Marcellus shale gas production boom stirs debate over taxes
A boom in natural gas drilling in Pennsylvania is generating billions of dollars for companies and private landowners, but some experts question whether the state's low effective tax on the bounty makes long-term sense.
Unlike most leading oil- and gas-producing states, Pennsylvania doesn't link fees to how much gas comes out of the well. Instead, each well pays an impact fee no matter how much it produces. That means that even as Marcellus shale gas production has soared, revenue to local and state governments isn't keeping pace.
For example, the impact fee generated about $204 million in 2011, when production was about 1 trillion cubic feet of gas. But when production doubled in 2012 to just over 2 trillion cubic feet, the impact fee revenue dropped to about $199 million. One billion cubic feet of gas equals about 180,000 barrels of oil.
“That gap is going to get bigger and bigger” over time, said Michael Wood, a research director with the Pennsylvania Budget & Policy Center, a progressive research group based in Harrisburg.
The Marcellus shale formation, with wells in Pennsylvania, Ohio and West Virginia, is the country's most productive natural gas field and is expected to produce gas for decades.
Over 20 or 30 years, that means the current impact fee here may generate $10 billion or $15 billion less than a flat tax on production, Wood said.
The Pennsylvania fee is essentially based on the numbers of wells drilled and on the wholesale price of gas, so when prices plunged last year, the revenue took a hit. Wood estimated that the 2011 revenue was the equivalent of about a 4.1 percent effective tax rate, which at first glance appears to be far lower than Texas, at 7.5 percent, or Oklahoma, at 7 percent.
As time goes on, a policy center analysis and a review by The Associated Press came up with the same conclusion: Pennsylvania's effective tax rate on gas production could drop to as low as 1.3 percent over the next few years.
The AP found that at the current pace, production could grow to about 4 trillion cubic feet in 2015. That's the equivalent of $16 billion in company revenue if wholesale prices are at $4, which is the current range. At West Virginia's 5 percent tax rate, that would generate about $800 million.
But the policy center estimates that the Pennsylvania impact fee will generate $237 million to $261 million in 2015, depending on the number of wells drilled and prices.
Those aren't fair comparisons, said Kathryn Klaber, the president of the Marcellus Shale Coalition, an industry group. She noted that many other states give drillers a tax exemption for the first few years of production to allow companies to recoup costs. In Oklahoma, for example, a well that's drilled horizontally, like many Marcellus shale wells, gets up to a four-year tax exemption, because the capital costs are far greater than a traditional well.
Such details are “hugely important in an industry that has upfront capital outlay,” Klaber said. “The Pennsylvania fee puts money in the pockets of state and local governments even before gas is being produced. So you've got a timing difference.”
Klaber said that increasing tax rates on drilling would slow investments, thus leading to lower production. There's been a big debate over that very issue in Alaska, where last month the Legislature passed a multibillion-dollar oil tax cut in the hopes it will lead to more production. Klaber said the current impact fee has “probably hit as close as we're going to get to some middle ground” on such issues.
Patrick Henderson, Gov. Tom Corbett's energy executive, wrote in an email that oil and gas operators have paid more than $1.7 billion in corporate state taxes since 2007, so just looking at the impact fee revenue doesn't tell the whole story. He added that Corbett “was proud to partner with the General Assembly in crafting a fair impact fee intended to encourage development in Pennsylvania.”
One energy expert in Texas said the current impact fee structure did help encourage companies to invest in Pennsylvania and trigger the boom.
Kenneth Medlock III, a director at the Center for Energy Studies at Rice University, wrote in an email that as production grows, the state will be stressed to provide more resources for inspections, environmental and health monitoring, and other costs.
The impact fee is “going to get reviewed at some point. It's going to have to,” Medlock noted.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Versatile U-PARC houses productive assortment
- Steelers opt for youth, speed while revamping roster
- U-PARC gives NEP Broadcasting space to grow
- New Kensington-Arnold continues to shuffle security staff
- Saxonburg police to take citizens behind the scenes with citizens ‘academy’
- TCS transcends small beginnings
- Steelers finalize 53-man roster
- Veteran’s organizing skills benefited community
- Western Pa. volunteers battle wildfires in West
- Freeport once again team to beat in WPIAL Class AA volleyball
- Recruiting: Hamlin latest WPIAL DB to hear from Buckeyes