Marcellus Shale: Severance Tax Update in Pennsylvania
This post was written by Nicolle Snyder Bagnell and Stephanie Hadgkiss.
Facing a projected budget deficit of $2.3 billion, Pennsylvania Governor Ed Rendell has proposed a "severance" tax on gas extracted from the Marcellus shale formation, the proceeds of which would go to the General Fund in order to offset revenue shortfalls in the state's budget. This proposal was reported in the Feb. 20, 2009 edition of the Oil and Gas Journal.
According to the article, Governor Rendell proposes to tax producers in the state 5% at the wellhead, plus 4.7 cents per thousand cubic feet of production --an approach identical to that of West Virginia. The tax would be paid monthly to the Pennsylvania Department of Revenue beginning Oct. 1, 2009 and has been projected to raise an estimated $1.82 billion over five years.
Pennsylvania oil and gas industry associations believe that such a tax could harm the state's industry, affecting both existing producers and out-of-state producers who may be encouraged to explore another domestic shale play instead. Because Pennsylvania's conventional wells are considered to be low-yielding, these associations believe that conventional wells can be profitable only with low operating expense. According to Lou D'Amico, executive director of the Independent Oil and Gas Association of Pennsylvania, "[t]he average gas well in Pennsylvania yields a profit averaging 15% of investment, which is net of operating expense and royalties" so "[a] 5% severance tax on gross production would amount to a full one-third income tax of each well's average cash flow, and is in addition to other taxes already imposed on the industry." Despite perceived potential, because the precise economics of a Marcellus well are yet undetermined, some believe that it is unwise to levy a tax against Marcellus production until certain variables are more clearly developed.
There is also a view from local governments that any tax revenue should be brought back to the host municipality, instead of going to a general statewide fund.
Still, Mike Wood, a research director at the Pennsylvania Budget and Policy Center, has explained that a severance tax would bring Pennsylvania in line with other states that already levy such a tax. According to Wood, 27 states have a severance tax on natural gas production.
On April 3, 2009, the House Appropriations Subcommittee on Fiscal Policy heard testimony on the tax. A vote has not yet been scheduled.
