Expect a battle royal when the cities take on the chambers of commerce when it’s time to decide whether Arkansas will raise the severance tax on natural gas.
The election isn’t until November 2012 — 62,507 signatures are needed to get the proposal on the ballot — but the usually friendly forces are choosing sides, lining up and oiling their guns.
Two of the guns opposed to the increase in the severance tax spoke to the Conway Rotary Club on Thursday and on Oct. 13.
Randy Zook, president and CEO of the Arkansas State Chamber of Commerce, said on Oct. 13 that the time leading up to the severance tax election will be "one of those times when friends agree to disagree."
Paige Miller, executive director of the Arkansas Independent Producers and Royalty Owners, an organization that began in 2007, soon after natural gas production began again in earnest, said on Thursday that Arkansans should beware.
"With all the shale production across the country, it would not be difficult for production companies to pick up their rigs and go someplace else," Miller said.
Arkansas’s shale play is small compared to other areas in the country, she said, such as the Marcellus Shale in the Appalachian Basin: Parts of New York, Pennsylvania, Ohio, Maryland, West Virginia and Virginia. Pennsylvania has a zero percent severance tax, she said.
On the other side of the issue, the Arkansas Municipal League will be leading the fight for the cities, the main beneficiaries should the tax be increased to 7 percent.
The idea, some say, is to get Arkansas’s tax rate closer to rates charged by gas-producing states next door: Oklahoma, Louisiana and Texas.
Natural gas companies in Arkansas currently pay between 1.25 percent and 5 percent of the cost of the gas.
By a complicated formula, the proceeds would go to construction and repair of Arkansas highways and roads, not just for repair of damaged roads in the gas-producing counties. The first $20 million collected each year would be designated for city streets.
Roger Lewis of Conway, publisher of pulseofconway.com, who spoke for the severance tax increase in 2008, applauded successful efforts by Gov. Mike Beebe to raise the tax that had been three-tenths of one cent per 1,000 cubic feet of gas.
Approved was a base rate of 5 percent on proceeds, defined as the money received by the producer from the sale of gas less the cost of treating and transportation.
There is a 36-month reduced rate of 1.5 percent for high-cost new wells, like the fracking wells, and a 24-month reduced rate of 1.5 percent for all other new wells. Another reduced rate of 1.25 percent is possible indefinitely for low-producing wells, new or old.
The reduced rates are designed to allow the production companies to recoup their costs.
Lewis is not in favor of the newest proposal from former ArkLa gas executive Sheffield Nelson.
"I think 7 percent is rather high. It’s in the high range of all the states. I’d rather they keep it at 5 percent and remove some of the exemptions," Lewis said. The exemptions are too liberal, he says, and he’d prefer a volume cap rather than a time cap.
"The first 36 months is when they really produce the gas, and in three years, production may be down. For instance, charge 1.5 percent for the first 10 million cubic feet or so, and that should recover the cost of production before they start paying tax."
Lewis said he’d also like for a bigger share of the distribution of the collected tax to go to the counties where wells are produced and damage to streets and roads is greater.
Faulkner County Judge Preston Scroggin said he worked closely in 2008 with the governor and the judges of the other six Fayetteville Shale counties to design "a fair formula," he said.
"Most people don’t realize that 99 percent of the wells are already taxed at 5 percent. "Raising the severance tax is a radical proposal that would upset the good balance we’ve had with the industry.
"I’ve never been against anything as strongly as I’m against this increase in the severance tax," Scroggin said.
All sides agree that Arkansas’s economy would be in bad shape were it not for natural gas production.
All also agree that the conversion of vehicles to compressed natural gas and the introduction of more CNG fueling stations should be encouraged, either by the production companies, private investment or the government through grants to schools, cities and counties to help pay for conversion of their fleet vehicles.
(Staff writer Becky Harris can be reached at email@example.com and 505-1234.)