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Beebe Announces Opposition to Severance Tax Proposal

Posted on April 4, 2012

Published in The El Dorado News-Times on March 5, 2012.

By: Allison Sider

LITTLE ROCK ? After initially suggesting he would favor an increase in the severance tax, Gov. Mike Beebe now says he probably won?t vote for it should it appear on the ballot in November out of concern that it will stunt the development of oil and gas fields in southern Arkansas.

In October, the governor remarked that while he did not plan to campaign for or against the proposed initiated act, he might vote for it.

"Obviously, I am going to vote. I may indeed vote for it,? Beebe said then in an appearance on the "Talk Business? website.

But that?s no longer the case. Beebe said during a news conference Tuesday that he?ll likely cast his ballot against the measure.

He said the same thing last week during an appearance on Arkansas? Educational Television Network.

"If we had the vote today, I?d vote against it,? he said then.

What changed his mind, Beebe has said, is the exploration that has begun in the Smackover Brown Dense formation in southern Arkansas and northern Louisiana.

The Brown Dense was the source of oil that led to the Smackover boom in the 1920s, which has long since peaked and leveled off at a low level of production.

But companies such as Southwestern Oil are hoping that the same drilling techniques used in the Fayetteville Shale will allow them to recover billions of barrels of oil from the formation.

The initiated act proposed by Sheffield Nelson, a former gas company executive and gubernatorial candidate, does not affect oil.

But Beebe said last week that there is some natural gas present in the south Arkansas formation, and he is reluctant to do anything that could drive production to another state.

"If we get too out of whack with Louisiana, we?re in a posture where they?re going to spend most of their money, do most of their drilling, on the other side of the line rather than on our side of the line,? he said.

Nelson?s proposal would raise Arkansas? tax rate to 7 percent of the market value of natural gas when it is taken out of the ground.

It would do away with the lower tax rates that high-cost wells, such as those in the Fayetteville Shale, are charged in the first few years they produce, and would also get rid of deductions for marketing and shipping.

Beebe said last week that those changes, more than the higher rates, would put Arkansas? tax out of line with neighboring states.

Louisiana does not impose a severance tax on natural gas for the first two years a well is in production, and then charges a flat rate per thousand cubic feet of gas.

Nelson said the industry will not be hurt by the tax increase, which is needed to pay for damage its trucks cause to streets and highways.

Though he disagreed with the idea that raising the tax will affect where companies drill for gas, Nelson said he?s not worried by the governor?s change of heart.

"If he just makes the statement and stays aside, I don?t anticipate it hurting us,? he said.

In order to get his proposal on the ballot in November, Nelson needs to collect the signatures of 62,507 registered voters by July 6.

The tax rate is currently between 1.25 percent and 5 percent, depending on the well.

Gas from high-cost wells is initially taxed at a lower rate so producers can recover drilling costs.

The severance tax was raised to its current level in 2008 during a special session called by the governor.

But natural gas prices have dropped sharply since then, and the tax has not generated as much revenue as expected.

The natural gas industry and the State Chamber of Commerce have launched a campaign against the severance tax proposal.

A committee led by Randy Zook, president of the state chamber, has raised more than $813,000 to fight the tax increase.

Zook said that raising the tax again will send the wrong signal to production companies thinking about operating in Arkansas.

"That?s a terrible signal to send an industry. When the price goes down, we?re going to come in and pop it to you again ? that?s the message implied in this effort.?