiana Legislative Auditor says the exemption cost the state more than $1.1 billion in revenue, from 2010 to 2014 alone.
Briggs admits, “Ours is one of the better ones. No question about it.”
Louisiana is the only state to completely exempt horizontal well producers from paying severance tax for the first two years of production. The Auditor’s report notes that’s when these wells produce the vast majority of their total oil or gas.
But based on how low oil and gas prices are now, Briggs defends the incentive.
“When you’re sitting with $2.66 gas, and having that severance tax exemption for two years or payout –whatever comes first—it’s an incentive to keep rigs working.”
With oil prices hovering just above $40 per barrel, Briggs says keeping drilling rigs working is important, since unemployed oil and gas workers hurt the state’s economy, too.
“It’s going to have an impact on education. It’s going to have an impact on healthcare. This industry employs thousands of people and right now, we’re laying thousands off.”
Briggs says the oil and gas industry has done their part to compromise, filing and passing a bill this year to help with the state budget crisis.
“We introduced legislation this past session that says when natural gas is below $4.50, we still get the incentive. And when it gets above that, we don’t get it any longer.”
But the Legislative Auditor’s report note that bill has a fiscal note saying there will be no revenue generated for at least five years. That’s because prices for oil and gas aren’t expected to reach the minimum thresholds any time soon.