Open letter: Energy industry needs severance tax break
Governor John Bel Edwards
Senator President Page Cortez
House Speaker Clay Schexnayder
State Senators and Representatives
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. 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 severance tax 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 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, a large number of 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 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.
Committee to Save Independent Oil
and Gas Companies of Louisiana