story by Michael Tilley
mtilley@thecitywire.com
A relatively higher price and the continued production of natural gas from existing wells resulted in a record of $62.685 million in Arkansas’ gross natural gas severance tax revenue during 2013. The tally was up more than 53% compared to 2012 collections and up more than 6.4% over the previous high set in 2011.
Also, a recent report from the Bureau of Economic Geology at the University of Texas says Arkansas’ Fayetteville Shale Play will produce natural gas out to 2050, but production in the Play could decline beyond 2015 if natural gas prices remain low.
Even with 80% fewer active rigs in Arkansas compared to the boom days of 2008, a wellhead price flirting with $5 per MCF – the price recently hit $4.824 MCF according to the federal Energy Information Administration – is supporting demand for natural gas produced in Arkansas, said Kelly Robbins, executive vice president of the Arkansas Independent Producers & Royalty Owners.
The winter weather and the continued growth in liquified natural gas (LNG) exports also is supporting the recent price increases in natural gas, Robbins said.
“The colder weather has obviously created greater demand, which as we know, whether for natural gas or widgets, will generally always increase the market value. This coupled with new or increased demands such as exportation of Liquefied Natural Gas (LNG) to other countries, increased usage of natural gas for the production of electricity, and even closer to home, the expansion of Compressed Natural Gas (CNG) stations via a state rebate program that will hopefully help encourage the building of up to 6 stations” in Arkansas, Robbins said in a note to The City Wire.
The U.S. Department of Energy has authorized energy companies to export up to 8.5 billion cubic feet per day of LNG to non-free-trade partners. That represents about 13% of daily LNG production.
RECENT TAX HISTORY
In 2009, the first year of the severance tax hike, Arkansas joined the list of the nation’s top marketed natural gas producers when sales of Arkansas natural gas spiked 57.5% to 690 billion cubic feet (Bcf). Arkansas natural gas sales rose another 36.1% to 939 Bcf of annual production in 2010, according to figures from the Arkansas Department of Finance and Administration and the federal Energy Information Administration.
A portion of the severance tax collections since 2009 are used for road and other infrastructure support in the counties seeing the increased natural gas production.
With production in Arkansas’ Fayetteville Shale Play diminished in the past few years, the price of natural gas does have more of an impact on severance tax collection levels.
In 2005 the price approached $15 per million BTU, which began a push by producers to use fracking and other innovative and unconventional drilling methods to find and produce natural gas.
But activity in the Fayetteville Shale Play – located in north and central Arkansas – began to diminish in recent years as the price dropped and as other gas plays emerged that produced a “wet” natural gas. Arkansas’ natural gas is dryer, meaning fewer products can be refined from the raw commodity. A wet natural gas may also be associated with areas in which oil is present, which presents a richer target for energy companies.
Robbins said there are about 12 rigs active in Arkansas, with 8 to 9 operating in the Fayetteville Play. That is compared to more than 55 rigs about six years ago, and down from 22 just two years ago. The monthly average for natural gas rigs in Arkansas during 2010 was 39.
However, the energy sector in Arkansas recovered in 2013 from a big drop in revenue in 2012. Following are the past five years of gross severance tax collections in Arkansas.
2013: $62.685 million
2012: $40.96 million
2011: $58.905 million
2010: $54.485 million
2009: $27.725 million (partial year of collections)
In 2008, the year before the severance tax was increased, collections were $1.314 million.
FUTURE PRODUCTION
Prospects for 2014 look promising with respect to staying at 2013 levels for the natural gas industry in Arkansas. Houston-based Southwestern Energy, one of the largest players in the region, expects production from the Fayetteville Shale Play to be “essentially flat” in 2014 compared to 2013.
“In the Fayetteville Shale, our well performance continues to improve, evidenced by a well we recently placed on production at over 12 MMcf per day, and our efficiencies created by our vertical integration are also expected to continue to improve keeping our well costs low,” noted a Dec. 10, 2013, company report on guidance for 2014.
The company plans to make capital investments of $900 million in the Fayetteville Shale Play during 2014, or almost 39% of the company’s combined $2.325 billion in capital investments in 2014. The company projects between 460-470 gross operational wells in the Fayetteville Play during 2014, just above the 441 in 2013.
The University of Texas report, issued in January, predicts the Fayetteville Shale Play will deliver 18 trillion cubic feet (TCF) of “economically recoverable reserves” by 2050, with production declining from about 950 billion cubic feet (BCF) a year to around 400 BCF by 2030. The report indicates there may be 38 TCF of “technically recoverable” natural gas, but notes that not all gas reserves make economic sense to produce.
However, without a gain in the price of natural gas, production in the Fayetteville Shale Play is predicted to moderate.
“In the pricing scenario of $4/mcf natural gas, production from the Fayetteville Shale reaches a plateau during the period of 2012-2015 and begins a gradual decline as the annual well count decreases,” according to the UT report.