There are three basic themes to opposing a severance tax on Pennsylvania’s shale gas production, such as the one currently being proposed by gubernatorial hopeful Tom Wolf and vehemently opposed by incumbent Tom Corbett.
There’s the burden on townships who stand to lose the impact fee they’ve been receiving for two years. There’s the possibility that landowners would have to pay a tax on their share of the wells’ bounty. And then there’s the industry’s bottom line.
“It’s going to kill us,” said Rich Weber, chairman and CEO of Moon-based PennEnergy Resources, not mincing words at a recent Marcellus Shale Coalition conference held Downtown. “It’s going to eliminate our industry.”
The imposition of a severance tax would invalidate the impact fee now paid by drillers for each well they spud, a measure included in Act 13 of 2012.
“I can’t believe you all aren’t more up in arms about this,” Mr. Weber said to municipal officials gathered at a panel on local government.
Some, indeed, are.
Twenty-seven out of 31 municipalities in Washington County, the most heavily drilled county in southwestern Pennsylvania, passed resolutions saying they oppose anything that would change the impact fee, which delivers money to local governments to offset the impacts of oil and gas development.
In September, the Washington County Association of Township Officials, which crafted the resolution, officially approved the measure and gave it to the Pennsylvania State Association of Township Supervisors to take to Harrisburg.
“(The impact fee) has been almost a blessing for all of us,” said Emilie Gadd, secretary of the Washington County association. “We feel we are impacted. We’re the ones tolerating all of this. Our countryside is being torn up.
“We should get our share,” she said. “Why should Pittsburgh get it when they have a moratorium against drilling?”
Mr. Wolf has proposed a tax that would be divided among municipalities that shoulder the burden of natural gas development, enforcement agencies that oversee the industry, investments in renewable energy development and education.
Although he hasn’t spelled out percentages, Mr. Wolf said by far the largest piece of the 5 percent tax would go toward K-12 funding.
“Five percent of what?” wondered George Stark, a spokesman for Cabot Oil & Gas, a Texas-based company whose Marcellus Shale holdings are in Susquehanna County.
There are ways to design a severance tax that might be easier to swallow, he said.
West Virginia, for example, where the severance tax is 5 percent, exempts all drilling equipment from its sales tax, Mr. Stark said.
Texas has a 7.5 percent levy on oil and gas that only kicks in once the well is profitable, Mr. Stark said.
Ohio, which is mulling a tax right now, is considering something between 2.5 percent to 2.75 percent.
EQT’s CEO David Porges said last month that it’s not necessarily wrong to expect companies to pay more when they’re making more money, as when gas prices are high; but the imposition of a tax would necessarily cut into spending budgets. The Downtown-based oil and gas company’s back of the envelope analysis showed that the tax proposed by Mr. Wolf would take $50 million out of its capital spending each year, he said. That’s about eight fewer wells annually.
“EQT was one of the first to support the existing impact fee for use by communities affected by our operations,” said Natalie Cox, a company spokeswoman.
“We also could support a reasonable severance tax [in lieu of or in addition to an impact fee] with a proper tax structure that would continue to give back to communities and ensure continued industry operations in Pennsylvania.”
Ryan Smith, an analyst for Colorado-based Bentek Energy who analyzed the impact of a 5 percent tax on Marcellus production, concluded it would not chase producers out of the area.
In the northeastern dry gas area, such a tax would decrease the average return on a well by about 5 percent, he said, “so wells that are making 30-40 percent (return) won’t be significantly impacted in terms of future drilling.
“If operators come under pressure during a low-price environment, enforcing the tax could encourage some producers to move rigs to West Virginia,” Mr. Smith said.
Some companies point to what happened in Alberta in the late part of the last decade as a cautionary tale. In 2007, the government of the Canadian province raised the royalty rates collected from oil and gas drillers in an effort to raise more money for state coffers.
Industry supporters say the plan backfired, although the subsequent drop in drilling also coincided with the Great Recession, muddling causation. In 2010, Alberta rolled back those higher rates in an effort to re-stimulate the industry, which had spread out to neighboring provinces that charged less.
In Pennsylvania’s fight against the levy, the last group of severance tax opponents are landowners who worry they would have to shoulder the tax burden on their share of company payments.
“In states that have a severance tax currently on oil and gas production, the severance tax isn’t paid strictly by the producers but instead is paid by the royalty owners as well,” Cabot warned on its blog, Well Said.
That’s the concern of Jackie Root, president of the Pennsylvania Chapter of the National Association of Royalty Owners, which represents property owners who lease their land for oil and gas development.
Ms. Root said a tax on oil and gas extraction would be unfair since no other extractive industries in the state are taxed, including conventional oil and gas wells.
“It would feel like saying we’re going to tax chicken and not beef,” she said.
Anya Litvak: email@example.com or 412-263-1455.