Drillers in Tuscaloosa Marine Shale region expect big savings from state tax cut

JACKSON — Canadian energy company Encana estimates a new 80 percent state tax cut will save it up to $800,000 a year in oil and natural gas extraction taxes on wells it puts into production after July 1 in Southwest Mississippi’s Tuscaloosa Marine Shale development.

Mississippi hopes to become a key destination for horizontal oil and gas drillers.

Mississippi hopes to become a key destination for horizontal oil and gas drillers.

Encana has six deep ground horizontal wells in the Tuscaloosa Marine Shale play and plans two more in the current quarter, though presumably the company would delay the new wells in order to qualify for the reduction in severance taxes. The reduction passed in this year’s Legislature cuts the tax on oil and gas extracted through horizontal drilling from 6 percent to 1.3 percent for the next five years.

The cut applies to oil and gas extracted from horizontally drilled wells for a period of 30 months or until the payout of the well. The legislation applies to all qualified horizontally drilled wells between July 1, 2013 and June 30, 2018

Companies that provide support and services for the horizontal drilling wells and their fracking operations also qualify for the tax break.

Just how much the lowered taxes will cost Mississippi in revenues is not clear. Much would depend on the level and pace of new horizontal drilling.

Mississippi takes in around $80 million annually in oil and gas severance taxes, with the oil severance tax accounting for the bulk of the tax revenue at around $67.5 million.

Oil and gas experts say the Tuscaloosa Marine Shale (TMS) situated in Southwest Mississippi and Southeast Louisiana is at depths of 11,000 to 15,000 feet but modern drilling techniques make the extraction more affordable and effective than in the past. The quantity of oil and gas that can be removed from the TMS is uncertain but energy companies are betting it is substantial.

So are state officials. Gov. Phil Bryant’s  office predicted in a press statement this week the Tuscaloosa development will be one of the “most active shale plays in the United States.”

Encana is among a handful of companies already working the deep horizontal wells in the TMS. Devon Energy, GDP Energy and Hong Kong Energy are also active int he region.

Drilling of each deep well so far has run from $11 million to $20 million.

Encana has decreased its drilling costs from around $20 million to $17 million a well, said spokesman Doug Hock. That cost is expected to go even lower, he added.

“We’re budgeting an average cost of approximately $15 million per well for the year,” he said. “This is related to technical changes and gaining an understanding of how to most efficiently access the resource.”

He said Mississippi’s cut in the severance tax will save the company roughly $700,000 to $800,00 “of additional cash flow” per well.

Encana is “gaining confidence in the potential of the play as it nears commerciality,” the company said in its fi4rst quarter earnings report.

The lower severance tax rate adds to the commercial viability of its work in the Tuscaloosa Marine Shale play, Encana said.

“This five-year program supports the pursuit of commerciality by positively impacting Encana’s economics for the emerging Tuscaloosa Marine Shale play,” said the company created through the merger of PanCanadian Energy Corporation and Alberta Energy Company Ltd. in 2002.

The prospect of an economic bonanza for the state in terms of jobs and revenue from extracting shale oil from far below ground in Mississippi led Bryant to make the tax cut part of his Energy Works: Mississippi’s Energy Roadmap plan.

Bryant predicts the lower rate will position Mississippi among the “most competitive states in the nation when it comes to attracting companies that explore and develop shale plays.”

 

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