What’s ‘Fair’ for Pa. Natural Gas?

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Pennsylvania House Finance Committee sent a bill to the floor that would levy a severance tax at on the extraction of natural gas. The tax would apply to unconventional (shale) gas wells that are already subject to the state’s impact fee.

The excise rate would start at 2 cents per thousand cubic feet (MCF) of natural gas if the price is not more than $3 and increase to a maximum of 3.5 cents if the market price is greater than $5.99. Southeastern Pennsylvania STATE REP. JOHN MURT (R-Northeast) stated, “This is a major step in making the natural-gas industry pay its fair share in helping fund programs necessary to fulfill our obligations to our schools and those with special needs.”

I have a few questions for this state rep and others in the Southeast who think the severance tax is a good idea. I understand the desire to make sure the Commonwealth has enough revenues to pay for the proposed budget. However, I would like to ask how one calculates the natural-gas industry’s “fair share.” I know other states have severance taxes such as West Virginia, but that state has a corporate income-tax rate slightly more than half of ours.

I do understand that a lot of producers are not paying income tax at this time as they are losing money or breaking even, owing to the low price of natural gas and especially the low price for Marcellus Shale gas due to infrastructure constraints (not enough pipeline capacity).

As the natural-gas industry is depressed owing to low prices, revenues from the impact fee this year are expected to be 23% below what was three years ago. The drilling of new wells has decreased because producers are not willing to sink new funds into this depressed market. This new tax would make their losses worse and cause the producers to look at Ohio and West Virginia.

One reason why many producers are not currently profitable is because of a lack of pipeline capacity. As of Monday, the price for natural gas at Henry Hub, the benchmark for the US, was $2.77/MCF. The average price in Appalachia was 75 cents/MCF, with the price at the main pipeline connection to the Marcellus Shale at 40 cents/MCF.

While I question the wisdom (and fairness) of the legislature picking and choosing which industry to tax, I do not think they should do this without addressing the issues with pipeline siting and development.

The Pennsylvania Department of Environmental Protection has been slow (I am being kind) in the permitting process, especially relating to environmental-impact findings. If the legislators want this tax, they should see the wisdom of ensuring that the price producers receive might get past the $3.00 threshold to the higher tax bracket. Without adequate pipeline capacity, that will not happen.

When the producers’ products cannot be transported outside of a limited region, a buyers’ market emerges. We have already seen what this has done to revenues from the impact fee and jobs lost owing to the scaleback in new drilling.

When the government picks winners and losers, there are losers. With this tax, we in the Southeast do not see the job losses owing to low prices. Those jobs are in the Northeast and Western Pennsylvania. The loss in impact-fee revenues has little impact here as we receive only a small portion of those taxes. Most of the funds rightly go to the communities affected by gas development and extraction operations.

However, we only need to look to Marcus Hook to see the negatives of the government picking winners and losers.

A number of powerful federal legislators care more about soybean farmers in the Midwest than refinery workers at Philadelphia Energy Solutions. The Environmental Protection Agency, under pressure from U.S. senators, decided last week to continue a rules that mandates certain levels of bio-fuels be included in gasoline and fuel oils. It has already cost jobs at the plant and more jobs are expected to be lost, according to workers union representative RYAN O’CALLAGHAN.

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