Modeling the horizontal well severance tax exemption in Louisiana

Abstract

The Haynesville shale is an unconventional resource play in Louisiana that requires significant capital expenditures to develop. To produce at commercial rates, shale gas wells are drilled horizontally and fractured to release their gas, and since 1994, a severance tax exemption on horizontal wells has been in effect, offering an incentive to investors to promote industry activity. In 2011, the Haynesville shale contributed 60% to the state’s gas production, and the impact of the horizontal severance tax exemption on revenue collection has been significant. The purpose of this paper is to model the horizontal well severance tax exemption for Haynesville shale gas wells to quantify its impact and the manner in which severance tax revenues are split between the operator and government. We develop an analytic framework to value the tax exemption under prevailing production, cost, and price scenarios. We estimate that the 2011 inventory of Haynesville wells will generate between $1.2 to $1.5 billion in severance tax revenue throughout their lifetime with at least 64% accruing to the private sector. A discussion of policy issues and trade-offs in Louisiana’s horizontal severance tax exemption and implementation is provided.