Natural Gas




Natural Gas Severance Tax: An Economy Killer

MAY 6, 2015

From labor unions to local chambers of commerce, community leaders are expressing a lot of anxiety over Governor Wolf's natural gas severance tax proposal.

The proposed tax “is a Wyoming County economy killer,” says Gina Severcool Suydam, executive director of the county’s chamber of commerce, in a letter to the Scranton Times Tribune.

Ms. Suydam attributes to the gas industry impressive economic gains in the county between 2007-2012:

  • 29 percent in average weekly wages — from $700 to $904.
  • 148 percent in average weekly wages in the natural resources and mining industry — from $642 to $1,594.
  • 134 percent in annual payroll — from $273 million to $639 million.

The biggest threat to the industry now is the proposed severance tax, says Ms. Suydam. It would be a serious additional cost burden in maintaining the competitiveness of Pennsylvania gas, consuming any advantage our producers currently have over gas from other areas.

Then there is Dennis Martire, vice president and Mid-Atlantic regional manager of the 40,000-member Laborers’ International Union of North America, who is quoted in a recent news release:

We already have seen a reduction in pipeline man-hours over the past two years related to falling gas prices,” reports Mr. Martire. If you excessively tax the shale industry, you risk hurting employers, workers and communities across the state.

The economic depression of the gas industry noted by Mr. Martire continues to be manifested in cutbacks in southwestern Pennsylvania: 220 jobs lost at Noble Energy and 170 jobs at Consol Energy.

Adding a tax to the current economic struggles of a promising industry would be ill advised. Or as Speaker of the House Mike Turzai (R-Allegheny) says:

The governor’s approach on a severance tax is punitive in nature and threatens to severely hurt hard-working Pennsylvania laborers, negatively impact family-sustaining jobs and shut down production and downstream benefits for all Pennsylvanians.

posted by GORDON TOMB | 01:25 PM | Comments

Could Schools Be Harmed by a Severance Tax?

APRIL 2, 2015

As odd as it might sound, some rural schools could actually be harmed by Gov. Wolf’s efforts to increase education funding by imposing a severance tax on natural gas.

At least one school superintendent sees Wolf's Education Reinvestment Act as more of a threat than a help.

Dr. Kenneth Cuomo, superintendent of the Elk Lake School District in Susquehanna County, says, “The concern is that the tax could be passed on to landowners in the form of post-production fees that are assessed against royalties paid by gas companies”

To address such fears, Wolf’s legislation does include a prohibition on directly passing on the tax to landowners or leaseholders. But Bill desRosiers, a spokesman for Cabot Oil & Gas, notes the prohibition would be contrary to the practices of other states. In the end, simple economics indicates companies will find other ways of passing along the cost of the severance tax.

According to Dr. Cuomo, that's bad news for Elk Lake, because royalties the district receives from three wells—nearly $2 million thus far—could decrease:

That’s revenue for the district and losing it would require us to increase taxes to keep our buildings afloat.

Most of the people who make these proposals don’t live north of Interstate 80 (where much of the state’s gas is produced) and don’t understand their impact.

Apart from skimming royalties from landowners and the school district, the severance tax proposal would diminish the ability of companies to support schools in other ways—such as $50,000 worth of pipe Cabot Oil & Gas contributed to the Susquehanna County Career and Technology Center.

“The pipe was enough to supply our welding program for three years,” reports Dr. Alice Davis, administrative director of the center, which serves up to 500 pupils from seven school districts, along with 200-300 adult students. “Without that contribution, our taxpayers would have had to pay for the pipe.”

Schools being harmed by a natural gas tax is just one of the many unintended consequences of the governor’s education proposals. His approach takes more from the pockets of Pennsylvanians without addressing reforms that can impact the classroom performance far more than money ever could.

Spending more wisely, not just spending more, is the real solution.

posted by GORDON TOMB | 00:55 PM | Comments

Alternative Energy: The Promise That Never Pans Out

MARCH 13, 2015

Green jobs and the broken window fallacy

One third of the $675 million in new corporate welfare under Governor's Wolf budget proposal is reserved for alternative energy programs. In this week's House budget hearings Community & Economic Development Secretary Dennis Davin defended the new borrowing saying,“We think when you look at those opportunities as a whole ... Pennsylvania will do much better.”

But history indicates otherwise.

A common target of Gov. Rendell's "economic development" schemes was alternative energy companies, who enjoyed $1 billion in renewable energy grants, tax breaks and loans, but only created 8,300 "green" jobs, costing taxpayers over $120,000 per job. In other words, using tax dollars to subsidize green jobs resulted in a net loss.

Worse yet, taxpayers don't have the funds for this program. The Governor wants to borrow the money and pay it back with natural gas severance tax revenues.

Even if placing more debt on Pennsylvania families created jobs, it is still wrong to ask the natural gas industry to subsidize their competitors. Kevin Sunday with the PA Chamber put it well, "It's very ironic that Gov. Wolf expects one industry to subsidize its competitors," he said. "We certainly shouldn't be picking winners and losers."

At the end of the day, Pennsylvania has given more than a billion dollars to alternative energy companies with nothing to show for it: from 1991 to 2014, our state ranked a dismal 45th in job growth. Handing out tax dollars based on political calculations is stifling economic progress. Common sense tells us it's time to try a different approach—letting Pennsylvanians keep more of their money.

posted by ELIZABETH STELLE | 02:00 PM | Comments

Families Benefit from Natural Gas Without Tax

MARCH 10, 2015

Of the many tax hikes in Gov. Wolf's  budget proposal, the natural gas severance tax on the surface seems less damaging to Pennsylvania families. But a severance tax could hit families in a very personal way, their natural gas bill.

For now, Lancaster OnLine reports that the average residential heating bill of UGI Utilities’ customers has dropped nearly 46 percent since 2008. The latest reduction of 3.8 percent–attributed to abundant supplies of Marcellus Shale gas–was instituted March 1.

Stated in terms of dollars, the average monthly bill has gone from $151 to $82 in the past seven years for 391,000 customers in 15 counties.

Those are but the latest benefits added to the gas industry’s billions of dollars paid in wages, impact fees, leases, royalties, dividends and taxes – and just one more example of why state government should not hamper the industry with unnecessary levies such as the governor’s proposed severance tax.

posted by GORDON TOMB | 08:40 AM | Comments

Fair Share? How Pennsylvania Gas Taxes Compare

MARCH 2, 2015

Pennsylvania is the only top natural gas producing state that doesn't tax drilling. Sound familiar? It's a favorite argument of tax proponents, but it misses the big picture. Pennsylvania taxes the natural gas industry many ways that don’t exist in other drilling states. For example, there is no corporate income tax or personal income tax in Texas or Wyoming, and the corporate income tax in West Virginia is 6.5%, compared to Pennsylvania’s 9.99% rate.

The chart below demonstrates that Pennsylvania's economy is far less inviting to natural gas development, even absent a severance tax.

Top Natural Gas Producing States 2013

States

Severance Tax on Natural Gas

Exemptions and Incentives for Unconventional Wells

Top Corporate Net Income Tax Rate

State and Local Tax Burden (as a percentage of State income/national rank)

1

Texas

7.5% of market value

Rate reduction appr. 2% for up to 10 years

none

7.5% / 47

2

Pennsylvania

2.1% *

 

9.99%

10.3% / 10

3

Louisiana

$0.03-0.13 per MCF

Severance tax suspension on horizontally drilled well for 2 years or until payback

8%

7.6% / 46

4

Oklahoma

7% plus 0.095% excise tax

Exempt from severance tax for 4 years or until gas production pays for the cost of the well

6%

8.5% / 39

5

Wyoming

6% of taxable value

Gas transportation costs subtracted from the taxable value

none

6.9% / 50

6

Colorado

2% - 5% based on gross income

Allows producers to deduct 87.5% of their property taxes paid to gov. from severance tax to state

4.63%

9% / 32

7

New Mexico

3.75%

 

7.3%

8.6% / 37

8

Arkansas

5%

1.5% on new discovery wells for 24 months and on high cost wells for 36 months (can get extension)

6.5%

10.3% / 12

9

West Virginia

5% + $0.047 per MCF

 

6.5%

9.7% / 19

10

Utah

3% - 5%

6 months exemption for development wells

5%

9.4% / 28

11

Alaska

25% - 50% net value

Reduction for all drilling in Cook Inlet basin and when gas in used in state; Limited tax credits for exploration

9.4%

7% / 49

12

Kansas

8% on gross value severed from earth

3.67% tax credit for ad valorem taxes paid, effectively reducing the severance tax to 4.33%

7%

9.4% / 26

13

California

<0.01 per MCF

 

8.84%

11.4% / 4

*Pennsylvania levies an impact fee (akin to a tax) based chiefly on the number of natural gas horizontal wells.
Sources: Energy Information Administration, Independent Fiscal Office, Tax Foundation

posted by ELIZABETH STELLE | 01:54 PM | Comments

Talk of Severance Tax Reduces Drilling

FEBRUARY 26, 2015

Pitfalls of Natural Gas Tax

What a shock! A gas exploration company says it is reevaluating plans to drill for natural gas in Southwestern Pennsylvania because of Gov. Wolf’s proposed severance tax, reports TribLive.

Paul Burke, vice president and general counsel of Huntley & Huntley Energy Exploration, is quoted by the website: “We have to invest serious capital in our business. We want to see what’s going on in this commonwealth before we invest.”

Indeed.

The company made its concerns known in a letter to Harmar Township, saying it was withdrawing a subsurface lease offer for approximately 90 acres of township-owned land. The company had proposed a payment of $3,500 an acre, plus a 15 percent royalty.

Harmar township's supervisor, Bob Exler, expressed his disappointment: “It’s big money for a small township. It was something I thought would be a windfall for us, and I’m sad they canceled.”

We can only guess at the loss of jobs, taxes and associated business, not to mention the other drillers who may be reversing plans without publicly saying so.

Meanwhile, numerous companies across the state have announced reductions in investment and employment because of excess supply and resulting decreases in energy prices. Among them are Chevron Corp., Range Resources, Antero Resources, Rex Energy, PennEnergy Resources, Cabot Oil & Gas Corp. and Universal Well Services. Tax uncertainty could even jeapodize the building of a Shell petrochemical plant in Beaver County.

While the cutbacks are considered by many to be temporary, they belie statements of proponents for additional taxes on the industry that insist companies won't leave Pennsylvania's rich natural gas desposits.

The current business climate for the industry underscores that energy companies have risks as well as rewards to consider. Just as other businesses, they should not be treated as money trees to be picked by politicians with budget gaps to fill.

posted by GORDON TOMB | 09:16 AM | Comments

Marcellus Shale Successes Continue

FEBRUARY 10, 2015

Pitfalls of Natural Gas Tax

The stories continue: more jobs, increased tax revenue and cheap energy, all from the free-market production of Marcellus Shale gas.

Take last week's report from the Central Pennsylvania Business Journal: A study commissioned by Sunoco Logistics says two of its pipeline projects will produce more than 30,000 jobs across Pennsylvania, including as many as 400 permanent positions once the project is complete. The projects are also projected to generate $23 million in personal income tax and contribute $4.2 billion to the state’s economy.

The pipeline project is just one isolated example:

  • Dura-Bond’s Steelton plant “plans to add 150 jobs after being awarded a contract to produce $400 million worth of pipeline for the 540-mile Atlantic Coast Pipeline in West Virginia, Virginia and North Carolina,” according to PennLive. The work at the Dauphin County facility is expected to extend through March 2017.
  • Sunoco Logistics’ Marcus Hook Industrial Complex — an 800-acre energy hub for the processing, storage and export of natural gas products — continues to expand and add jobs as Delaware County officials work to identify additional business opportunities for it, reports the Philadelphia Inquirer. Sunoco Logistics’ pipelines serve the complex.
  • New Jersey’s largest gas and electric utility will decrease the typical residential gas bill by 31 percent in February and March, according to NorthJersey.com. Public Service Electric & Gas “has repeatedly cut the cost of gas to its lowest rate in 14 years as a result of low-cost gas from the Marcellus Shale formation in Pennsylvania and surrounding states,” the website said.

A new tax on Marcellus Shale drilling could put at risk these jobs and countless future projects. The economic benefits from a revived natural gas industry are impressive. Marcellus Shale counties saw more than double the employment growth of non-Marcellus counties last year. While government programs continue to hand out individual grants and loans, they can't compare to the industry's track record of improving employment for entire counties with zero cost to taxpayers. Government programs simply pale in comparison to the revitalization spurred by natural gas. 

posted by GORDON TOMB | 02:15 PM | Comments

EPA Rule Would Increase PA Energy Bills by $1,000

NOVEMBER 26, 2014

The war on coal will be a catastrophe for consumers, according to a new analysis of energy prices under new U.S. Environmental Protection Agency (EPA) regulations.

According to an Energy Ventures Analysis report, combined annual gas and electricity bills in Pennsylvania will increase by more than $1,000, or 46 percent by 2020 compared to 2012.  Industrial power rates alone will increase by 62 percent.

The November report—"Energy Market Impacts of Recent Federal Regulations on the Electric Power Sector"—says that Pennsylvania is among five states that "would bear the greatest increases in annual residential power bills." The others are Texas, Mississippi, Maryland and Rhode Island.

Commissioned by Peabody Energy, a St. Louis-based coal company, the report calculates state-by-state effects of a number of EPA regulations, including the Clean Power Plan to reduce carbon dioxide emissions.

Nationally, gas and electricity costs for all customers will increase by $284 billion, or 60 percent, says Energy Ventures.

The increase will result "in large part due to an almost 135 percent increase in the wholesale price of natural gas" as EPA regulations force coal out of use and drive up the demand for gas, says the report.

Numerous business groups and politicians are objecting to the Clean Power Plan, including Pennsylvania’s Democratic senator, Bob Casey, who says that the proposed rule for CO2 emissions, "imposes a disproportionate and unfair burden on Pennsylvania." And the Supreme Court recently announced it will review the regulations in the spring.

Energy Ventures also takes into account the economic effect of rules recently implemented to regulate ozone and particulate matter, the interstate transport of air pollution, mercury, and haze in public parks.

"Our analysis is the first to fully examine the combined economic impacts of the EPA's long list of proposed and finalized regulations on the electric power industry," says Seth Schwartz, Energy Ventures president. The Clean Power Plan is based on flawed assumptions, he says.

From skyrocketing energy bills to killing green jobs to raising manufacturers' cost, the EPA’s actions are harming all Pennsylvanians.

posted by GORDON TOMB | 00:13 PM | Comments

Landowners Will Bear Burden of Severance Tax

AUGUST 21, 2014

Randy Walker’s Armstrong County farm has been in the family for three generations. On 72 acres they grow hay, corn, oats, and care for cattle. A few years ago, Randy leased his land to local energy firm EQT, which built three Marcellus Shale wells on his property. Randy receives damage payments for the acres that aren’t usable during drilling. "The payments aren’t much" he says, "but if I said no, no one would get the benefits."

The drilling site includes two lined ponds, one with fresh water and one with flowback water. "The water has to be at least two feet below the liner’s edge," Randy explains, "and the fence around the pits go eight inches into the ground. When all the wells are drilled they’ll take out the water, and put the dirt back...the well pad will cover less than two acres."

Randy has a good relationship with EQT. "They’ve been so easy to work with. They explained everything to me so I knew what was coming. They’ve been extremely honest...they took care of small problems quickly."

For example, the company couldn’t build a road to move in their equipment due to an existing pipeline that no one would claim. In the meantime, EQT asked permission to use a small farm road. Randy recalls the road being completely destroyed, "It was a quagmire of disaster." Eventually EQT rebuilt the road—a road they would never again use. In fact, Randy later asked EQT to add more gravel, and the same day they were out adding rock.

EQT also took care to protect the environment. "They did all kinds of water testing before and after drilling. I have cattle that drink from a spring just down the hill from the well pad, and we’ve had no problems."

Soon the crews will return and begin a fourth well.

Randy is grateful for the extra income. He notes there are fewer financial pressures, "Life is a lot easier now for my wife and me." Thanks to a leasing bonus and royalty payments, he was able to paint his barn and purchase a higher quality tractor. "There are over 600 acres in my pool. That’s a lot of people benefiting from drilling."

Drilling in rural Pennsylvania isn’t just benefiting landowners. Randy notes his amazement when he visited the drilling pad and saw his brother-in-law from Texas. "He just happened to be assigned to my drilling pad," he chuckles.

It’s not just out-of-staters who are finding work. Randy says he’s always running into locals working on his pad, from mechanics to construction workers. And he’s quick to point out that even the experts from Texas and Louisiana contribute to the local economy. During the construction of his well pad, workers booked rooms at a nearby hotel in Kittanning.

If a severance tax is enacted in Pennsylvania, Randy knows he’ll be the one paying the bill. "My royalties are based on my share of what the wells produce," he explains. "A tax at the wellhead taxes my share and the company’s share, but the companies will just pass that on."

In other words, it’s the landowners and consumers of natural gas heat or electricity that will bear the brunt of the tax. It’s a good reminder that people ultimately pay the taxes levied on corporations. 

Randy concludes, "We could run our state economy on this boom if the government would let us. But with more taxes...I just don’t know how many wells won’t be drilled and jobs won’t happen."

posted by ELIZABETH STELLE | 02:50 AM | Comments

Warning to PA: Alternative Energy Subsidies Damage Europe

FEBRUARY 12, 2014

Energy Policy

State legislators who advocate for an expansion of government incentives for alternative energy sources need to pay attention to the events happening across the pond where the European Commission is abandoning country-by-country targets for greenhouse-gas emissions after 2020.

Mounting debt and surging rates from an over-reliance on renewable energy sources such as solar and wind prompted the commission’s action, reports the Wall Street Journal (paywall):

Take Spain, where financial incentives for renewable energy have driven renewables to as much as 25% of electricity generation. They have also left the country with a $41 billion gap between what energy costs to produce and what utilities can charge for power. Mariano Rajoy's government has been scrambling to scale back the subsidies and close the gap. These efforts have left in the lurch those who installed wind and solar on the promise of high fixed payments for their power.

In Germany, Angela Merkel is also seeking to push through cuts in wind and solar subsidies and to cap new installations of renewable capacity going forward. Germany's feed-in tariffs—which guarantee renewable-energy suppliers above-market prices for their power—have helped drive up retail power prices by 17% in the past four years while costing utilities and small businesses billions. Many of Germany's largest energy users are exempt from the green surcharges, a fact that the European Commission is currently investigating as a possible illegal subsidy.

Moreover, the Journal says, European companies are moving production to the U.S. where the shale gas boom is producing an advantage in energy costs—not to mention a reduction in carbon emissions as natural gas picks up more of the share of electricity generation.

As the Journal said in a separate piece:

“The innovation of the private oil and gas industry in extracting natural gas from shale has done more to reduce CO2 emissions than have all of the Obama Administration's subsidies, mandates and crony-capitalist schemes for renewable energy.”

Another benefit of the gas boom has been lower heating bills, which have remained moderate even during recent cold snaps.

All of which suggests that state Rep. Tommy Sankey (R-Clearfield) is on the right track with his bill to repeal Pennsylvania’s Alternative Energy Portfolio Standards.

The standards—adopted in 2004—require the state’s electric companies to obtain 15 percent of their energy from alternative sources by 2023. Europe’s experience is crystal clear evidence it’s time for government to stop picking energy winners and losers.

posted by GORDON TOMB | 10:45 AM | Comments

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