Low gas prices may undercut Gov. Wolf’s shale tax estimates

State taxes sign
Source: DollarPhotoClub

Low gas prices might be great news for the consumers, but it spells trouble for state budgets – especially if, like Governor Wolf’s administration in Pennsylvania, they’re banking on proceeds from gas severance tax.

The 5 percent tax on the extraction of natural gas from the Marcellus Shale, plus a flat fee of 4.7 cents per thousand cubic feet of gas produced, is to replace the three-year-old Marcellus Shale impact fee, which assesses a set fee per well.

Analysts calculate that the Marcellus Shale impact fee is likely to generate about $225 million this year, while Gov. Wolf promised that the new severance tax could generate over $1 billion. But not everybody agrees with Mr Wolf’s arithmetic.

Administration officials acknowledged that the severance tax, if enacted as proposed, would only generate $165 million for the 2015-16 budget year because it would be in effect for only the last few months of the fiscal year.

Additional complication is the fact that Marcellus gas is produced in areas not connected by pipelines and therefore sells at a much lower price than Henry Hub – the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX) and the OTC swaps traded on Intercontinental Exchange (ICE).

“For that reason alone, the tax proposal from the administration, the dollars just don’t add up,” said David Spigelmyer, president of the Marcellus Shale Coalition, the industry trade group that is fighting the proposal.

Spigelmyer, the Marcellus Shale Coalition president, said Pennsylvania shale gas is selling for an average of $1.60 a unit this month.

At the current production level of four trillion cubic feet a year, the severance tax would generate about $508 million at a $1.60 price. If production increased to nearly five trillion cubic feet, as Wolf’s budget advisers estimate, the tax would generate $632 million at the current price.

However, that’s assuming that the production will increase. With the current climate of low prices many question whether that assumption can be made. The rig count certainly shows a different story dropping from 137 at the peak in 2011 to 45. Six rigs have shut down since January.

“If you’re going to put a whopping big tax on gas, you’ve got to know you’re going to see less drilling,” said Spigelmyer.

While analysts argue about the future gas prices at various trading points, Michael Wood, the policy director of The Pennsylvania Budget and Policy Center, argues that even the much lower estimates for the severance tax are considerably higher than the current Marcellus Shale impact fee.

“The longer the tax is delayed, the more money the commonwealth is leaving on the table – even at the current low prices,” said Wood.

Meanwhile in Ohio, Gov. John Kasich is calling for an increase of state’s current tax of 20 cents a barrel on oil and 3 cents per thousand cubic feet of natural gas, to a 6.5 per cent tax on profits when sold at the wellhead and 4.5 percent when sold downstream.

However, similarly to Philadelphia, the lawmakers at the Ohio General Assembly are reluctant to impose a tax that might dissuade businesses from investing in the state. Chris Zeigler, executive director of the American Petroleum Institute – Ohio, said in a statement that Kasich’s proposal “places the economic promise and future development of Ohio Shale at serious risk.”

The question of the shale tax in Ohio must be decided by 30th June, by which date the state budget must be approved.

Find more information about Gov. Wolf’s severance tax at Philly.com

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