Louisiana's shaky government finances hit a major oil slick

Weak oil prices have slammed the great centers of American energy in many different ways and from a variety of angles. In the case of Louisiana, the rout kicked the state while it was already down.

The crude price rout arrived in 2014 as Louisiana was already using a patchwork of one-time measures to grapple with budgetary shortfalls that came about because the Pelican State had slashed income taxes and raised education spending when it was flush with cash.

Now, job cuts in oil fields and the fabrication plants that support drilling activities have worsened a drag on sales and income tax receipts, which account for more than half of the state's total tax collection.

Facing a nearly $950 million budget gap for the current fiscal year, Louisiana lawmakers were forced to raise or reinstate sales taxes, rein in exemptions and make cuts to health-care services for low-income residents during a special legislative session in March.

For fiscal 2017, which begins July 1, Louisiana faces a roughly $600 million shortfall, leaving the state's college scholarship program underfunded and other services at risk.

The state plans to issue new debt this fall and next spring, but the office of Gov. John Bel Edwards warned that bond sales are expected to be "greatly limited" after credit downgrades from two of the three major ratings agencies.

Louisiana finds itself in this situation after years of plugging budget holes by selling state property, tapping money from legal settlements and shifting around funds, said James A. Richardson, a professor at Louisiana State University and an economist for the Louisiana Revenue Estimating Conference.

"The general idea was we're going to get through this year and things will get much better, and we'll be back on the road to recovery and revenues will grow again," he told CNBC.

"Essentially after several years of doing that, you run out of tricks," he said.

Revenues have never returned to the long-term benchmark, he said, and by the time crude prices came crashing down, Louisiana remained mired in that loop of temporary funding.

The impact of the oil price slump is hardly limited to severance tax receipts. Louisiana is not only a major producer of oil and gas, but a top manufacturing center for equipment such as offshore rig gear and steel tubes. It's also a major shipbuilding hub.

Layoffs in those sectors mean less sales and income tax makes its way into state coffers.

Louisiana's mining and logging sector, an official statistical category that includes oil and gas extraction, shed about 12,100 employees in the year through January. Employment in the manufacturing industry, which is highly exposed to the energy industry, was down by nearly 7,000 positions during the same period.

In the exploration and production segment, the number of rigs operating in Louisiana's oil fields fell by about two-thirds, to just 22, in the last two years. Offshore rigs have been halved to 23 during the same period.

Job cuts extend beyond the roustabouts who work in the field and ripple through the supply chain, according to a spokesperson for the business development group Louisiana Economic Development, or LED.

Carbo Ceramics, which makes ceramic proppant used in hydraulic fracturing, warned the Louisiana Workforce Commission last month that it would temporarily close its New Iberia operations and lay off 61 workers.

Last year, oilfield services firms including Baker Hughes and Noble filed so-called WARN notices in Louisiana as their clients in the upstream exploration sector shelved projects.

Since the downturn began, exploration and production companies around the world have deferred $380 billion in capital spending, with deep-water projects accounting for more than half of the total, according to research consultancy Wood Mackenzie.

The number of offshore projects coming online in the Gulf of Mexico actually hit a multiyear high in 2015, according to Imran Khan, senior research manager for deep water Gulf of Mexico at Wood Mackenzie. But exploration work, particularly seismic surveying, has fallen fast.

"The services companies are absolutely hurting for more work," he told CNBC. "One of the things that has absolutely slowed down is survey work, because no one is interested in doing exploration work" in the Gulf of Mexico.

In the Gulf, drillers are trying to redesign projects rather than cancel them outright, he said. That situation has come about not just due to lower oil prices, but also because the quality of reservoirs simply isn't proving valuable enough to start deep-water drilling in some cases, he explained.

Still, LED says the downturn has affected Louisiana's equipment makers and shipbuilders, some of whom produce not just for offshore operations in the Gulf of Mexico, but for upstream companies throughout the United States and around the world.

The state's saving grace has been its refining industry, which benefits from lower costs when crude and gas prices fall. Construction on chemical manufacturing and processing facilities has largely proceeded apace, according to LED.

With energy-related employment down and sales taxes taking a hit, Louisiana State's Richardson said lawmakers must now face the music and either cut even deeper or raise more revenue.

Programming Note: CNBC's Brian Sullivan will report live from Louisiana's oil patch on Friday, May 6.