Leader Blues

Tuesday, April 15, 2008

EDITORIAL >>Huge windfall for natural gas

Remember the dire warnings from foes of the natural gas severance tax? The little 5 percent tax on gas from the Fayetteville shale would crimp exploration companies so much that they would go elsewhere in search of gas and leave Arkansas high and dry. The big cash investment, the jobs, the royalties, the economic spin-off would go elsewhere — to Louisiana, Oklahoma, Texas, Pennsylvania, somewhere. Arkansas would be left in the backwater again because Gov. Beebe wanted to saddle the good investors with an unfair severance tax.

That was last month before the legislature passed the tax overwhelmingly.

Yesterday, the CEO of one of the largest production companies in the shale play offered a different story. A study by the University of Arkansas College of Business had estimated in March that the economic impact in Arkansas from shale exploration would reach a whopping $18 billion over the next 10 years, even accounting for the dampening effect of a severance tax.

That won’t touch it, said Aubrey McClendon, CEO of Chesapeake Energy Corp. The $18 billion figure is “completely irrelevant,” he said. He expected the companies to spend between $75 billion and $100 billion over the next decade or so. That’s billion, not million. The way the academics calculate economic impact, the cumulative effect would be far greater than $100 billion.

“It really could be transformative,” he said.
We can assume that someone told him that thanks to Beebe and the legislature they would have to pay a tax of 5 percent on the net proceeds from the gas.

The shale, he predicted, would produce 20 trillion cubic feet of gas.
Let’s see. . . At the current market price of gas of about $10 a thousand cubic feet (it’s expected to continue rising), that’s roughly $200 billion in sales. That could mean $6 billion to $8 billion in taxes for Arkansas highways, roads and streets, which is where 95 percent of the severance taxes will go.

Critics of the tax said it would not produce enough money to meet many of the state’s highway needs. You can build a lot of roads for eight billion dollars.

Judging by the photographs of the devastation of roads and bridges from the floods, we may need lots of it right away. We can be thankful that we won’t have to pay higher gasoline taxes to get the work done. Oil hit $114 a barrel this week, and gasoline is headed toward $4 a gallon.

The governor and legislature never looked more providential.