The governor’s mid-biennium budget review wisely includes a promised and detailed look at the state’s energy policies. Among the most pressing concerns: a need to update taxes and regulations on drilling for oil, natural gas and natural gas liquids trapped in deep shale formations. The shale drilling boom already is under way, with the state assuming thousands of new wells.
The proposal calls for an overhaul of Ohio’s severance tax structure, the first comprehensive update in 40 years. A 1 percent tax would be applied to natural gas from deep, horizontally drilled wells instead of the current rate of 3 cents per million cubic feet. The severance tax would be lifted from most smaller, conventional wells. The tax on oil and natural gas liquids from deep wells would be levied at 1.5 percent for the first year, then increasing to 4 percent.
Even then, Ohio would have a relatively low severance tax. The rate in Texas is 7.5 percent. Better to follow Michigan and West Virginia, which charge 5 percent, the revenue necessary to help in covering the cost of the drilling boom, including initial preparation. A portion would be well routed to research and development in clean energy.
Unfortunately, the governor’s plan gives local governments little help in dealing with the impact of a rapid influx of heavy drilling rigs and workers. A proposed $25,000 fee per well would go to local governments, but the plan would be revenue-neutral in the long run, drillers recouping the money from locals over time.
The governor rightly proposes improved regulations on the controversial drilling method that is enabling the dramatic expansion of Ohio’s energy industry. Hydraulic fracturing uses horizontal drilling, then injects high volumes of water mixed with sand and chemicals to break up rock formations deep underground.
The proposal calls for drillers to disclose the chemicals used, and it ensures proper well construction. Drillers would be encouraged to treat and recycle used drilling fluid (lowering usage of injection wells for disposal) and would have to meet enhanced pipeline safety standards. They also would be required to enter into road maintenance agreements with local governments.
The governor gets close to a balanced approach. Still, he leaves Ohio short of the resources necessary to compensate for what it gives up.