Have You Driven a Ford Lately?

As debate over taxes and regulations continues in Marcellus, regulators in Texas suspend the state’s severance tax to encourage new investment in Eagle Ford

With a name like “Eagle Ford,” you might think it’d be a place one would go to pick up a used F-150 with an optional trailer-tow package.

But for folks in South Texas, the Eagle Ford shale formation represents a whole lot more than that. To them, it’s an enormous reservoir of potential – a reservoir filled with trillions of cubic feet of clean-burning, American-made natural gas (and more than a little oil). And just like the Marcellus, efforts are currently underway to convert the historic potential of these natural resources into jobs for communities that need them, revenue for a state treasury in the red, and real opportunity for a part of the world that could certainly use some of it right about now.

Move over, Marcellus: The Eagle Ford is the newest shale play to arrive on the scene, and among the most monumental. Rig counts in the region have shot up by more than 500 percent in the past nine months. Scarce investment dollars have begun to flow into the area in record amounts. And at least among regulators in Texas, everyone seems to agree that the potential for growth is orders of magnitude greater than it currently stands today. But they also understand this: Without the proper regulatory and tax framework in place, the full potential of the blockbuster Eagle Ford shale play will never be realized. And jobs will be lost (and revenue deferred) as a result.

Maybe that’s why the Texas Railroad Commission, the chief regulator of oil and gas operations in the state, issued an order last week classifying three counties residing in the Eagle Ford as a “high-cost/tight-gas formation pursuant to Statewide Rule 101.” What does that mean in practice? For starters, it means that natural gas wells developed in that part of the state will now be eligible for relief from the severance tax. And while that certainly doesn’t mean that producers in the area will stop paying billions in annual taxes and royalties, it does mean the fortunes of the Eagle Ford and the thousands of residents whose livelihoods depend on it just got a whole lot brighter. All because the play just got a whole lot more competitive.

And as mentioned, folks in South Texas have started to take notice:

If you live in this area of Texas you are about to see a boom like you may have never imagined in your wildest dreams. Population of small towns in the area will begin to grow again … and there will be good jobs for your children without them having to leave for the big city. … For county governments tax coffers will swell and this will lead to new schools and road construction.

How significant is this new designation by the Texas Railroad Commission? Since the average Eagle Ford well costs more than $6 million to drill, the effective severance tax rate imposed by the state on producers in the Eagle Ford will drop from 7.5 percent to zero — and under the current law, that rate will stay that way for nearly a decade. Hello, investment. Welcome to Texas. Nice to make your acquaintance.

So there you have it: In Texas, understanding fully that a competitive shale play is an economically prolific one both for the state and its residents, the Railroad Commission didn’t waste a second in sending a loud and unambiguous message that it intends to keep it that way. Now it’s Pennsylvania’s turn to make its decision. And you can be assured the good folks in South Texas will be paying close attention to what’s decided.