On September 29, 2010, the Louisiana Tax Commission, appointed by the Governor, approved a new rule that would increase oil & gas property tax assessments within the state by more than double the established rates in 2010. Specifically, this new measure targets the lateral sections of unconventional oil & gas wells. Without question, this tax increase will stifle the over $10 billion investment in the Haynesville Shale.
In order to adequately and economically develop unconventional resource plays such as the Haynesville Shale, oil & gas companies needed to explore new and innovative technological advancements to capture these vital energy resources. The process of horizontal drilling became the most effective method to ensure the production of these unconventional oil & gas reserves.
During the process of drilling a horizontal well, a lateral section is drilled and established. This lateral section is cemented, perforated, and essentially becomes the key component to severing oil & gas from a targeted geological formation. The 2011 rule changes the depth to total “measured depth” which will assess the horizontal section the same as vertical wells with casing, pipe, and equipment.
Prior to the new imposed rule, property tax rules addressed valued equipment assets found in the vertical section of an oil & gas well. According to the LA Tax Commission’s new rules, the lateral section of an oil & gas well has an intrinsic value. This finding could not be further from the truth. As the lateral section is permanently cemented deep below the earth’s surface, the equipment within this section becomes an asset that can no longer be recovered by an oil & gas operator. Additionally, some horizontal wells have no casing in the horizontal section, called an “open hole.” To tax equipment that has no potential for resale and is non-recoverable is unfair and unreasonable.
Today, the Haynesville Shale serves as one of the few positive economic drivers in our state. At a time when oil & gas development is at a stand still in the Gulf of Mexico and we are experiencing significantly low natural gas prices, a tax increase of this magnitude will lead to a statewide exodus of many companies and certainly discourage future companies from doing business within our state.
While the Governor, Louisiana Economic Development and local officials work to recruit investment and jobs throughout our state, the Louisiana Tax Commission has just put a significant dent in those efforts. The old adage that Louisiana is “Open for Business” may not be the case for long.
Don Briggs is the President of the Louisiana Oil & Gas Association.