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February 18, 2015Where’s the safety factor in silver and gold?
February 18, 2015
As the price of oil remains low compared to previous levels, industry has certainly taken notice and made adjustments.
And as The Times has noted in a previous issue, the deepwater oil and gas industry takes a long-term approach to its budgeting, and although slight belt tightening has already been felt, the effects have been minor and likely will continue to be minor for several months.
But then there’s the trickle down effect – the one in which everyone in the Bayou Region, whether they work in an oil and gas related field or not, will feel as a direct result to the low price of oil.
And that’s what local government agencies have their eyes on when it’s those very dollars that contribute to the services many in the public take for granted every day.
Governments, of course, can only operate with the funds available to them, and on top of lower oil and gas revenues resulting in fewer taxes and royalty payments to government, when fewer people are working and/or making lower salaries, sales taxes plummet as those individuals choose to save what they do have.
According to Louisiana Mid-Continent Oil & Gas Association Offshore Committee Director Lori LeBlanc, the state of Louisiana loses $12 million for every $1 decrease in the annual average price of oil. That means that if the current price of oil – at about $50 per barrel – stays at its current level for much of 2015, the state of Louisiana would net roughly $552 million less than it did last year when the average price of oil was $96.19, according to statista.com. With other factors involved, LeBlanc said that the current state shortfall is about $1.6 billion.
LeBlanc added, however, that state and parish budgets are far less dependent on the price of oil than they were when an industry collapse devastated the area in the early 1980s. For instance, in 2013, taxes paid by the oil and gas industry in Terrebonne and Lafourche parishes accounted for 13.7 and 14.3 percent, respectively, of the total taxes collected in the parishes. Those figures rank along with the state average of 14 percent. In 1981, oil and gas taxes accounted for a whopping 42 percent of total taxes collected.
But with that said, local government agencies are bracing themselves for expected negative financial effects due to the current price of oil.
According to the Louisiana Constitution, 10 percent of the royalties from mineral leases on state-owned land, lake and river beds and other water bottoms belonging to the state are to be paid to the governing body in which the lease sits.
This somewhat easy to estimate figure depending on the oil price forecast but on utterly unpredictable one due to the unforeseen swings in the price of oil places an undetermined amount of revenue into the hands of local government agencies.
2014 royalties could be characterized as an above average year for Terrebonne and Lafourche parishes. Lafourche took in about $9.4 million in royalty payments last year, and Terrebonne had received $4.2 million in the first three quarters of last year, with the fourth quarter predicting it to join Lafourche in going over its recent-years average.
But with the current low price of oil, agency finance leaders say they will keep an eye on how it will affect payments.
“Our royalty also came in higher than we had experienced in the three years, four years, but we are definitely concerned and going to be keeping an eye on royalty for this upcoming year because the price of oil has dropped tremendously,” said Lafourche Parish Finance Director Renita Jackson. “We are going to be looking at that each quarter and making sure that we are coming in on target of what we are anticipating receiving for 2015.”
Lafourche splits its royalty payments into several funds. Last year, the General, Animal Shelter, Building & Maintenance, Roads & Bridges, Drainage, Recreation, Library, Civil Defense, IV-D, Commission of Women, Coastal Zone Management, Beachfront, RSTD 2 and Capital Projects funds got a share. Those funds represented 7 percent of the total dollars which funded parish projects and services last year. The parish also left about $2.8 million in the royalty fund, which would help any possible shortfall in 2015.
Lafourche Parish President Charlotte Randolph said at a council meeting last month that the parish makes its annual budget based on the price of oil being $80 per barrel. She said that any reduced revenue wouldn’t affect any 2015 parish projects, but future projects will need to be considered carefully.
In Terrebonne Parish, budgeters expect about $5 million per year in royalty payments annually regardless of the oil price forecast. Terrebonne uses its royalty payments for recurring expenditures and any amount received over $5 million for special non-recurring projects.
“If for any reason it goes down, then we have a little reserve that we fall back on so that we can maintain the operations of the government,” said Terrebonne Parish Consolidated Government Chief Finance Officer Jamie Elfert. “ … We always try to budget as conservatively as we can, and if we know there is a change in the economy or we know something is coming up like what’s been happening now, we make our adjustments at the time.”
In the last 10 years, Terrebonne Parish royalties have been as high as about $9.1 million in 2008 and as low as about $4 million in 2009.
With where the price of oil will be for the remainder of 2015 as an unknown variable, as well as other factors which contribute to royalty payments such as production volume and number of wells also being undetermined, it is impossible to predict how much less our local government agencies will receive in 2015. However, it is a likely prediction that it will be less than it was last year and less than it usually receives.
