A proposed natural gas severance tax in Pennsylvania would have negative economic consecutives, reducing the number of horizontal gas wells drilled and increasing job losses, said a Natural Resource Economics Inc., study released by the Associated Petroleum Industries of Pennsylvania (API-PA).
"Higher energy taxes could put a damper on energy activity, and the commonwealth could be worse off with a new severance tax," Stephanie Wissman, API-PA executive director, said during a May 7 briefing. Gas development supports thousands of jobs in Pennsylvania and contributes nearly $35 billion/year to the state economy, she said.
The report, "The Economic Impacts of the Proposed Natural Gas Severance Tax in Pennsylvania," analyzed the impact of Gov. Tom Wolf's proposal to implement an additional gas severance tax. Proposals include adding 5% on the gross market value of production plus a fixed fee of 4.7¢/Mcf produced and setting a floor of $2.97/Mcf regardless of the actual gas price (UOGR March/April 2015, p. 14).
"If a new tax is created, in 2016 alone, the commonwealth could lose 6,000 jobs, not just in the oil and gas sector but also across a range of industries that are part of the gas industry supply chain and from service industries that depend on spending by workers employed in these industries," Wissman said.
She suggests industry is being unfairly singled out for a tax, noting other industries do not face a severance tax.
"The oil and gas industry has always been subject to these types of considerations over the years, and it will probably always be that way," she said.
The Pennsylvania Legislature faced a June 30 deadline to adopt a budget for the next fiscal year.
During April, the Pennsylvania State Association of Township Supervisors said it was joining counties that oppose Wolf's proposal to replace a variable fee on Marcellus shale wells with a flat annual payment to local governments in drilling areas.
The Pennsylvania Oil & Gas Association noted in its April newsletter that when Gov. Wolf unveiled details of his severance tax plan in March, "it contained a feature not found in any other state's tax-a price floor that guarantees the state would receive payments based on a value of gas of at least $2.97/Mcf, no matter how low actual prices fall. At the time the details of the tax were made public, gas was selling at five Pennsylvania hubs for prices ranging from $1.23 to $2.52."
Study estimates drilling pace
Timothy J. Considine, a University of Wyoming energy economics professor, wrote the report under a consulting agreement between Natural Resource Economics and API. He noted the findings and conclusions were his alone and did not necessarily reflect the views of API or UW.
"The proposed severance tax is estimated to reduce the number of wells drilled by 1,364" during 2016-25, he said, adding the severance tax proposal was estimated to reduce Pennsylvania's gas production by over 900 MMcfd by as early as 2021 compared to what it would be without a severance tax.
"The cumulative loss in natural gas production is 2.86 tcf," during 2016-25, he said. "The proposed price floor for calculating the tax will increase the burden of the severance tax when natural gas prices are low, which are times when the industry is least capable of absorbing a cost increase."
He said the proposed severance tax would reduce financial returns from drilling, which in turn reduces drilling activity and the number of producing wells. His estimates were based on survey data he collected during 2009-12 about costs and drilling for seven top operators in the Pennsylvania Marcellus.
Considine called his estimates conservative, based upon projections of declining well productivity. If the productivity of Marcellus and Utica holds steady or increases, the economic losses from the severance tax could be larger, he said.
Gas impact fee questioned
Under Pennsylvania law, the passage of a new severance tax would repeal the existing gas impact fee. Investment and production losses resulting from a new tax could lead to cumulative losses of over $20 billion in value added or gross state product to the Pennsylvania economy during 2016-25, the study estimated.
API-PA's Wissman said an existing local impact fee, collected from every shale drill site in Pennsylvania, has distributed more than $630 million to communities since 2012, including more than $224 million in just 2014.
That's on top of over $2.1 billion in state and local taxes already generated by industry, she said.
By 2025, supported employment in the state could drop by nearly 18,000 relative to projected levels without the tax, the study said, adding high-paying construction and oil and gas sectors would be hardest hit.
"State lawmakers should reject the severance tax so that the benefits of Pennsylvania's energy development continue to flow," said Wissman.
The API-PA is a division of the American Petroleum Institute.