C.O.G.E.N.T. Blog Post: Concerned About The Severance Tax? You Betcha!

By: Emily Krafjack, President

Connection For Oil, Gas & The Environment In The Northern Tier

The announcement of the Governor’s proposal for severance tax probably got more news bytes than any other news articles this week.  Most of these news bytes were beyond the shale. Why is that?

Governor Wolf announced his proposal while visiting a Chester County school this week touting his “Pennsylvania Education Reinvestment Act” his first stop on the “Schools That Teach Tour.”

Every Pennsylvania Shaler (residents above the Shale) including municipal, county officials and assembly members need to be concerned about this on so many levels.

“Featuring” a natural gas severance tax in an education bill is an insult to the communities that will be directly affected by such a tax— and not necessarily in a good way.  Is it “featuring” or “burying?”

Late January, Governor Wolf signed an executive order reinstating the moratorium on new leases for oil and gas development in state parks and forests at Benjamin Rush State Park located in the north east section of the City of Philadelphia, a highly unlikely state park to experience either unconventional natural gas leasing or drilling activity.

While largely symbolic, we figured it was reasonable to recognize that the Governor is very busy and perhaps lacked the time to travel to an actual state park or forest land that would actually benefit from his executive order.

During December, then Governor-elect Wolf, commenced with a short-lived budget tour that ended at the far northern reaches of Pennsylvania in Kingston, a good hour away from the nearest unconventional natural gas well.

Actually, we had very much hoped that the then Governor-elect would come to our northern tier region and talk about his intentions as we knew that likely a severance tax was going to be the focus of his plans.

So, this week, the severance tax tour’s alter-ego “Schools That Teach Tour” was kicked off in Chester County with the next stop in Schuylkill County, both many hours drive away from the nearest unconventional natural gas well.

The 2013 impact fee revenue to Chester County, $485,000+; Philadelphia County, $1.4 million+; Schuylkill County, $140,000+; pretty good revenue from unconventional shale gas resources for having no impacts.

Our region at this point anyway, is clearly not part of this conversation in any way.  

Being patient with the budget tour, the signing of the moratorium, but now the third event with the severance tax, well, it is a little hard to feel any politics of inclusion here in the northern tier, the true far reach of Pennsylvania and the heart of unconventional natural gas drilling.

Presently, there is not much we can say about the proposal as once again, there are no firm details, no draft document we can actually read and review.  What we can see is that the aim of the tax is education, featuring it in an education bill and far removed from our area is not lost on most of us.

What we do know is that the proposed revenue calculation details are not clear.  While there is a production forecast, there are no details on the actual price these calculations are base on and, unfortunately, we’ve seen this before.

Previous proposals based on the Henry Hub price which one would be hard pressed to find either a northern tier or other Pennsylvania leaseholder paid on the HHP.

As taxpayers, leaseholders and living directly in the development area experiencing impacts, whether it be roads or air quality— we have several reasons to be included in the discussion of any and all severance tax proposals and deliberations.

What are these reasons?  Well, first and foremost, the guaranteed minimum royalty is yet to be adequately defined.

Our regional air quality is dramatically changing and we’ve been lacking adequate air monitoring, not to mention air studies.  The long-term study we’ve been awaiting failed to include producing well pads as a monitored source point.

There has been no studies done and no state regulation of setbacks/mitigations developed on a health-based standard.

Act 13 of 2013’s impact fee calculations and accounting methods need to remain intact with any new tax adopted.

We continue to lag with mandated PA One Call for unconventional gathering lines and gas safety regulations for Class 1 Area gathering lines, well over 90 percent of all gathering lines in our region.

There is an uncertainty and lack of clarity regarding funding of DEP for oil and gas and other programs related to the development in our region, including need for sufficient staffing levels.

We continue to have an emphasis deficit by the Commonwealth to do any health studies relating to unconventional shale gas development.

These issues have all been waiting a long time now to be addressed.  Any severance tax package needs to be appropriately labeled as to what it is.  It needs to be clearly defined as a severance tax and these issues need to be clearly attended to within the legislative language.

There are matters that need to be addressed better and funding education is not the mechanism to do that.

Our region’s leaseholders, many of us, are going to be the taxpayer when it comes to the severance tax.  Many of our executed leases, valid contracts provide for that.  As such, we need to be included in the conversation.

Severance tax may be a volatile revenue source and the administration needs to understand that.  Just this year, the state of North Dakota booming in the Bakken Shale unconventional oil play has had major changes as a result of the volatility attached to a severance tax.

North Dakota has a pretty efficient legislative body that works with a two-year budget cycle.  Because of the volatile nature of fossil fuel resource extraction— falling oil prices and reductions in well drilling— they are experiencing a massive budget shortfall.

“The new forecast cuts about $762 million from the state’s budget for the rest of the fiscal year ending in June 2015 and slices $4.05 billion from the two-year biennium from July 2015 to June 2017.”

This forecast actually includes a crude oil price where this week’s announced proposal is silent on natural gas price.

Further, “Royalty payments to landowners will cut individual income tax collections by $30 million in the current fiscal year and by $139 million of the 2015-2017 biennium.  Corporate income tax collections will drop by $13 million this year and by $58 million in the next biennium.  Sale tax revenue is expected to drop by $87 million in the rest of the current fiscal year and by a total of $350 million in the next two years as a result of the decline in the number of drilling rigs.”

In June 2014, Industry Week, noted that North Dakota is the second largest oil producing state in the United States.  Our Commonwealth needs to look at better ways to fund education and resolve the pension crisis.

From where we sit, unconventional drilling is not the cash cow to fund or settle either issue.

So, as I write this blog, our road here is snow covered.  In fact, our road has been snow covered many a day lately.  Perhaps the infamous jeep the Governor drives, just can’t handle our snowy roads and include us in the conversation.

I hope I am wrong.  I hope Governor Wolf not only visits a school in every northern tier county, but also hosts a town hall meeting here to explain to leaseholders the benefits of one more deduction to their royalty checks.

As, while the press releases notes that “No portion of the tax imposed in this legislation will be allowed to be deducted from royalty payments,” it seems highly unlikely that legislation can trump bona fide contracts that provide for tax deductions.

Emily Krafjack is President of the Connection for Oil, Gas and the Environment in the Northern Tier, a grassroots organization of ordinary Shalers working together to maintain their community flavor while continuing to live where they’ve always live and right now that is on top of the Marcellus Shale.  Click Here for the blog post and the C.O.G.E.N.T website.

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