Case for Severance Tax

Across the country, 96% of natural gas is produced in states that have severance taxes, a tax paid on the extraction of natural gas and other non-renewable fuels. Pennsylvania however, remains the only state with significant natural gas resources not benefiting from one. A severance tax with a significant portion of the revenues invested in the environment means that when private companies remove finite, non-renewable resources from beneath our state, the same companies reinvest in Pennsylvania's natural resources.

"...we gladly pay a severance tax in every state where we're active, except New York and Pennsylvania."

—Matthew Sheppard, spokesperson for Chesapeake Energy Corp., quoted in the Elmira Star-Gazette, 3/26/09

Drilling will have consequences for our environment. During a 2.5 year period starting January of 2008, Marcellus drillers in PA amassed 952 environmental violations of state drilling laws. A severance tax could be used to offset the impacts of drilling and invest in land, water and wildlife conservation. This means investing in watershed restoration and protection; habitat conservation, public access to outdoor recreation, and conservation of natural space and farmland. It can be accomplished by directing a portion of the tax to the Environmental Stewardship Fund (Growing Greener) as well as to the PA Fish & Boat Commission and PA Game Commission for habitat improvement and public access purposes.

While severance taxes are viewed as a basic cost of doing business in other states, the drilling industry in Pennsylvania is fighting paying their fair share to Pennsylvania citizens. They claim that they are in their infancy, that a tax will stifle drilling investment, that they are already heavily taxed, and that a tax will create a burden to Pennsylvanians. None of these arguments stand up to analysis.

A multi-billion dollar "infant" industry Should Pennsylvania taxpayers protect drilling companies from a fair tax because the drilling industry in PA is in its infancy? According to the industry, Marcellus gas producers spent a total of $4.5 billion developing Marcellus shale gas resources in 2009 and will spend $8.8 billion in 2010. How many billions of dollars does an industry have to spend before they are no longer just getting started?

Who are these "infants" already spending billions in our Commonwealth who claim they need of protection at the cost of the PA taxpayer? There is Royal Dutch Shell PLC, Europe's largest oil company who purchased 650,000 net acres of Marcellus Shale land in May 2010; Exxon, who muscled into the Marcellus play with a $31 billion dollar purchase of XTO Energy; Reliance Industries Ltd., India's largest private-sector company, which acquire a 60 percent stake in 104,400 Marcellus acres; and Oklahoma's Chesapeake Energy Corp., who earned enough to pay its CEO $112 million in 2009.

A severance tax will not stifle drilling investment Studies have shown that the size and location of natural gas reserves, the market price of natural gas and the availability of investment capital are of vastly greater significance. Transportation costs account for nearly half the price of natural gas. The Marcellus Shale could hold 500 trillion cubic feet of recoverable gas, enough to fuel the nation's current demand for 19 years. That combined with the cost to develop Marcellus Gas wells being relatively lower than in many other gas plays, and because of Pennsylvania's proximity to lucrative eastern markets, makes our natural gas an attractive commodity– even with a severance tax – to gas produced in other regions. According to John Pinkerton, chairman and CEO of Range Resources Corp, drilling in the Marcellus Shale is ideal because, "you're in the best spot on planet Earth to sell gas."

Multiple case studies of severance taxes across the country show that vastly different severance tax rates do not significantly affect drilling investment, but do impact needed government revenue to deal with the consequences of drilling.

Russell Braziel at gas market forecaster Bentek stated, "Because the Marcellus is cheap to develop and so close to market, it will make other plays in the South and Midwest uneconomic," "If you want to be in the gas business, you'll have to be in the Marcellus."

An industry exempt from taxes The drilling industry claims it is already subject to one of the highest corporate tax rates in the country because of Pennsylvania's 9.99% Corporate Net Income Tax. Yet the drillers of more than 70% of the wells in the Marcellus Shale will pay the state's 3.07% Personal Income Tax rather than the Corporate Net Income Tax. And drilling companies benefit from numerous Federal tax breaks. For example, Range Resources recently reported to the Securities and Exchange Commission that it pays no federal income taxes because of the federal tax breaks given to gas drillers.

"The industry will probably hate me for saying this, but as far it goes in my world of spreadsheets, the severance tax is not a deal-breaker. I don't believe it will have a huge impact on drilling. It's not that large."

— Subash Chandra, oil and gas industry analyst, Jefferies & Co. Inc., The Philadelphia Inquirer, May 2, 2010

No additional burden to Pennsylvanians Imposing a severance tax will not increase utility costs for Pennsylvania consumers. Pennsylvanians currently import four times more gas than we produce. We already pay tax on the gas we import from Texas, Wyoming, Oklahoma, and New Mexico. Instead, not having a severance tax with a significant portion of the revenues invested in the environment means the drilling companies do not pay their fair share and do not reinvest in Pennsylvania when they extract our natural resources.

Sources:

Considine, Timothy, Robert Watson, and Seth Blumsack. An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play, The Pennsylvania State University, (May 2010) (update to August 2009 report). [Full Report]

Form 10-K for RANGE RESOURCES CORP, 24-Feb-2010, Annual Report, http://biz.yahoo.com/e/100224/rrc10-k.html

Helman, Christopher, Range Resources Is King Of The Marcellus Shale, Forbes Magazine , August 09, 2010

Kirkland, Joe, Big Money Drives Up the Betting on the Marcellus Shale, New York Times, July 8, 2010.

Pennsylvania Budget and Policy Center, Fair Compensation for Pennsylvanians
Understanding the Natural Gas Severance Tax, May 7, 2010

Schwartzel, Erich, Shell Buys Marshall Company to Access Marcellus Shale Land, Pittsburgh Post-Gazette, May 29, 2010