May 31, 2009

It was February 4th when Governor Rendell first proposed a severance tax on natural gas extraction as a part of his budget.   How much of a part? $107,200,000 worth.   Since that time, hearings, press conferences and many articles have been held and published and here we are about to turn the calendar over to June.   The month of June, the busiest of legislative months during the year, brings all things financial into focus and with a deficit approaching $3 billion this year may be “June on steroids” and may spill into July and beyond if an agreement cannot be reached.

 So the stage has been set for the debate on a severance tax.   The Governor's proposal is modeled after the state of West Virginia.   The proposed rate is 5% of the value of the natural gas at the wellhead plus $0.047 per thousand cubic feet of natural gas severed. The tax would be effective October 1, 2009.     On May 13, House Environmental Resources and Energy Chairman Camille Bud George has introduced the Governor's proposal in HB 1489.   The bill requires a driller to apply for a severance tax registration certificate, requires wellhead meters and establishes a r eporting period defined as "a calendar month in which natural gas is severed.” The tax imposed would be 5% of the gross value of units severed at the wellhead during a reporting period, plus 4.7 cents per unit severed.   To read the bill, click here . 

Those in the legislature that oppose the severance tax argue that the state should lease more land to generate the revenue.   They argue that a tax will inhibit the growth of the industry in the Commonwealth and stifle the benefits that other states have enjoyed.   Representative Dave Reed (Indiana) , Chairman of the Republican Energy task force, has sponsored HB 1050.   The bill, a result of the “Energize PA” initiative, would expand the state lands available for leasing to drill for natural gas and additionally lead to royalties that would provide an estimated $260 million a year for the Commonwealth's budget. To read the bill, click here . To read the press packet, click here .

 In the Senate, President Pro Tempore Joe Scarnarti (Jefferson) said " I don't believe now is the time for any new severance tax-- Let's make the environment conducive for them to invest here and we can have that tax discussion later once the production is up and running."   We should build the industry and then work with them on possibly what's an appropriate tax. I think we could certainly chase them out of here with a knee jerk extraction tax at this time. Anyone who thinks we are going to tax our way to a new industry here is out of their minds."   Representative Tim Solobay (Washington) has a column on Natural Resources. To read the column, click here .

There are some other things to keep in mind.   There are other shale plays that are in various stages of development and industry is likely to factor in costs on where they invest.   Click here to see a US Map.   According to North America Rotary Rig Count by Baker Hughes International; Arkansas with the Fayetteville Shale Play has 46 rigs, Colorado has 45 rigs and a shale play called the Green River Shale Play, Louisiana has 140 rigs and a shale play called the Haynesville Shale, Oklahoma has 83 rigs and the Woodford Shale Play, Texas has 347 rigs and is home to the Barnett Shale Play, Pennsylvania has 29 rigs and West Virginia has 23 and is home to the Marcellus Play.   Companies have multiple states to choose from in addition to overseas areas.   Below is a chart showing several states Corporate Net Income Tax Rates and Severance Tax Rates.

(1) Federation of Tax Administrators