Louisiana Legislative Auditor
Daryl G. Purpera, CPA, CFE

August 24, 2015

State Lost More Than $1 Billion in Potential Tax Revenue from Horizontal Wells

Louisiana’s severance tax suspension for horizontal wells has resulted in significant revenue loss for the state, according to an informational report issued Monday by Legislative Auditor Daryl Purpera’s office.

The report cited the Louisiana Department of Revenue’s annual Tax Exemption Budget, which stated that “Louisiana has lost more than $1.1 billion in additional revenue from the severance tax suspension for horizontal wells from fiscal years 2010 to 2014.”

The report looked at the severance tax suspension that was granted in 1994 to provide an incentive for drilling horizontal wells. According to the statute, the severance tax is suspended for up to 24 months or until the payout of the well is achieved. “Because horizontal wells produce the most oil or gas in the first two years, Louisiana is forfeiting substantial revenue during the most productive period of a well’s life,” the report said.

Approximately 98% of the revenue loss from fiscal years 2010 through 2014 was from horizontal wells drilled for natural gas, most of which are located in the Haynesville Shale in northwest Louisiana. According to the Louisiana Department of Natural Resources, all of the Haynesville Shale horizontal wells’ best production is in the first two years. Because production drops significantly after the first two years, some operators may never pay severance taxes.

Auditors compared Louisiana with other top oil and gas producing states, noting that, “while some states with horizontal drilling allow reduced severance tax rates, no other state currently grants a severance tax suspension for horizontal wells.” In Montana, Texas, and Oklahoma, horizontal wells are subject to a temporary reduced rate. Oklahoma and West Virginia previously suspended horizontal well severance taxes, but in recent years have eliminated the exemption. Some states, such as Pennsylvania, did not have any exemptions or reductions that provided severance tax incentives to horizontally-drilled wells.

In an effort to increase revenue to the state, several bills were proposed during the 2015 Regular Legislative Session related to the severance tax exemption. The only bill that passed was House Bill 549 (Act 120) which applies a tiered severance tax exemption to production occurring on or after July 1, 2015, based upon the price of oil and natural gas.

However, according to the bill’s fiscal note, this bill is not projected to generate any additional revenue for the next five years. Although oil and gas prices are revised annually, the current official budgeted oil and gas price projections do not approach the bill’s minimum thresholds for imposing any tax until fiscal years 2019 and 2020.

For more information contact:

Legislative Auditor
225.339.3800



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Office of the Louisiana Legislative Auditor | www.LLA.La.gov