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Tax Exemptions for Horizontal Wells Cost State $1.1 Billion

Louisiana Department of Natural Resources

Last session, Louisiana legislators faced a $1.6 billion budget shortfall. And those shortfalls are expected to continue, even for the next Governor.   "I get calls from legislators probably weekly asking me, so Daryl, what do you see?  Where can we raise some revenue?" says Daryl Purpera, Louisiana’s Legislative Auditor. 

On Thursday, the Legislative Audit Advisory Council heard a report on the severance tax exemption for horizontal wells. In Louisiana, those wells are typically located in the Haynesville Shale, which runs through the northwestern part of the state.  It is one of the largest natural gas producers in the country.

Louisiana charges a severance tax - a tax on oil and gas produced in the state. But in 1994, the state said that horizontal wells didn’t have to pay that tax for up to two years. According to the report released by the Louisiana Legislative Auditor, exempting horizontal wells from those severance taxes has cost the state $1.1 billion in revenue between Fiscal Years 2010 and 2014.

These wells are most productive in their first two years. Karen LeBlanc, Director of Performance Audit Services, says "production decreases by about half the first year, and then decreases after that." Which means the state may never receive severance taxes on some of these wells.

Louisiana is the only state with this type of exemption still on the books.

Tim Barfield with the Louisiana Department of Revenue says it’s a delicate balance. Those incentives are important, especially with the price of oil so low. "When the markets do come back," he says, "do we want to be one of the first states where drilling activity starts and stays? Or do we want it to go to other places first?"

At the end of the day, says Purpera, "that is $1.1 billion of real dollars."