by Jeff Hankins
Posted 2/14/2011 12:00 am
Updated 11 months ago
Jobs, wealth, economic growth in otherwise stagnant counties and even increased tax revenues were all seen as positive attributes. We were assured that environmental issues and damages to highways and county roads were nothing to worry about. A 2008 study by the University of Arkansas, commissioned by natural gas firms, estimated a whopping $18 billion economic impact.
At the urging of former natural gas executive Sheffield Nelson, Gov. Beebe and the Legislature raised the long-stagnant severance tax rate on natural gas to ensure the state was benefiting from the drilling in a more direct way. Those additional dollars are being spent on highways, though not necessarily in the drilling regions.
The most critical of details for the Fayetteville Shale Play to deliver the highest level of benefits for everyone directly impacted was a continued high price for natural gas. The price peaked at about $11 per thousand cubic feet in 2008, but has been down to the $3 range in recent months. At an Arkansas Business symposium in 2007, gas executives said the costly drilling methods required a price level of at least $6 to be viable.
Where are we today? We have one of the largest players, Chesapeake Energy Corp., ready to sell its assets in Arkansas. Nelson wants a ballot initiative that would raise the severance tax to 7 percent while closing loopholes to raise more money for highways. Royalty payments and drilling activity levels have plummeted. And we have unusually high minor earthquake activity in some of the primary drilling areas that may be related though evidence so far is inconclusive.
Add to all that the glut of natural gas from additional shale developments across the country, and the $18 billion glow is much dimmer than expected. State economists say it's been neither boom nor bust, but most everyone agrees there have been substantial benefits and the state will continue to benefit for many years.
Chesapeake's announcement wasn't stunning, considering the financial challenges it has faced. The positive spin would be that the Fayetteville Shale is valuable and its assets could be sold for a premium price. The negative spin would be that Chesapeake is more bullish on its other natural gas properties.
Meanwhile, Southwestern Energy Co. has opened its new $25 million offices in Conway, which would indicate a long-term commitment to Arkansas. Southwestern moved its corporate offices from Fayetteville to Houston several years ago, but its investment in the Fayetteville Shale has been substantial.
Environmental concerns about the drilling process, which involves substantial amounts of water and wastewater, have been addressed from the get-go. I still think that if there were major issues that could create long-term problems, they would have been identified during exploration and drilling in the Barnett Shale Play in Texas. Furthermore, similar drilling processes are being used in newer shale areas of Pennsylvania and elsewhere.
The initial wealth created by the Fayetteville Shale Play was substantial and had the potential to positively impact Arkansas families for generations. Those who were conservative with their newfound riches will be fine, and those who spent wildly may be wishing they hadn't since the size of those royalty checks has tumbled.
However, I think history will show the overall economic impact of the natural gas industry helped Arkansas survive the recession. The jobs and income that were generated provided an enormous boost to the state and local communities. We knew the biggest windfall would be in the early years of drilling.
Nelson's obsession with increasing the severance tax remains fascinating. It's not something he would have advocated while he was CEO of Arkansas Louisiana Gas Co. from 1972-88. His well-known fallout with the Stephens family, which still has massive natural gas holdings in the state, continues to play out with these kinds of proposals. The messages of Arkansas' severance tax being too low and needing more revenue for highways provide easy, reasonable cover for his underlying obsession.