Mississippi complicates drilling choice for La.

08 05, 2013 by The Advocate

Developing Louisiana’s section of the Tuscaloosa Marine Shale has been complicated by an unlikely competitor: Mississippi.

Earlier this year, the Mississippi Legislature passed a law that cut severance taxes in the Tuscaloosa from 6 percent to 1.3 percent for wells that begin production July 1 or afterward. Encana Corp. says the tax break will reduce its costs by around $700,000 to $800,000 per well.

The wells are so expensive to drill — Encana spent about $20 million on its first one — that oil companies argued they needed the break to continue developing the formation, said Howard O. Leach, attorney for the Mississippi State Oil and Gas Board.

“Their argument to the Legislature was, ‘We’re spending so much money to drill these wells that these wells may never reach pay out,’ ” Leach said.

The industry convinced the Legislature, which also limited the severance-tax cut to 30 months or until well costs are recovered, whichever occurs first.

Baton Rouge landman Dan S. Collins said Mississippi’s severance tax break is just a little better than Louisiana’s incentive package. In Louisiana, the state waives severance taxes for up to two years or until well costs are recovered, whichever happens first.

However, Louisiana Oil and Gas Association President Don Briggs said Mississippi’s incentives won’t be the determining factor for energy companies.

“Companies, for the little bit of difference, aren’t going to drill in Mississippi versus drilling in Louisiana,” Briggs said.

If there’s more oil on the Louisiana side, energy companies are going to drill there, he said.

So far 20 wells have been drilled in Louisiana’s portion of the Tuscaloosa; 16 are producing. No rigs are drilling right now.

In Mississippi, four Tuscaloosa wells are being drilled, according to the Oil and Gas Board. Of the 16 wells permitted, nine are in production.

Collins said the new severance tax rate is just one of the steps Mississippi has taken to make itself more attractive to energy companies.

Mississippi also has a “forced pooling” provision that allows well drillers to force mineral rights owners to join a drilling and production unit.

In addition, the Mississippi State Oil and Gas Board has permitted two much larger drilling units.

In Louisiana, the typical drilling unit is 640 acres; Mississippi is allowing two units of close to 2,000 acres.

The larger units mean companies can hold onto their leases by drilling fewer wells, Collins said. That’s good for the operating companies but not as good for landowners.

Collins said he is convinced Louisiana will follow suit.