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Drilling tax rates are under scrutiny in Pennsylvania

By Bob Downing Published: May 15, 2013

From the Associated Press:

A boom in natural gas drilling in Pennsylvania is generating billions of dollars for companies and private landowners, but some experts question whether the state's low effective tax on the bounty makes long-term sense.

Unlike most leading oil and gas producing states, Pennsylvania doesn't link fees to how much gas comes out of the well. Instead, each well pays an impact fee no matter how much it produces. That means that even as Marcellus Shale gas production has soared, revenue to local and state government isn't keeping pace.

For example, the impact fee generated about $204 million in 2011, when production was about 1 trillion cubic feet of gas. But when production doubled in 2012 to just over 2 trillion cubic feet, the impact fee revenue dropped to about $199 million. One billion cubic feet of gas equals about 180,000 barrels of oil.

"That gap is going to get bigger and bigger" over time, said Michael Wood, a research director with the Pennsylvania Budget and Policy Center, a progressive research group based in Harrisburg.

The Marcellus Shale formation, with wells in Pennsylvania, Ohio and West Virginia, is already the country's most productive natural gas field and is expected to produce gas for decades.

Over 20 or 30 years, that means the current impact fee here may generate $10 billion or $15 billion less than a flat tax on production, Wood said.

The Pennsylvania fee is essentially based on the numbers of wells drilled and on the wholesale price of gas, so when prices plunged last year, the revenue took a hit. Wood estimated that the 2011 revenue was the equivalent of about a 4.1 percent effective tax rate, which at first glance appears to be far lower than Texas, at 7.5 percent, or Oklahoma, at 7 percent.

As time goes on, a policy center analysis and a review by The Associated Press came up with the same conclusion: Pennsylvania's effective tax rate on gas production could drop to as low as 1.3 percent over the next few years.

The AP found that at the current pace production could grow to about 4 trillion cubic feet in 2015. That's the equivalent of $16 billion in company revenue if wholesale prices are at $4, which is the current range. At West Virginia's 5 percent tax rate, that would generate about $800 million.

But the policy center estimates that the Pennsylvania impact fee will generate $237 million to $261 million in 2015, depending on the number of wells drilled and prices.

Those aren't fair comparisons, said Kathryn Klaber, the president of the Marcellus Shale Coalition, an industry group. She noted that many other states give drillers a tax exemption for the first few years of production to allow companies to recoup costs. In Oklahoma, for example, a well that's drilled horizontally, like many Marcellus Shale wells, gets up to a four-year tax exemption, because the capital costs are far greater than a traditional well.

Such details are "hugely important in an industry that has upfront capital outlay," Klaber said. "The Pennsylvania fee puts money in the pockets of state and local governments even before gas is being produced. So you've got a timing difference."

Patrick Henderson, Gov. Tom Corbett's energy executive, wrote in an email that oil and gas operators have also paid more than $1.7 billion in corporate state taxes since 2007, so just looking at the impact fee revenue doesn't tell the whole story. He added that Corbett "was proud to partner with the General Assembly in crafting a fair impact fee intended to encourage development in Pennsylvania."

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Utica and Marcellus shale web sites

Ohio Department of Natural Resources' Division of Oil and Gas Resources Management State agency Web site.

ODNR Division of Oil and Gas Resources Management. State drilling permits. List is updated weekly.

ODNR Division of Geological Survey.

Ohio Environmental Protection Agency.

Ohio State University Extension.

Ohio Farm Bureau.

Ohio Oil and Gas Association, a Granville-based group that represents 1,500 Ohio energy-related companies.

Ohio Oil & Gas Energy Education Program.

Energy In Depth, a trade group.

Marcellus and Utica Shale Resource Center by Ohio law firm Bricker & Eckler.

Utica Shale, a compilation of Utica shale activities.

Landman Report Card, a site that looks at companies involved in gas and oil leases.FracFocus, a compilation of chemicals used in fracking individual wells as reported voluntarily by some drillers.

Chesapeake Energy Corp,the Oklahoma-based firm is the No. 1 driller in Ohio.

Rig Count Interactive Map by Baker Hughes, an energy services company.

Shale Sheet Fracking, a Youngstown Vindicator blog.

National Geographic's The Great Shale Rush.

The Ohio Environmental Council, a statewide eco-group based in Columbus.

Buckeye Forest Council.

Earthjustice, a national eco-group.

Stop Fracking Ohio.

People's Oil and Gas Collaborative-Ohio, a grass-roots group in Northeast Ohio.

Concerned Citizens of Medina County, a grass-roots group.

No Frack Ohio, a Columbus-based grass-roots group.

Fracking: Gas Drilling's Environmental Threat by ProPublica, an online journalism site.

Penn State Marcellus Center.

Pipeline, blog from Pittsburgh Post-Gazette on Marcellus shale drilling.

Allegheny Front, environmental public radio for Western Pennsylvania.