Bob Downing

Ohio’s severance tax rate on natural gas and oil is among the lowest in the United States, but it is suddenly generating tens of millions of dollars for state coffers.

That’s because lots of horizontal wells have been drilled in eastern Ohio and are starting to produce large volumes of natural gas and, to a lesser degree, oil from the Utica Shale.

Income from the tax has jumped from $2.5 million in fiscal year 2010 to nearly $21.3 million in fiscal year 2015, according to the Ohio Department of Natural Resources. That’s an increase of 752 percent since drillers went after the Utica Shale. The biggest jump was a 261 percent increase from fiscal year 2014 ($5.9 million) to 2015.

Most of that tax money is derived from a tax on natural gas.

The tax total for fiscal year 2016 that began July 1 and runs through June 30, 2016, is already at $16.6 million through Dec. 31 and could top $30 million.

“That’s just shocking,” said Teresa Mills of Columbus, a spokeswoman for the Virginia-based Center for Health, Environment and Justice and a drilling watchdog in Ohio.

“Wow! That’s pretty amazing,” she said. “I know there are more wells on line and producing more, but that severance tax total is still shocking. … It’s not disturbing but it is just really surprising.”

Such a level of severance tax income means that the Ohio Department of Natural Resources should be fully staffed to handle any and all drilling problems in the state, she said.

“There’s no excuse for ODNR,” she said. “With funding like that, there’s no excuse for the state. ODNR must put up or shut up.”

The jump in Ohio’s severance tax income is not a surprise, said Andrew Thomas, executive in residence at the Energy Policy Center at the Maxine Goodman Levin College of Urban Affairs at Cleveland State University and an expert on the Utica Shale.

“Production has increased significantly. Production has gone up a lot. And that’s producing more severance tax income. … It’s been a big jump,” he said.

“It is a significant amount of money,” said Shawn Bennett, executive vice president of the Ohio Oil and Gas Association, a statewide trade group.

What is unknown is how long that financial windfall will continue for Ohio as Utica drilling is slowing down — like shale drilling in other states — due to low commodity prices. That will likely reduce Ohio’s severance tax income at some future time, although production from already-drilled wells will continue for a time.

Only 15 wells were drilled in Ohio from July through September as the industry retrenched, Bennett said.

That number of wells drilled in Ohio has declined from 144 in third quarter 2014 to 133, to 102 to 63 to 15 in subsequent quarters, he said.

The number of drilling rigs at work in Ohio has dropped from 59 rigs 13 months ago to 14 rigs today.

That decline has already had big impacts as severance taxes have plummeted in most shale-drilling states. Six states that rely heavily on severance taxes are now looking at those taxes. Those states includes Texas, North Dakota, West Virginia, Wyoming, Oklahoma and Alaska.

Pennsylvania does not impose a severance tax, although that has been proposed. The state does impose fees that raise $856 million a year.

Ohio is one of 36 states that imposes severance taxes on natural-resource extraction.

Ohio’s tax is 3 cents per thousand cubic feet of natural gas and 20 cents per barrel of oil through three assessments. There is no tax on natural gas liquids including ethane, butane and propane.

The tax is also levied on older, smaller, vertical-only wells across Ohio. The $2.5 million collected on 2010 reflects largely the tax on such wells.

To date, Ohio has approved 2,118 Utica Shale permits. Of that total, 1,670 Utica wells have been drilled and 1,125 Utica wells are producing.

Under state law, the severance tax money must go to two divisions with the Ohio Department of Natural Resources: the Division of Oil and Gas Resources Management that oversees drilling and the Division of Geological Survey.

In 2015, Oil and Gas Resources Management got $19.7 million and Geological Survey got $1.6 million. The totals are likely to grow this fiscal year.

The 2016 fiscal budget for the Division of Oil and Gas Resources Management is about $22.5 million and the budget for the Division of Geological Survey is about $2.9 million. Both divisions have other incomes, too.

Last year, Ohio hired additional inspectors, bringing that number to more than 50. It has also hired eight new staffers for a new Emergency Response Team. That team will handle any and all drilling incidents in eastern Ohio. Four staffers will be stationed in local counties and four will be stationed in Columbus.

The severance tax not only pays for budgets but also for vehicles and Ohio’s orphan well program that seals up old abandoned wells, said ODNR spokesman Eric Heis.

It’s unclear how the state might use the severance tax money in the coming years, although it could help the state through a rough patch should that tax income decline, he said.

There has been heated debate for several years between Gov. John Kasich and the Ohio Legislature over raising Ohio’s severance tax. Seven proposals have been introduced in the General Assembly but none have been passed.

Kasich proposed to increase the severance tax to 6.5 percent of the commodities’ value and to funnel some of that money to local communities impacted by drilling. He also wanted to use the severance tax income to fund a state income tax refund.

At $50 per barrel of oil, the 6.5 percent rate would amount to a tax of about $3.25 per barrel of oil and about 15 cents on each thousand cubic feet of natural gas. Such a tax on oil would be 16 times greater than what drillers pay now in Ohio, critics said.

That would result in Ohio’s severance tax being higher than West Virginia’s rate of 5 percent, but lower than the 7.5 percent rate that Texas collects.

Oil is currently under $30 per barrel.

The industry has opposed such a hike, saying the timing was bad because commodity prices were dropping and a tax hike would drive drillers out of Ohio.

It appears highly unlikely that Ohio will hike the tax in 2016, said David Hill, president of the Ohio Oil and Gas Association, in a January posting to his statewide membership.

Bob Downing can be reached at 330-996-3745 or bdowning@thebeaconjournal.com.