If anyone wonders whether the general economic recession will affect the oil and gas industry, they need look at Pennsylvania where Gov. Edward G. Rendell proposed a natural gas severance tax on Feb. 4 in his annual budget message.
He seeks the levy as the Keystone State faces a current projected budget deficit of $2.3 billion. Interest in producing gas from the Marcellus shale has created what he termed “a Pennsylvania gold rush,” Rendell told legislators.
He proposed a tax of 5% at the wellhead, plus 4.7¢/Mcf, an approach identical to neighboring West Virginia’s. State officials project that it would raise about $1.82 billion over 5 years, starting with $107.2 million in 2009-10 and climbing to $631.9 million in 2013-14.
Tax could hurt
State oil and gas industry associations warn that the tax could hurt existing producers who also would have to pay it. “Conventional wells in Pennsylvania are low-yielding and marginally economic. Only with careful cost control and minimal operating expense can these wells attract any investment,” said Lou D’Amico, executive director of the Independent Oil and Gas Association of Pennsylvania Feb. 5.
Stephen W. Rhoads, president of the Pennsylvania Oil and Gas Association (POGAM), said the proposed tax has a 6.25% effective rate. The volumetric component makes it very regressive: When gas prices fall below $2, the effective tax rate is about 7.5%. When prices are $7.50-8, it’s below 6%, he told me in a Feb. 13 telephone conversation.
POGAM also tried to determine the proposed levy’s bottom line impact over a typical shallow well’s 20-year lifetime. “When you put an effective 6.25% tax against the gross income to the working interest, drilling costs and operating expenses, it takes about 30-35% of the net income away,” Rhoads said.
He said Pennsylvania faces a difficult budget year, and the governor wants to fill holes. Rhoads said Rendell also welcoms alternative proposals, and that POGAM has one.
Alternative
“We think it would be more practical to lease state forest lands which lie within the Marcellus Shale fairway for production and development. The Department of Conservation and Natural Resources earned, on average, about $2,500/acre or about $90 million when it held a lease sale in September for just this purpose,” he said.
“If you assume Marcellus production rates based on what’s going on in other shale plays, a lease sale of 100,000 acres annually for 4 years and lease signing bonuses similar to last year, we believe the governor could raise $1 billion from the lease sales and royalties, based on the department’s standard 16.5% rate, in the $800 million range over 5 years,” Rhoads said.
That would be close to the $1.82 billion the state projects to receive from the proposed tax, while giving Pennsylvania a chance to determine what’s actually within its part of the Marcellus, he noted.
