API economist: Taxes, restrictions could stymie gas potential

Nov. 29, 2010
State and federal lawmakers should resist calls to heavily tax or restrict development and production of natural gas from shale formations, an American Petroleum Institute senior economist urged.

Nick Snow
Washington Editor

State and federal lawmakers should resist calls to heavily tax or restrict development and production of natural gas from shale formations, an American Petroleum Institute senior economist urged.

Sara Banaszak's recommendation came days after Pittsburgh's city council unanimously voted to ban gas drilling within the city limits, and a West Virginia legislative subcommittee received a bill draft which would raise permit fees and impose a $25,000 performance bond requirement for each new well.

"We want legislatures to proceed with caution," Banaszak told reporters during a Nov. 18 teleconference. "There are new types of geologies in many states and in Canada which can produce natural gas. If the entire costs in one area make it less competitive, a producer will be inclined to look at another place."

She said, "By keeping prices competitive, a state can produce more revenue from higher gas production than from raising taxes. We've seen efforts in several Canadian provinces to lower taxes to stay competitive. That's a cautionary note that I think US state legislatures should consider."

The Associated Press reported that a 90-page draft bill was presented to the West Virginia legislature's joint judiciary committee earlier in the week which would impose four permit fees ranging $5,000-15,000/well in addition to a $25,000 performance bond.

'Catastrophic, astronomical'

Charlie Burd, executive director of the Independent Oil & Gas Association of West Virginia, observed, "I think it would be catastrophic. This kind of permit fee increase is astronomical. It would have terrible results. These numbers far exceed anything we've seen anywhere else in the country."

The oil and gas division within the state's Department of Environmental Protection has indicated that current fees don't cover permit costs and regulatory expenses, Burd told OGJ on Nov. 18. "I believe the industry is willing to accommodate a reasonable fee increase. It proposed the last fee increase in 2005, so it has a history of trying to accommodate oil and gas regulatory needs," he said. "I don't think a reasonable person would look at these proposed increases and call them reasonable. These numbers appear to have been pulled out of thin air."

James A. Martin, who leads the state's oil and gas division, also expressed surprise at the proposal's reported numbers. DEP is still working on its own proposal, which could include new fees, but it's in a very preliminary stage, he told OGJ. An initial examination of this draft showed several possible changes in water management and other regulations, but only the addition of horizontal wells to sections covering permits. Application and modification fees and bond requirements apparently have not been formulated yet.

The proposal which the legislature's joint judiciary committee received was drafted there and presented by its counsel, a DEP spokeswoman said. DEP's proposal is a working document which will change before state lawmakers receive it in the next session, she emphasized.

The Pittsburgh City Council's Nov. 16 vote came on a measure sponsored by one of its members, Douglas Shields, who proposed it out of concern about possible air and water contamination from growing shale gas production in the state. "This is a dangerous activity to be doing in a densely populated area," he maintained. "The industry is in total denial about its impacts. All they care about is jobs and money."

'Shortsighted view'

Kathryn Z. Klaber, president and executive director of the Marcellus Shale Coalition, said she was disappointed but not surprised by the council's vote. "It represents a blow to the city's weak financial standing, and at the same time is a straightforward attack on individual property rights," she said.

"At a time when the natural gas industry is generating jobs and prosperity for tens of thousands of Pennsylvanians and economic development across the commonwealth, it's unfortunate that the council continues to maintain a shortsighted view regarding responsible shale gas development and its overwhelmingly positive economic, environmental, and energy security benefits," Klaber continued.

Banaszak noted, "You can't deny there are challenges. The dialogue we've been having so far makes it clear we haven't done a good enough job communicating the way regulation occurs at the state level. I think a lot of parties out there still don't understand."

Shale gas production has grown dramatically in Pennsylvania and the state is revisiting many of its regulations and policies, the API senior economist said. Other states are doing the same, she added.

Bills to federally regulate hydraulic fracturing, the process used to produce shale gas, were introduced during the 111th Congress and would have been very onerous for the industry to implement, Banaszak said. "With respect to the new Congress, I think we shouldn't make any assumptions. That's why we remain concerned about proposals which would duplicate state requirements at the federal level," she said.

Up to 80% of the domestic gas wells which will be drilled in the next decade will need to be fraced, she said. API supports disclosing ingredients of frac fluid to state regulators, local authorities and hospitals as needed, Banaszak continued, adding: "The only restriction is that we operate in a highly competitive environment. Millions of dollars are invested in designing competitive technologies, and they need to be recovered. I can't predict how the public will respond to the latest disclosures, but we're committed to disclosing as much as we can."

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